Beth Cooper - Senior Vice President and Chief Financial Officer Mike McMasters - President and Chief Executive Officer.

Good morning. My name is (Liton) and I’ll be your conference operator today. At this time I would like to welcome everyone to the First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

Senior Vice President and Chief Financial Officer, Beth Cooper, you may begin..

Good morning everyone and welcome to the Chesapeake Utilities first quarter 2014 earnings conference call. We have prepared a presentation to accompany our discussion today. This presentation can be accessed on our website under the Investors section and events and webcast sub-section.

Before we begin, let me remind you that matters discussed in this conference call may include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements.

Please refer to the Safe Harbor for forward-looking statements in the company’s 2013 annual report on Form 10-K for further information on the risks and uncertainties related to the company’s forward-looking statements. Now I’ll turn the call over to Mike McMasters, President and Chief Executive Officer..

Thanks, Beth, and good morning everyone. Earlier this week we announced first quarter net income of $17.7 million or $1.82 per share for 2014. 2014’s earnings per share for the first quarter were $0.28 per share or 18% higher than 2013. Turning to Slide 3.

One of the key things that we’ve been able to leverage over the last few years is the price advantage that natural gas has relative to other sources of energy. We’ve extended our systems to serve markets and are previously served by natural gas both in Delmarva and in Florida.

We’ve increased the capacity of our transmission system to provide additional service to our current customers that are growing. The natural gas price advantage has increased our opportunities for growth and we’ve been able to execute on those opportunities.

We continue to see opportunities for the expansion of natural gas infrastructure in our current service territories and we’re continuing to look for opportunities to expand beyond those territories.

Natural gas is an abundant, clean and inexpensive fuel and the significant reserves we have here in the United States provide security of supply and price. This is reflected in the comparison of energy prices on Slide 3. The price advantage that natural gas has is expected to continue for the foreseeable future. Turning to Slide 4.

No matter what page you look at, over the last 20 years, 10 years, five, three or one year ended March 2014, Chesapeake has produced top quartile total return to shareholders. On average over the past 20 years Chesapeake’s shareholders have earned more than 13% return on an annualized basis. Turning to Slide 5.

2013 marked the seventh straight year of record earnings per share delivered by the company. Slide 5 shows that for the five years ended December 2013 without our peer group and compound growth in earnings and delivered earnings growth at nearly double at nearly double the rate of the second ranked peer. We think that the formula for success is clear.

Turning to Slide 6. While the amount of capital invested is important, it only benefits shareholders of the return generated justifies the investment. As Chart 6 shows we ranked third in our peer group and return on equity for the five years ended December 2013. We’re also well above the medium return of 9.73%. Turning to Slide 7.

On May 6, the Board of Directors increased the company’s dividend by $0.08 per share annually or 5.2%.Compound annual growth rate in the dividend over the past five years is also been 5.2%.

The growth in the dividend has been supported by growth in earnings as evidenced by the annualized payout ratio of 48% based on the current annualized dividend of $1.62 and 2013 basic earnings per share of $3.41. We understand how important dividends are to investors particularly given the expectation for broad market returns.

We also believe that superior earnings and dividend growth will enhance shareholder value going forward. We’re committed to dividend growth supported by earnings growth. It is a combination of investing relatively larger amounts of capital at higher returns that underlies our success and generating above average growth and earnings.

The above average earnings growth has enabled us to provide above average dividend increases. The graphic on Slide 8 combines capital spending to capitalization and return on equity for 43 gas distribution and electric combination utility companies.

As you can see Chesapeake is one of the few companies in the upper right hand high return, high investment quadrant. We believe that this has driven our past success and we will execute our strategic plan with the goal of maintaining this position. Now I’ll turn the call back over to Beth Cooper..

Thanks Mike. As Mike noted first quarter earnings per share were higher by $0.28 per share or 18% over the first quarter of 2013.

On Slide 9 you can see that this significant growth in first quarter 2014 earnings over first quarter of 2013 was a result of the impact of the extreme temperatures this past winter, positive contributions from the acquisitions we consummated in 2013, and continued strong growth in the natural gas distribution and transmission businesses.

This consistent level of superior earnings growth has enabled us to provide shareholders the superior dividend growth. The latest example is the $0.08 or 5.2% increase in the annualized dividend approved by the Board on May 6 which Mike mentioned earlier.

I would now like to highlight the key accomplishments and results for the business segments during the first quarter of 2014. Detailed discussions of the changes in gross margin and operating expenses by segment for the quarter are provided in our press release and Form 10-Q which were issued and filed on Tuesday.

Slide 10 shows Chesapeake’s regulated energy businesses which include our natural gas transmission and distribution and electric distribution operations generated operating income of $21.1 million in the first quarter of 2014 compared to $17.3 million in the first quarter of 2013.

Growth in the Regulated Energy segment generated $1.9 million in additional margin from major natural gas service expansions and customer additions, $4.3 million in additional margin from the operations of Sandpiper Energy and $724,000 and increased margins from the Florida Gas Reliability Infrastructure Program or GRIP as we commonly refer to it.

As you may recall the operating assets of Sandpiper Energy were acquired from the previous centers at the end of May, 2013. So we have only $1.9 million during the first quarter of 2014 compared to the same period in 2013. The increase in margin was partially offset by a $4.1 million increase in other operating expenses.

The key drivers of the increase in other operating expenses were $1.7 million in additional payroll incentive compensation and benefit cost as a result of our recent growth, our first quarter performance and also to expand the company’s capabilities for future growth, $1.4 million in other operating expenses associated with Sandpiper’s operations and lastly $744,000 of higher depreciation, amortization, asset removal and property tax cost due to our recent capital investments and to maintain just some integrity.

Continuing on to Slide 11 unregulated energy operating income increased by $1.5 million to $10.9 million in the first quarter of 2014 as the impact of colder than normal weather, the benefit of recent acquisitions and increased financial results from Xeron, our propane wholesale marketing operation located in Houston, Texas, more than offset the cost incurred to successfully manage the extremely cold weather and growth.

Gross margin for this segment increased by $3.6 million for the quarter which was partially offset by a $2.1 million increase in other operating expenses. The other segment reported on Slide 12 is principally BravePoint, our advanced information services business.

The other segment reported an operating loss of $326,000 for the first quarter of 2014 compared to a loss of $125,000 for the first quarter of 2013. While margin at BravePoint increased by $163,000 during the first quarter of 2014 higher payroll related expenses more than offset the improvement.

Slide 13 highlights the key variances between first quarter 2014 and 2013 results. Colder than normal weather conditions accounted for $1.6 million or $0.17 per share in additional earnings. Weather during the first quarter of 2014 was significantly colder than the first quarter of 2013.

Compared to last year heating degree days were 310 degree days or 13% higher on the Delmarva Peninsula and 89 degree days or 19% higher in our Florida service territories as a whole. In terms of normal temperature the Delmarva Peninsula was 15% colder than normal and our Florida service territories as a group were 5% colder than normal.

In regards to the margin impact the colder than normal temperatures generated $1.6 million of incremental gross margin during the first quarter.

Growth in the natural gas businesses combined with contributions from recent acquisitions, natural gas service expansions, GRIP and higher operating income for Xeron more than offset the impact of lower retail propane margins and accounted for $5 million and higher net income or a $0.51 increase in terms of the earnings per share impact for the first quarter of 2014.

These results highlight the growth we have achieved across the areas we serve and have recently added to our service territories as well as the successful efforts of our team and seeking out creating and then cultivating profitable growth. Finally the lower retail propane margins per gallon were also something that we anticipated.

We foresaw the return of propane margins to more normal levels and have been highlighting the likelihood of this occurring during our last several conference calls.

While the first quarter saw this become reality we do not know the level to which these margins will decline as this will be driven by both domestic and international demand for propane as well as more local market conditions and competition.

The higher cost of serving the growth just mentioned resulted in a $3.4 million impact to net income from the increase in other operating expenses quarter-over-quarter.

The increase in expenses was principally driven by expenses from acquisitions, higher payroll and benefit cost, increased incentive compensation due to strong performance and increased depreciation, asset removal and property tax cost associated with the growth in the company’s energy businesses.

Like the propane margins the higher payroll costs were anticipated as we are focused on strengthening our organization to support the growth we have achieved and to facilitate and support future growth.

Slide 14 shows our commitment to maintaining a strong balance sheet that allows us access to competitively price capital to fund our growth initiatives. Last year we successfully negotiated a new senior note agreement for $50 million and new unsecured long-term debt at a rate of 3.88%. The transaction will be funded on May 15.

On Slide 14, we’ve shown the pro forma impact of the financing to the components of capitalization as of March 31, 2014. On a pro forma basis our equity to permanent capitalization is 63.7% and equity to total capitalization is 58.1%. Our objective is to maintain an equity to capitalization ratio of 55% to 60%.

In that regard we continuously review our financing plan to ensure a strong balance sheet, to provide sufficient liquidity for capital investments and to optimize our capital structure. Turning to Slide 15 as we discussed during our year end 2013 conference call, capital expenditures for 2013 totaled $108 million.

We continue to project 2014 capital expenditures at approximately $111 million unchanged from our previous disclosures and again exceeding $100 million. The largest portion $85 million is expected to be invested in our regulated energy operations.

Based upon our history we know that the completion of some of these projects may ultimately extend into 2015. Actual capital expenditures typically lag behind the budgeted timeframe.

As we’ve indicated over the years our financial success has been a result of our ability to identify significant opportunities to invest in growth while maintaining our capital investment discipline. Now I’ll turn the call back over to Mike to discuss our opportunities for future growth and to provide closing comments..

Thanks, Beth. Acquisitions and service expansions in our natural gas distribution and transmission business have been the major source of profitable growth in the past and we expect that they will continue to be in the future. Slide 16 details the key sources of expected growth for 2014.

In the first quarter these initiatives accounted for $5.7 million of incremental margin. And they’re expected to contribute approximately $10.4 million in incremental margin for the full year compared to 2013.

In addition to the major projects that have already been initiated on Slide 17 we have one major project we expect to provide significant contribution to margins that was not included in the table above.

The expansion of transmission facilities to serve a new customer in Kent County, Delaware in January of 2015 should generate between $1.2 million and $1.8 million annually. This does not include revenue from any mainline transportation services provided to that company customer.

I should note that these slides we’ve not included any rate cases or other projects underdeveloped on a negotiation. We expect that we’ll add to these strategic opportunities as we move forward. Slide 18 shows our focus for 2014 and beyond. We see attractive opportunities for growth across our energy businesses.

As in the past we will continue to look for profitable large project investments in the natural gas distribution and transmission businesses. As a result of past expansions we have the opportunity to serve new commercial, industrial and residential customers and will be fine-tuning our conversion programs to meet that objective.

We will also look to provide additional natural gas services to our existing customers. In Florida we expect to generate additional margins through our GRIP program. We’re also exploring opportunities to provide natural gas service to power generators, combined heat and power projects, and other applications for natural gas.

In the unregulated energy business we’re continuing our efforts to grow. In addition to our core growth many of the opportunities that we’re seeing in our regulated natural gas business are available as unregulated investments.

Further success in our community gas systems strategy and start-ups like this Pennsylvania and Cecil County, Maryland are generating growth. We’re also looking – continue to look for acquisitions to enhance our growth.

Finally compressed natural gas, propane vehicles, combined heat and power projects and midstream opportunities all represent potential avenues to supplement growth in this business. Slide 19 compares how we’re doing and delivering the value relative to our peers.

We’re fortunate to serve areas with significant opportunities and to provide energy services that are friendly to the environment and low cost for our customers. We posses some fundamental advantages but our success this past year and over the past 20 years is ultimately a function of our people.

Many service territories have growth opportunities but our team has done a remarkable job of identifying and cultivating growth and then exercising financial discipline and effectively managing regulation to produce superior returns to shareholders while providing clean, reliable, low cost energy to our customers.

I’m proud to say that our employees have delivered top quartile performance in 16 of the 17 categories presented on Slide 19. This has happened over the past one, three and five years. We’re working hard to maintain our performance going forward. Thank you again for joining our call today.

We’re proud of what our team has accomplished for shareholders in the past and are committed to maximizing returns going forward. We’ll now be happy to take questions..

(Operator Instructions) There are no questions at this time. I’d like to turn the call over, Mike McMasters, President and Chief Executive Officer, the call back to you..

Thank you. I just want to thank everyone for joining us this morning and we’ll be talking to you probably later. Thank you. Bye..

This concludes today’s conference. You may now disconnect..