Beth Cooper - SVP, CFO & Corporate Secretary Mike McMasters - President & CEO.

Spencer Joyce - Hilliard Lyons.

Good morning. My name is Katlyn, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2014 Third Quarter Earnings 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).

Beth Cooper, you may begin your conference..

Thank you, Katlyn. And good morning everyone. Thank you for joining us this morning to review our third quarter and year-to-date results. We have prepared a presentation to accompany our discussion today. This presentation can be accessed on our website at chpk.com under the Investors section and Events & Web cast subsection or via our IR app.

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.

The Safe Harbor for forward looking statements section of the company's 2013 Form 10-K provides further information on the factors that could cause such forward looking statements to differ from our actual results. Finally, please note that earnings per share data reflect the company's three-for-two stock split effective on September 8, 2014.

Turning to Slide 3. Yesterday morning, we announced third quarter net income of $3.2 million or $0.22 per share. As reported, third quarter 2014 net income was $699,000 or $0.05 per share lower than 2013. However, 2013's results included the net impact of two nonrecurring items which increased last year's earnings by $0.05 per share.

These nonrecurring items included a credit to other operating expenses for the recovery of certain litigation expenses partially offset by additional other non-income taxes. As you can see, excluding these items quarter-over-quarter, EPS was virtually unchanged.

The results in the third quarter reflected two trends that we have foreshadowed for several quarters. Continued gross margin growth generated from natural gas service expansions and cost increases to support the growth. We typically report the lowest amount of gross margin in the third quarter due to the seasonal nature of our energy businesses.

Consequently, the impact of cost increases associated with strengthening the team and higher depreciation is magnified in this quarter. More specifically, I will now highlight the key accomplishments and results for the business segments during the third quarter of 2014.

Detailed discussions of the changes in gross margin and other operating expenses by business segment for the quarter and year-to-date are provided in our press release and Form 10-Q, which were issued yesterday.

Turning to Slide 4, Chesapeake's Regulated Energy businesses, which include our natural gas transmission and distribution and electric distribution operations generated operating income of $9.2 million in the third quarter of 2014, compared to $10.2 million in the third quarter of last year.

2013's results reflected $1.9 million of a credit in expenses associated with the recovery of certain litigation expenses. Excluding this recovery operating income increased $900,000 or approximately 11% quarter-over-quarter.

This increase resulted from $3.2 million in additional gross margin primarily from natural gas service expansions, other customer growth and the Florida Gas Reliability Infrastructure Program or GRIP as we commonly refer to it.

The increase in gross margin was partially offset by a $2.4 million increase and higher operating expenses excluding the litigation cost recovery to support growth such as depreciation, amortization asset removal as well as higher payroll and benefit costs.

On Slide 5, the Unregulated Energy segment reported an operating loss of $2 million for the third quarter of 2014 compared to an operating loss of $1.8 million during the third quarter of 2013. We typically report an operating loss in the summer given the seasonal nature of the propane distribution business.

Quarter-over-quarter gross margin for this segment declined by $330,000 due principally to lower margins from Xeron which were partially offset by lower other operating expenses. Slide 6 highlights the key variances between third quarter 2014 and 2013 results.

As indicated, non-recurring charges discussed earlier accounted for $697,000 or $0.05 per share decline in net income and earnings per share for the third quarter of 2014.

Increased gross margin generated primarily from natural gas distribution and transmission system expansions, customer growth and the Florida GRIP program contributed $2 million or $0.14 per share in increased earnings.

This increase was offset by $1.7 million or $0.12 per share in higher operating expenses and $279,000 or $0.02 per share in higher interest charges associated with increased investment in the company's businesses.

For the quarter, BravePoint’s gross margin increased $346,000 which was partially offset by $175,000 of higher other operating expenses both stated on an after tax basis as shown on Slide 6. Mike, will discuss the sale and BravePoint later in the conference call.

For the nine months ended September, 2014, earnings per share had increased by $0.19 per share or 12% as shown on Slide 7 from $1.59 per share to $1.78 per share. A reconciliation of year-to-date net income and earnings per share is shown on Slide 8.

The net impact of several unusual items including colder weather in the first quarter of 2014 compared to last year, recovery of litigation cost incurred prior to 2013, sales tax expense associated with the Eastern Shore Gas acquisition and additional other non-income tax expense during 2013 accounted for $1.4 million or $0.10 per share in additional earnings for the first nine months.

Increased gross margin resulting from natural gas expansions and other customer growth, colder temperatures in the first quarter the Florida GRIP contributions from acquisitions completed in 2013 and increased wholesale propane sales added $9.3 million or $0.63 per share to earnings year-to-date.

Increased other operating expenses associated with supporting the growth we have achieved and positioning for continued growth as well as incentive bonuses resulting from strong financial results reduced earnings for the first nine months by $7.9 million or $0.54 per share.

On a year-to-date basis, BravePoint contributed $490,000 of additional gross margin and incurred $609,000 in higher other operating expenses both on an after tax basis. Finally, an increase in net interest charges of $0.03 per share was offset by a $0.03 improvement in net other charges during the first nine months of the year.

In total, these changes results in net income of $26 million or $1.78 per share for the first nine months. We believe this higher performance on a year-to-date basis demonstrates continued successful implementation of our strategic plan and positions the company well in terms of 2014s overall expected performance.

Slide 9 is indicative of the company’s commitment to maintaining a strong balance sheet which should facilitate access to competitively priced capital to fund our growth initiatives. Our equity to permanent capitalization was 64% and equity to total capitalization was 55% as of September 30.

We expect our financing requirements for the rest of this year to be met through utilization of our short term lines of credit. Given our plans for additional capital investment in 2015, we expect to secure additional short term debt capacity as well as access the long term capital market to meet our financing needs.

Slide 10 shares the forecast of $112 million in capital expenditures for 2014. Of this $93 million is expected to be invested in our regulated energy operation. In terms of 2015, we are currently finalizing our capital budget but expect to make capital investments at a level at least equal to our 2014 capital forecast.

I would like to point out that the magnitude of the project we are undertaking today require a longer construction period and, therefore, longer gap between the announcement date and when they are placed into service. We expect this trend to continue in 2015.

Acquisitions and service expansions in our natural gas distribution and transmission businesses are examples of the significant capital investments that we have made which have been a major source of profitable growth in the past and which we expect to contribute in the future.

Slide 11 details the margin contribution from key projects for the third quarter on a year-to-date basis and forecasted impact for 2014.

For the first nine months of 2014 these initiatives accounted for $9.6 million in additional margin compared to the first nine months of 2013, and they are expected to generate approximately $24 million in gross margin which represents approximately $11 million in incremental gross margin for the full year.

Our financial success has been a result of our ability to identify significant opportunities to invest in growth while maintaining our capital investment discipline. We set targets for our investment levels and pursue profitable opportunities that meet our investment objectives while achieving target return.

The level and effectiveness of the capital investments we have made have fostered the earnings and dividend growth and ultimately the shareholder return that has set us apart. Herein lies the path for our past success and the clear road map for our future. Now I will turn the call over to Mike McMasters, President and Chief Executive Officer..

Thank you, Beth, and good morning, everyone. As Beth has highlighted, 2014 is shaping up to be another strong year for Chesapeake. Before moving on to Slide 12, I would like to say a few words about some of the items that differentiate us as a company and our ability to take advantage of the natural gas price advantage.

We are fortunate to serve areas that have organic growth opportunities. But we are not resting on our laurels, but rather we are looking at opportunities beyond our existing service territories and offerings. We are continuing to strengthen our business development activities to expand our reach and capabilities to enhance our ability to grow.

Many companies have service territories that have growth opportunities. Many others have far more resources to identify and development opportunities around the country.

What separates us from those is that our team does remarkable job of identifying and developing growth opportunities in a disciplined manner and effectively manage regulation to produce superior returns to shareholders.

This enables us to deliver clean, reliable, low cost energy to our customers and generate returns on capital that are above peer group medians and, therefore, access to capital necessary to continue our growth cycle. Turning to Slide 12.

The environmental and economic advantages of natural gas continue to provide opportunities for the expansion of its use in our service territory and across the United States. Natural gas is an abundant, clean and affordable fuel, and the significant reserves we have here in United States provides security of supply and price.

This is reflected in the comparison of energy prices on Slide 12, which shows that natural gas enjoys a significant price advantage compared to oil and is expected to maintain this advantage for the foreseeable future. This natural gas price advantage coupled with the competitive advantage of our company creates the opportunity for continued growth.

As Slide 13 summarizes, on September 15 the Florida Public Service Commission approved a settlement in the company's electric rate case in Florida. The new rates were effective November 1 and will result in annual increase in revenue of approximately $3.8 million. The settlement included an authorized return equity of 10.25%. Turning to Slide 14.

In September, 2014, the company announced its first combined heat and power project in a newly formed subsidiary Eight Flags Energy. The FERC qualifying facility will be sited in Amelia Island, Florida at the Rayonier Advanced Materials Paper Mill.

The plant will have 19.8 megawatts of generation capacity and all electricity generated will be sold to our electric distribution system in Florida. Steam from the plant will be sold to Rayonier Advanced Materials and a contract for these sales has been executed.

The facility will cost approximately $32 million to construct and is expected to be on-line in July, 2016. In addition to generating approximately $7.3 million an incremental margin the electric output from the plant is expected to reduce our purchased electric cost for approximately $4 million annually.

We continue to look for similar opportunities across the areas we serve. Turning to Slide15, on October 1, 2014, we sold our advance information services business BravePoint for $12 million in cash.

As indicated on Slide 15, we expect to record a pretax gain of $6.5 million to $7 million or about $4.4 million after tax from the sale in the fourth quarter of 2014. The proceeds from the sale will be reinvested in our regulated and unregulated energy businesses.

Turning to Slide 16, we see attractive opportunities for growth across our energy businesses. As in the past, we will continue to look for profitable opportunities in natural gas distribution and transmission businesses.

As a result of past expansions, we are positioned to provide service to many new customers where service is not previously available. To maximize this opportunity, we have developed conversion programs to make it easy for these customers to convert to natural gas.

In addition to providing service to new customers, we are also looking to provide new services to our existing customers. Finally, we expect to generate additional margins through the initiatives such as the GRIP program, providing natural gas service to power generators and other applications for natural gas.

In the Unregulated Energy business we expect to benefit further from the integration of previous acquisitions and we will continue to pursue profitable opportunities within our footprint. Further success with our community gas system strategy and startups should also generate growth.

Additionally combined heat and power projects, compressed natural gas, propane vehicles and midstream opportunities all represent potential avenues to supplement growth in this segment. As the shareholder return Chart 17 shows Chesapeake has produced top quartile return to shareholders for the 1, 3, 5, 10 and 20 years ended September, ‘14.

Over the past 20 years Chesapeake shareholders have earned more than 13% returns on a compound annual basis. As shown on Slide 18, for the five years ended June, 2014, Chesapeake has led its peer group in compound growth and earnings by delivering annual growth of 14.25%. We think that the formula for success is clear.

Turning to Slide 19, while the amount of capital invested is important it only benefits shareholders if the return generated justifies the investment. As Chart 19 shows the company has delivered return on equity in the top quartile and well in excess of the peer median for the 1, 3, and 5 years ended June, 2014.

Our average return on equity for the five years ended June, 2014 was 12.16% compared to the peer group median of 9.71. Slide 20 shows our continuous dividend growth. In May, 2014, the board of directors increased the company’s dividend by 5.2% and compound annual growth of dividend over the past five years has also been 5.2%.

The growth in the dividend has been supported by earnings growth as evidenced by an average payout ratio of 48% over the five years ended 2013. We understand how important dividends are for 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 are committed to dividend growth supported by earnings growth and believe that the growth potential in our service territory and our low payout we are well-positioned to provide superior dividend growth in the future.

Turning to Slide 21, is the balance of investing relatively larger amount of capital at higher returns that underlies our financial success in generally above growth average growth and earnings that has allowed us to pay out higher dividends and that high dividend growth over the long term.

This graphic on Slide 21 contrasts capital spending and return on equity for 43 gas distribution, electric and combination utility companies. As you can see, Chesapeake continues to be in 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. Slide 22 shows our investment proposition. We have engaged employees who are focused on cultivating profitable growth.

They build on our portfolio of strong, efficient, utility and energy businesses and our strong balance sheet to create new opportunities for growth in areas we know using skills we possess. We believe this formula will continue to position us to deliver superior earnings growth, dividend growth and total return to our shareholders.

Slide 23 compares how we’re delivering value relative to our peers. I am proud to say that our employees have delivered top quartile performance in 17 out of 20 categories. We plan to work hard to maintain our performance going forward. Thank you again for joining our call today and for taking interest in or being a shareholder of Chesapeake Utilities.

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

(Operator Instructions). Your first question comes from the line of Spencer Joyce from Hilliard Lyons. Your line is open..

Mike, Beth, good morning. Happy Friday..

Good morning, Spencer..

Good morning..

First off, congrats on a pretty solid quarter here despite the expense uptick and then specifically the Eight Flags and the rate case announcement in Florida, looks like things are humming right along.

But on that the question side, I wanted to talk about the CapEx projection just for a second because if I remember correctly we saw a substantial spike and expectations about a quarter ago and then with this quarter we see that kind of ratchet back now to the $110 million, $111 million range.

And I am wondering specifically what changed kind of over the past 90 days that would drive such a delta in the expected spend for this year?.

Spencer, it’s really the timing of some of the projects that we had in that higher projection and some of that is -- most of that is now carrying over into our forecast for 2015. And that’s why we laid out before you.

We don’t have the budget finalized yet; we’re in the process of doing that right now, but the spend next year will be equal to or greater than the level of spend that we’re talking about this year. So it’s really a carryover impact the timing of the projects..

Yes, it slipped by 90 days and it just kind of stuck with that second quarter. If it slides by 90 days it falls in the following year so..

So, would it be somewhat of a timing issue? And I am assuming kind of multiple projects here.

Is it possible that we see perhaps outsized CapEx in Q1, Q2 next year or would it -- this trend follow more of your usual spending pattern?.

I think what you’re going to see is you’re going to see increased spend in those first couple of quarters related to some of the projects that we will be pursuing. And there will be more information coming out about that at a later time..

Okay, fantastic. I think I got that piece. Also congrats on the BravePoint sale, I think most people were pretty happy to see that, I know it’s not a piece of the business we spend a lot of time on, but look forward to being able to put that capital kind of back into the core regulated side.

But my question for either of you is can you kind of quantify what may be in trailing 12 results from the standpoint of BravePoint whether it would be their top line or operating expenses or even a net income number that may be kind of worked into forward estimates that maybe we should be backing out at this point?.

Yes, trailing 12 months is about $300,000 loss actually for BravePoint. I guess the net income number..

Okay..

That’s just a slight loss..

Okay, got you. And you got a bit improving a little bit but I wasn’t sure if it was still kind of at a loss there..

I think our gross revenues are -- gross margin shows up somewhere in the documents..

Yes, but that’s on a year-to-date basis that’s out there but..

We can get to the, okay. We can get to the trailing 12..

Okay, great, great, yes. But if it’s roughly breakeven on the net income that’s probably most important piece too..

Yes..

That’s all I had. Again congrats on a pretty solid performance here in Q3 and we’ll talk soon..

All right, thanks, Spencer..

Thanks..

(Operator Instructions). There are no further questions at this time. I turn the call over to President and Chief Executive Officer Mike McMasters..

Thank you. We’re very excited about where we are right now as a company. We’re looking forward to executing on the opportunities we've been developing. I just want to thank everyone for spending time with us this morning and have a nice weekend. Thank you, bye..

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