Beth Cooper - Senior Vice President and CFO Mike McMasters - President & CEO.

Spencer Joyce - Hilliard Lyons.

Good morning. My name is Jack; I'll be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2014 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] Thank you. Ms.

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

Thank you, Jack. And good morning everyone. We appreciate you joining us this morning to review our fourth quarter and yearend results. We know that this is a very busy time at the height of the earnings reporting season and we appreciate your continued interest in the company.

Joining me on the call today are Mike McMasters, President and CEO; and Mat Kim, Vice President and Controller. We have prepared a presentation to accompany our discussion today. This presentation can be accessed on our website at www.chpk.com under the Investors section and Events & Webcast 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 2014 annual report on Form 10-K which was filed yesterday provides further information on the factors that could cause such statements to differ from our actual results.

Finally, please note that earnings per share data are shown on a fully diluted basis and reflects the company's three-for-two stock split effective September 8, 2014. Turning to Slide 3. Yesterday we announced 2014 net income of $36.1million or $2.47 per share, an increase of $3.3 million, or $0.21 per share compared to 2013.

This increase in earnings per share represented growth of 9.3%. As reported fourth quarter net income was $10.1 million, or $0.69 per share. The fourth quarter results represented an increase in net income of $414,000, or $0.02 per share over the fourth quarter of 2013.

Our employees have consistently delivered increased performance year after year with 2014 representing the eight year of record earnings. We believe we are well positioned to build on this track record of success given our major projects currently in progress and some key strategic actions we are undertaking.

Mike will elaborate on these projects and actions later in the call. In addition to achieving record earnings there were two significant non-recurring items that impacted our results in the fourth quarter and therefore for the year.

In October, we announced the sale of BravePoint, our advanced information services business which represented an after tax gain of $4 million, or $0.27 per share. While we earn in significant returns from BravePoint over the 23 years we owned it, its recent performance was negatively impacting our financial results.

In December, we also recorded a non-cash impairment charge of $3.9 million, or $0.26 per share related to the uncertainty around the implementation of a customer billing system. Taking this impairment charge has eliminated our financial risks.

Setting aside these two non-recurring items, 2014 results reflect the continued execution of our strategy to generate profitable growth from systematic expansion, acquisitions, key projects, the gas reliability, infrastructure program or as we commonly refer to GRIP and various regulatory initiatives like the electric rate case in Florida.

While this growth has required additional capital investment as well as increased operating expenses, we believe our eight years of record earnings demonstrate our commitment to investing in growth and maintaining capital discipline to achieve outstanding earnings performance and therefore total shareholders return.

I'll now highlight the key accomplishments and results for the business segment during 2014. Detailed discussion of the changes in gross margin and other operating expenses by business segment for the fourth quarter and full year are provided in our press release and annual report on Form 10-K both of which were issued yesterday.

Turning to Slide 4, Chesapeake Regulated Energy businesses which include our natural gas transmission and distribution and electric distribution operations generated operating income of $50.5 million in 2014 compared to $50.1 million in 2013.

Absent to $6.4 million pretax impairment charge for the billing system, operating income for 2014 increased by $6.8 million to $56.9 million. The increase of $20.1 million in additional gross margin was cultivated from multiple areas of regulated energy segment.

$5.5 million from the full year impact of the Eastern Shore Gas acquisition for Sandpiper Energy, $5.6 million from natural gas service expansion, $2.9 million from the Florida GRIP, $2.7 million from other natural gas customer growth and $1.3 million from the electric rate case in Florida.

Excluding the non-recurring impairment charge the gross margin increase was partially offset by a $13.2 million increase in operating expenses which is largely driven by our growth and expansion projects. Turning to Slide 5, the Unregulated Energy segment reported 2014 operating income of $11.7 million, or $630,000 below 2013.

Approximately two thirds of the slightly low operating income was due to a $432,000 impairment charge for goodwill and intangible assets associated with Austin Cox. Gross margin increased by $2.5 million in 2014 as a result of the increased consumption of propane due to colder temperatures in 2014 as well as higher wholesale of propane.

The gross margin increased was more than offset by higher operating expenses reflecting the cost of servicing growth and the aforementioned goodwill and intangible asset impairment charges. Slide 6 highlights the key variances between the full year's results for 2014 and 2013.

As mentioned earlier, earnings per share increased $0.21 or 9.3% year-over-year. Non-recurring charges and gains including the BravePoint divesture, the billing system impairment charge and tax and litigation item netted out to account for $288,000 or $0.02 increase in earnings in 2014 compared to 2013.

Colder than normal weather accounted for $1.7 million, or $0.11 per share in additional earnings in 2014.

Consistent with our strategy of generating growth from our mix of regulated energy businesses increased gross margin was generated from multiple sources in our Regulated Energy segment as discussed earlier and totaled $11.5 million, or $0.80 per share. In the Unregulated Energy segment increased wholesale propane sales generated $0.06 per share.

Higher operating expenses consistent with serving this growth offset this additional gross margin by $9.3 million, or $0.64 per share. Gatherco acquisition transaction cost incurred in 2014 reduced earnings by $454,000, or $0.03 per share.

Finally, higher interest charges associated with financing, increased investment in the company's businesses reduced year-over-year earnings by $745,000 or, $0.05 per share. Slide 7 shows the major project contributing to margin in 2014 as well as their projected impact for 2015.

The full year impact of the Eastern Shore Gas acquisition and Sandpiper's result and major systematic expansion across our service territories contributed $24.3 million and margin in 2014 compared to $13.2 million in 2013. This represents an increase in margin of $11.1 million.

Our expectations at present are that these projects will contribute approximately $26.5 million in margin in 2015.

This projection does not include contributions from additional acquisitions and expansions such as the Gatherco acquisition we announced in February, 2015 or the expansion to provide new off peak firm transportation service to Calpine which is schedule to begin in the fourth quarter of this year.

Slide 8 shows a forecast of $223 million in capital expenditures for 2015. This does not include the $59.2 million acquisition of Gatherco which is being completed with a combination of equity, cash and assumption of a small amount of debt.

Of the $223 million and budgeted capital expenditures $176 million is expected to be invested in our Regulated Energy operations. Our capital budget includes several large projects that are still under development and negotiation.

As you know, we've already announced several large projects that require significant capital spending including the Eight Flags combined heat and power plant, the Calpine related expansion and our projected spend of $20 million for GRIP in 2015.

I'd also like to point out that the magnitude of the projects we are undertaking today require more extensive planning and evaluation as well as a longer construction period. The impact therefore is a longer timeframe between the announcement date and when the projects are placed into service.

We also anticipate that some project spending will carry over into 2016. However, in 2014 we spent 88% of our original capital budget as announced this time last year and over the last three years we have spent 82% to 88% of the original capital budget that we announced at the beginning of the respected fiscal years.

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 65% and equity to total capitalization was 54% at the end of 2014.

We've also provided a pro forma capitalization estimate based on the 2014 yearend capitalization plus the impact of the Gatherco acquisition. Given our expected level of capital investment, we secured additional short-term debt capacity in 2014 and expect to access longer-term capital as needed to meet our financing need.

We target to maintain a ratio of equity to total capitalization of 50% to 60%. 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 target for investment levels and pursue profitable growth opportunities that meet our investment objectives while achieving target returns. The level and effectiveness of the capital investment we've made have foster the earnings and dividend growth and ultimately the shareholder return that has set us apart.

Now I'll turn the call over to Mike McMasters..

Thank you, Beth. And good morning, everyone. As Beth has just highlighted, 2014 was another record year for Chesapeake. Before moving on to slide 10, I'd like to say a few words about some of the items that differentiate us as a company. We are fortunate to serve areas that have organic growth opportunities.

Nevertheless, we are not resting on our laurels but rather we are looking at opportunities beyond our existing service territories and beyond our existing offerings. To enhance our ability to grow we continue to strengthen our business development activities and to expand Chesapeake's reach and capabilities.

Putting on our foundation of dedicated and capable employees, what separates us from most is that we do a remarkable job of identifying and developing growth opportunities in a disciplined manner. Within effectively manage regulation to produce superior returns to our shareholders.

Our determination and consistent performance enable us to deliver, reliable, low cost energy to our customers, generate returns on capital that are above peer group mediums and as a result access the capital necessary to continue our growth cycle. Turning to Slide 10.

The environmental and economic advantage of natural gas continues to provide opportunities for expansion of its use in our service territory and across the United States. Natural gas is in abundant, clean and affordable fuel and 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 10 which shows that even with the falling price of oil late last year, natural gas still enjoys a price advantage compare to oil and is expected to maintain this advantage for the foreseeable future.

This natural gas price advantage coupled with our other competitive advantages creates opportunities for continued growth. One example of this growth is the power development of the Eight Flags Energy combined heat and power plant described on slide 11.

In September, 2014, the company announced its first combined heat and power project in a newly formed subsidiary Eight Flags Energy. The facility will be located in Amelia Island, Florida at the Rayonier Advanced Material Paper Mill. The plant will have 19.

20 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 combined heat and power plant and the related facilities will cost approximately $37.5 million to construct. The project is expected to be online in July 2016. In addition to generating approximately $7.3 million in incremental margin, the electric output from the plant is expected to reduce our purchase electric cost.

Earlier this week the Florida Public Service Commission approved the purchase power agreement between our subsidiaries Florida Public Utilities and Eight Flags. The project is expected to save our electric customers on a net present value basis approximately $28 million over the 20 year term of the agreement.

In this case in particular, our Florida team identified the opportunity to increase its service from Rayonier and lower FP's power cost and then reached out to the contractors with the appropriate expertise to assist the development of project in a manner that creates win for the community, our customers and our investors.

We continue to look for similar opportunities where we can economically meet customer need or he empowers in an environmentally friendly manner, leveraging our existing natural gas transmission and distribution systems.

Slide 12 shows another example of us looking beyond the traditional approaches to provide a service that addresses our customers' economic and energy requirements while generating returns on capital our investors expect.

In December 2014, Eastern Shore natural gas, our interstate pipeline subsidiary entered into an agreement with Calpine Energy services. Calpine is committed to enter into a 20 year service agreement with Eastern Shore to provide natural gas service for Calpine's new state of the art electric generation facility in Duval, Delaware.

We estimate that new service is expected to commence in the fourth quarter of 2015 will generate at least $5.8 million of margin annually. Eastern Shore will invest approximately $30 million to provide these services. Including pipelines to bring natural gas to electric generation plant is one of our identified strategies for future growth.

Turning to Slide 13. On February 2, 2015, we announced that we entered into a merger agreement whereby we will acquire all of the outstanding stock of Gatherco and merge the company into our newly formed subsidiary the Aspire Energy of Ohio. The transaction has provided $59.2 million and is expected to close during the second quarter of this year.

Given the timing of the closing, we expect the acquisition to be accretive to earnings during 2016, the first full calendar year of operations. Gatherco sent proxy statement to shareholders early this week, we are cautiously optimistic that they will approve the transaction at the shareholder meeting that is scheduled for later this month.

Slide 14 shows an overview of Gatherco's business. Gatherco was established in 1997 with the acquisition of Columbia Gas Transmissions, a natural gas gathering assets in Ohio. Today the company operates 16 gathering systems and over 2,000 miles of pipeline in the areas in and around the UDT shale play in Eastern and Central Ohio.

Gatherco serve more than 300 producers with gathering in liquids processing services and also deliver natural gas to local distribution companies that serve approximately 30,000 customers. We believe that there are significant growth opportunities to add both production and distribution customers in and around the system.

Gatherco also owns vital ways of way that could present additional opportunities for growth. Turning to Slide 15. We see attractive opportunities for growth across our energy businesses. As in the past, we will continue to look for profitable opportunities in the natural gas distribution and transmission business.

As a result of past expansions we are positioned to provide service to many new customers where service was 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 and looking providing these 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 will continue to pursue profitable opportunities both inside and outside of our current footprint. For the success with our community gas system strategy and startups to generate growth. We are engaging commercial fleets to convert their vehicles to operate efficiently on propane.

We currently have two public and three private propane filling stations to provide service to propane fuel vehicles. Additionally, combine heat and power projects, compress natural gas, propane vehicles and midstream opportunities all represent potential avenues to supplement growth in this segment.

As shown on Slide 16, Chesapeake generated returns on equity between 11% and 12.2% over the last 10 years. Our success in investing $545 million in capital over that time, along with the acquisition of FPU has enabled our eight years of record earnings and a five year compound annual growth rate and earnings per share of 11.3%.

We believe that the key to our success has been and will continue to be our ability to identify and develop opportunities to invest significant amount of capital and returns that justify the investment.

As shareholder return showed on Slide 17 shows Chesapeake just produced top quota return to shareholders for the one, three, five, 10 and 20 years ended December 2014. For each of the five period zones, Chesapeake's shareholders have earned more than 40% returns on a compound annual basis. Slide 18 shows our continuous dividend growth.

In May 2014, the Board of Directors increased the company's annualized dividend by 5.2% and compound annual growth rate of dividend over the past five years has also been 5.2%. The growth in the dividend has been supported by earnings spread as evidenced by an average payout ratio of 46% over the five years ended.

We understand how important dividends are to investors particularly given the expectations for broad market returns. We also believe it is superior earnings and dividend growth will enhance shareholder value going forward.

We are committed to dividend growth supported by earnings growth and believe that with the growth potential in and outside of our service territories and our little payout, we are well positioned to provide superior dividend growth in the future.

There is a balance and investing relatively large amounts of capital at higher returns that underlies our success in generating above average growth in earnings, which have allow for a higher than average dividend growth rate over the longer term.

The graphic on slide 19 contrast 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 20 shows our financial performance over the last five years. I am proud to say that our employees have delivered top quota of performance in 16 out of 20 categories.

Further, our 10 year of compound annual total shareholder return of 14.7% ranked first almost amongst our peers. We plan to work hard to maintain our performance going forward. We will now be happy to take questions. Thank you..

[Operator Instructions] And your first question comes from Spencer Joyce from Hilliard Lyons. Your line is open. .

Hi, Beth, good morning. How are you? Doing well and doing well in dodging snow best I can I guess it is headed your way now. .

There is plenty of cold here and we are smiling. .

I hear you. Well first off congrats on a good year, another year of double digit earnings growth is pretty impressive. I know we keep looking at that ROE versus capital investment slide. It is pretty impressive across the board. But turning here to a couple of questions I want to ask about the Eight Flags project.

That $7.5 million gross margin projection, is that going to be split somewhat between regulated and non regulated portion of the business? I know you won't have quite a few touch points along that chain there. Or is that perhaps going to be unregulated. .

There is all, the majority of that -- the vast majority of that's going to be unregulated, there might be a little small sliver of regulated but as you know the regulated electric distribution rate have pass through cost, you pass through cost of power and so there is not a whole lot of pick up there on the regulated utility side most of because of the customer.

.

Okay. Got you. So most of Eight Flags will be unregulated. I have to assume it will be while unregulated somewhat more stable and or predicable than perhaps some of the propane marketing or some of the current non regulated stuff that you are having.

Is that a fair assessment there?.

Yes. It is. You figure that this is going to be essentially base load power to FPU that's being sold and then we will have steam out they are being sold to Rayonier.

Okay, great, great. Thanks. Turning to Gatherco a little bit and I know I have asked this before but what's the timeframe on getting a read on perhaps specifically the EBITDA kind of on a trailing basis for Gatherco.

I know we have the purchase price but kind of don't have that other side of the equation to gauge a purchase multiple or really for-- kind of the price of value proposition of that deal at this point.

What's the timeframe for getting that stuff?.

Right now, Spencer, I think we envision as we come through the second quarter and we have some performance of that business unit we will be able to share some more information in regards to composition of their business. In terms of contribution of margin from the various components and provide more color around that.

So I think we are really looking at the -- probably the June 30th earnings release to have some additional information. .

Okay, great, that's very helpful. Also regarding perhaps additional growth there in the east Ohio region. Is it too much of leap at this point to think that the Gatherco deal is getaway for you all establishing an LDC or more heavily regulated subsidiary there in that region.

Is that really too far down the road to be playing into our outlook?.

I would say yes, Spencer. I think what you can see us doing -- obviously the first year we are going to be looking at every opportunity we can find and the company is actually been doing that anyway.

Gatherco as on its own but we bring access to more capital so we are going to be looking at initially cultivating their current opportunities and then also reaching out to the producers to see if there is additional services that we can provide, we think that there are -- and the LDC side of things that obviously will be at the top of our mind but starting an LDC from scratch is -- it will -- those cost to regulation is pretty high but we obviously can do that.

We know how to do that..

Yes. Absolutely.

So that will be something we will be considering so --.

Okay, great. One last kind of to tie up or follow up. I really think that organic customer growth story has been under emphasized by me for a little while.

So many exciting projects on your end, if I may have missed id did you all give sort of a core assumption for organic customer growth rate and kind of mammoth here for the past year we have been around 2%.

Is that -- would that be a number going forward that you all are comfortable with?.

When you look at our recent history and you are correct Spencer, when you look at 2014 overall, that is the growth rate that we have been running, it is been little here on the peninsula what you had is a 2.5% customer growth in Florida, some of that growth is driven on the CNI side so looking at from a growth percentage kind of a little less important.

So I think for purposes of looking at in today's market with where things are, I think that's a reasonable estimate to use. .

Okay, fantastic and good point there on kind of the gap between the growth there on the peninsula and there on the Florida peninsula actually. But that's all I had. Congrats on a good year. See you at AGA. .

[Operator Instructions] There are no more questions at this time. I'll now turn the call back over to Mike McMasters, President and CEO..

Yes. Thank you for joining us on our call today. And for taking interest in or being a shareholder of Chesapeake. We are proud what our team has accomplished for shareholders in the past. And we are committed to maximizing return going forward. Thank you. Bye. .

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