Beth Cooper - SVP and CFO Mike McMasters - President and CEO.

Spencer Joyce - Hilliard Lyons.

Good morning. My name is Lynn and I'll be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 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] I would now like to turn the conference over to Beth Cooper, Senior Vice President and Chief Financial Officer, you may begin conference..

Thank you, Lynn and good morning everyone. We appreciate you joining us this morning to review our first quarter 2015 results. On the call today with me 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. Moving to slide two, 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 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 is shown on a fully diluted basis and reflects the company's three-for-two stock split effective September 8th, 2014. I am pleased to report that 2015 is off to a great start. We continue to execute on our strategic growth plan.

During the first quarter we announced our acquisition of Gatherco which closed on April 1st. we are also continuing to develop and cultivate profitable growth opportunities in our natural gas and propane businesses across Delmarva and in Florida.

Our regulatory initiatives such as the Florida base rate and the Florida Gas Reliability Infrastructure Program, or as we commonly refer to it as GRIP, continue to support and supplement the growth.

As shown on slide three on Wednesday we announced first quarter 2015 net income of $21.1 million or $1.44 per share, an increase of $3.4 million or $0.22 per share compared to the same quarter in 2014. This increase in earnings per share represents growth of 18%.

We believe we are well-positioned to build on our successful track record given the Gatherco acquisition, several major projects currently in progress and other key strategic actions we are undertaking. Mike will elaborate on these later in the call.

First quarter 2015 results reflect the continued successful execution of our strategy to generate profitable growth from system expansion, acquisition, major projects and regulatory initiatives like the GRIP program and electric rate case in Florida.

I will now highlight the accomplishments and results for the two business segments during the first quarter. Detail discussions of the changes in gross margin and other operating expenses by business segment for the quarter are provided in our press release and quarterly report on Form 10-Q both of which were issued on Wednesday.

Turning to slide four, Chesapeake Regulated Energy businesses which include our natural gas transmission and distribution and electric distribution operations generated operating income of $22.2 million in the first quarter of 2015 compared to $21.1 million in 2014.

The increase in Regulated Energy operating income reflected $4.6 million an additional gross margin from service expansion, customer growth, the GRIP and the electric rate case. The higher gross margin was partially was offset by a $3.5 million increase in other operating expenses.

$722,000 of the increased cost were associated with several non-recurring items including transaction and vendor negotiation cost, with the balance of the increased expenses attributable to the growth and higher margins reported in this segment and our year-to-date performance.

As shown on slide five, the Unregulated Energy segment reported first quarter 2015 operating income of $15.2 million, which was $4.4 million higher than the same period in 2014. Higher earnings for this segment reflected a $4.5 million increase in gross margin while operating expenses increased only slightly.

The key drivers of the gross margin change from the first quarter of 2014 to the 2015 were higher retail propane margin and higher propane consumption on the Delmarva Peninsula which were partially offset by lower results Xeron due to less wholesale propane price volatility in the first quarter of 2015.

As a result a favorable supply management the Delmarva propane distribution operation experienced a decrease in its average propane inventory cost during the quarter in addition to lower wholesale prices which generated increased retail margins per gallon.

Our retail pricing strategy is guided by local market conditions which include competition with other propane suppliers as well as the availability in price of alternative energy sources. In the first quarter these conditions future enhance retail margins per gallon.

While we are pleased by the additional contribution from these higher margins, we do not assume that market conditions will remain as favorable going forward. These conditions may fluctuate based upon many factors including, but not limited to changes in demand, supply and other energy commodity prices.

As a result we do not factor this level of margin into our long term plans or forecast for future periods. Slide six highlights the key variances between first quarter results for 2015 and 2014.

As mentioned earlier earnings per share increased $0.22 or 18% quarter-over-quarter, the absence of BravePoint which was sold in October 2014 and colder weather during the first quarter of 2015 accounted for a $0.03 per share increase in earnings for the quarter.

In our Regulated segment increased gross margin of $0.19 per share was generated from multiple sources. In the Unregulated Energy segment higher retail propane margin less lower margin from Xeron accounted for an increase of $0.17 per share.

Higher operating expenses associated with serving growth offset this additional gross margin by $0.11 per share. Slide seven highlights the company's commitment to maintaining a strong balance sheet which should facilitate access to competitively price capital to fund our growth initiatives.

Our equity to permanent capitalization was 66.8% and equity to total capitalization was 57.6% at the end of March 2015. On a pro forma basis using the March 2015 capitalization plus the Gatherco acquisition which closed on April 1st, our equity to total capitalization was 68.8% and equity to total capitalization was 57.6%.

We target to maintain a ratio of equity to total capitalization of 50% to 60% and we will access longer term capital as needed to meet our financing needs. Our financial success has been a result of our ability to identify significant opportunities to invest in growth, while maintaining our disciplined capital allocation process.

We set targets for investments and pursue profitable growth opportunities that meet our investment objectives, while achieving target returns. The level and impact of the capital investments we've made have foster the earnings and dividend growth and ultimately the shareholder return that have consistently set us apart over the last eight years.

The 2015 budget for capital expenditures is $223 million as shown on slide eight. It does not include the $52.8 million acquisition of Gatherco net of the cash acquired in the transaction. The purchase was completed with a combination of equity, short term borrowings and assumption of a small amount of debt.

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

As you know, in addition, we have already announced three large projects that require significant capital spending in 2015. The Eight Flags combined heat and power plant, the Calpine mainline service expansion and our projected spend of $20 million for GRIP.

It is note 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.

Over the last three years we have spent 82% to 88% of the original capital budgets that we announced at the beginning of the respective fiscal year. Now, I'll turn the call over to Mike..

Thank you, Beth, and good morning, everyone. Turning to slide nine, on April 1, 2015 we completed the acquisition of Gatherco and merged the company into our newly formed subsidiary, Aspire Energy of Ohio, LLC. The enterprise value, net of cash, acquired was $52.8 million.

Approximately 593,000 shares of Chesapeake stock were issued together co-shareholders in the transaction, which brings our total shares outstanding to approximately 15,221,000 as of April 1, 2015. Slide 10 shows an overview of Gatherco’s business.

It was established in 1997 with the acquisition of Columbia Gas Transmission’s 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 Utica Shale Play and Eastern and Central Ohio.

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

Gatherco also owns valuable rights of way that could present additional opportunities for growth. We are making good progress in the integration of Gatherco into the Chesapeake family. As we indicated when we announced the transaction we are rebranding Gatherco as Aspire Energy.

Operationally we have moved some administrative functions to Chesapeake’s headquarters and have begun the implementation of our safety, environmental compliance and other programs including service excellence training for Aspire employees.

We are in the process of identifying and recruiting for key positions as well as new positions to support our growth plans for this business. We believe that Aspire will be accretive to earnings in the first full year of operations.

We are currently working with the team in Ohio to identify new growth projects and to add to the list of opportunities that are already on the board. We expect growth to come from additional sales to Consumers Gas Cooperative and from additional gathering services to producers.

We have harder director appreciative services and have already begun growth initiatives we envision. Slide 12 shows the major projects contributing additional margin for the first quarter of 2015 as well as their projected impact for the full year 2015 and 2014.

Transmission system expansions to serve customers in Newcastle and Kent Counties, Delaware, added 1.4 million in incremental margin for the first quarter of 2015. For the full year 2015, these expansions are expected to generate total incremental gross margin of $1.9 million compared to 2014.

As noted, projects implemented in prior years contributed incremental margin of $21.8 million in 2014 and are expected to contribute approximately same amount in 2015. Finally Aspire Energy is expected to contribute $8.8 million in incremental margin over the last nine months of 2015.

Slide 13 highlights s the expected margin impact of two large projects under construction that we have previously mentioned. Both projects will be completed in 2016 and are expected to produce approximately $31.1 million in annual margin once they are operational.

For the first project described on slide 14, Eastern Shore Natural Gas will invest approximately $30 million to build facilities to serve electric generator in Kent County. This project is expected to go into service during the first half of 2016 and should provide $5.8 million of incremental annual margin.

Second project shown on slide 15 is the Eight Flags Energy combined heat and power plant. As previously announced the facility will be located in the Amelia Island, Florida at the Rayonier Advanced Material 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 combined heat and power plant and the related facilities will cost approximately $40 million to construct. The project is expected to be online in the third quarter of 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, thus, saving our electric customers approximately $3 million to $4 million annually.

During the first quarter the groundbreaking ceremony for this plant occurred with more than 100 state, local and other key officials and attendants. We were pleased by the interest and support we received for the state-of-the-art facility.

Investing in infrastructure to serve the energy needs of large customers in Florida and on Delmarva is one of our key strategies for future growth. Turning to slide 16. 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 that we have here in the United States continue to provide security of supply and price. This is reflected in the comparison of energy prices on slide 16.

As indicated, even with the falling price of oil late last year, natural gas still enjoys a price advantage compared to oil and is expected to maintain this advantage for the foreseeable future. This natural gas price advantage coupled with our other competitive advantages create the opportunities for continued growth. Turning to slide 17.

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 continue to be positioned to provide service to many new customers where service was not previously available.

To maximize this opportunity we have implemented conversion programs to make it easy for these customers to convert to natural gas. As evidenced by the development of our Eight Flags combined heat and power plant, we are also looking to provide new services to our existing customers.

Finally, we expect to generate additional margins through 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.

Further success with our community gas system strategy and startups should 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 fueling stations to provide service to propane fueled vehicles.

Additionally, combined heat and power projects, compressed natural gas, propane vehicles and midstream opportunities all represent potential avenues to supplement growth in this segment.

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

As the chart on slide 18 shows, Chesapeake ranks near the top of 43 gas distribution, electric and combination utility companies in terms of capital invested and return on capital over the last three years.

Our ability to achieve higher than industry average returns on investing higher than industry average levels of capital relative to our size is the cornerstone of our strong financial results. As shown on slide 19, Chesapeake has generated returns on equity between 11% and 13.2% 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 and earnings per share of 11.3%. Slide 20 shows our continuous dividend growth.

On May 6, 2015 the Board of Directors increased the company’s annualized dividend by $0.07 or 6.5%. Compound annual growth in the dividend over the past five years have been 5.5% has been supported earnings growth as evidenced by an average payout ratio of 46% over the five years ended 2014.

We understand how important dividends are to investors, particularly given the expectations for broad total 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 and believe that with the growth potential in and outside our service territories and our little payout, we're well-positioned to provide superior dividend growth in the future.

As the shareholder return chart on slide 21 shows, Chesapeake has produced top quartile total return to shareholders for the one, three, five, 10 and 20 year ended March 31, 2015. For each of the five periods shown, Chesapeake shareholders have earned more than 14% returns on a compound annual basis.

Slide 22 shows our financial performance over the last one, three, and five years. I'm proud to say that our employees have delivered top-quartile performance in 16 of 20 categories. Further our 10 year compound annual total shareholder return of 14.9% ranked first amongst our peers.

We plan to work hard to sustain our performance and track record going forward. Turning to slide 23, as we have said before, our success starts with engaged dedicated and capable employees that construct and operate reliable energy delivery systems, their pipelines, wires or trucks.

Our employees take care of our customers and the communities we serve. They also do remarkable job of identifying developing and transforming growth opportunities in a disciplined manner. We manage regulation to produce superior returns to shareholders.

Our employees drive for growth through their determination and consistent performance, enables us to delivery to clean, reliable, low-cost energy solutions to our customers, generate returns on capital that are above the peer group mediums and as a result access the capital necessary to sustain our growth. With that I'll turn it over for questions..

[Operator Instructions] Your first question comes from the line of Spencer Joyce with Hilliard Lyons..

Hi. Good morning. Congrats on an awesome quarter..

Thanks Spencer..

Thank you..

Just a quick one here. Qualitatively can you talk a little bit about the acquisition pipeline that you see maybe in the context of some of the recent malaise in the oil and gas space. I know that the upstream stuff is probably where you're looking, but perhaps that's color the conversation a little bit.

And then separately, I know you all had been very controlled from a timing standpoint of when you've done acquisitions. It has been two or three all at one time.

Are you still out there looking being active or can we assume maybe we'll see Gatherco anniversary before you route there kind of in the marketplace again?.

Well, I guess, Spencer, actually the -- maybe just happens to be looked like it's one a year or something like that or once -- one every two years. We're constantly looking at things. As you know it's -- you look at a lot of things before you end up with one that makes sense.

And so we're going to stay disciplined and that disciplined to some degree slows us down.

But -- and as far as the pipeline, it's one of those things where I think if you're looking at two and you got a 5% probability or something or if you're looking at 10 and you have a 5% probability, something you don't really end up with a big pipeline, you're trying to do expected value.

So, it's just really hard for us to say or give you any real predictable pattern on that..

Okay.

And I guess also maybe with respect to Gatherco, I know we're still pretty early in this stages our getting in there and evaluating maybe some of the ground-level talent, but can you just talk a little bit about what you've seen maybe relative to your initial expectations, or so as far as integrating versus your initial timeline, kind of how that's going?.

Okay. Well, Gatherco is a relatively small company. There's about 45 to 50 employees. So, it's not a major integration if you will. What we found when we're talking to employees is they are actually very excited about the opportunity. What's constrained their company in the past has been their access to capital and so they are very pleased.

If you know we're looking to spend capital dollars and that's kind of sets them loose to accelerate their growth. And I think it's fair to say that to a person on our side, as they met Gatherco employees, they have been very pleased.

So, we think it’s a good match for us and from a culture and employee perspective in addition to the financial benefits..

Thanks. That's really encouraging to hear that they are excited and that the easier access to capital could be a long-term positive. But if your prior history is any indication, we may see some upside risk here. So, I'm pretty excited about it. But that's all I have. Thanks for the color and you folks travel safe out there EGA [ph]..

You too. See you there Spencer..

Thanks Spencer..

[Operator Instructions] Thank you. I will now like to turn the conference call over to Mr. Mike McMasters.

Thank you all again for joining our call today, and for your interest in Chesapeake Utilities. We're proud of what our team has accomplished for shareholders in the past and we're committed to working hard to deliver superior shareholder returns in the future. Thank you very much for time..

Thank you..

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