Beth W. Cooper - SVP, CFO and Assistant Secretary Michael P. McMasters - President and CEO.

Spencer Joyce - Hilliard Lyons.

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2015 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] Thank you. Beth Cooper, you may begin your conference..

Thank you, Phyllis, and good morning everyone. We appreciate you joining us today to review our third quarter and year-to-date results. Joining me on the call today with prepared remarks is Mike McMasters, President and CEO.

We also have several additional members of our management team here with us today to answer questions following our prepared remarks. The presentation to accompany our discussion today can be accessed on our Web-site under the Investors section and Events & Webcasts subsection or via our IR app.

Moving to Slide 2, before we begin, let me 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 2014 annual report on Form 10-K provides further information on the factors that could cause such statements to differ from our actual results. As summarized on Slide 3, yesterday we reported net income of $5.1 million or $0.33 per share for the third quarter.

This represents an increase of $1.9 million or $0.11 per share over the same quarter of 2014. While third-quarter results are typically lower due to the seasonality of our businesses, we are pleased to report quarter over quarter increases in net income and earnings per share.

Continued strong growth in both our Regulated and Unregulated Energy business segments generated the higher results. Our growth in earnings is the result of the concerted efforts of our employees to reach sustained earnings growth on our investments with total assets exceeding $1 billion for the first time.

In particular, our growth investment in plant increased $147 million since the start of 2015 as a result of the sustained execution of our strategic growth plans. I will now highlight the accomplishments and results for the two business segments during the second quarter.

Detailed discussions of our results for the quarter and nine months ended September 30 are provided in our press release and quarterly report on Form 10-Q, both of which were filed 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 $11.8 million in the third quarter of 2015, compared to $9.2 million for the same quarter in 2014.

The increase in Regulated Energy operating income reflected $4.3 million in additional gross margin from service expansions, customer growth, the electric rate case and the Florida Gas Reliability Infrastructure Program, or GRIP as we refer to it.

As shown on Slide 5, the Unregulated Energy segment reported a third quarter 2015 operating loss of $1 million compared to an operating loss of $2 million for the same period in 2014.

The Unregulated Energy segment has typically reported an operating loss or very modest earnings during the third quarter due to the more seasonal nature of the Delmarva propane distribution and Aspire Energy of Ohio operations.

In terms of the increased quarterly results, higher retail propane margins per gallon contributed $1 million of additional gross margin due to our retail and supply management strategies. PESCO, our natural gas marketing company, generated $479,000 of higher margin as our strategic growth initiatives are being executed and gaining momentum.

Lastly, Aspire Energy of Ohio also generated $2 million of gross margin during the quarter. Slide 6 highlights the financial results for the first nine months of 2015 and 2014. The Company reported diluted earnings per share of $2.16 for the first nine months of 2015, up $0.38 or 21% over the same period in 2014.

Increased operating income from both the Regulated and Unregulated Energy segments contributed to the higher earnings for the first nine months of the year. For the Regulated Energy segment, operating income increased $6.6 million to $47.6 million. Operating income for the Unregulated Energy segment increased $4.8 million to $13.7 million.

The key variances in terms of net income and earnings per share contribution between the nine-month results for 2015 and 2014 are highlighted on Slide 7. Unusual items resulted in a $0.05 increase in earnings per share for the first nine months, which primarily represents the gain from the customer billing system settlement.

Although the past winter was colder than normal, it was comparable to the previous year. So the weather impact year-over-year was minimal.

In our Regulated Energy segment, an increase in gross margin of $0.53 per share was generated from natural gas customer growth, service expansions in the natural gas transmission businesses, continued investment in the Florida GRIP to enhance infrastructure, reliability and safety, and the electric rate case.

In the Unregulated Energy segment, margin generated by Aspire Energy of Ohio, higher retail propane margins and increased customer consumption, which were partially offset by lower Xeron results, accounted for an increase of $0.39 per share.

Higher operating expenses largely driven by our growth, year to date performance and the addition of Aspire Energy of Ohio increased by $0.51 per share. Finally, interest charges and other changes reduced year to date earnings per share by $0.08.

Our financial success has been a result of our ability to identify and develop significant growth opportunities for investment. We set targets and aggressively pursue profitable growth opportunities that meet or exceed our target returns.

The level and impact of our capital investments over the last eight years have fostered the earnings and dividend growth and ultimately the shareholder return that have consistently set us apart. As we are drawing near the end of the year, we have updated our capital expenditures forecast.

We are currently projecting 2015 capital expenditures of $130 million to $160 million, as shown on Slide 8. Our planned investments for future growth are underway with the updated forecast representing only a timing difference in regards to these investments.

As a final note, with the execution of the Gatherco acquisition for $52.5 million, our cumulative 2015 capital investments will range between $182.5 million to $212.5 million.

As we discussed on previous calls, the timelines associated with capital projects have many stages with significant milestones included therein related to the inclusion of the projects in our capital budget and/or forecast, the required external approvals of those projects if any, the announcement of the projects, and then ultimately the in-service stage.

The permitting and regulatory processes have extended the overall timeline of the projects, thereby expanding the lapse of time between the inclusion in our capital budget and forecast and the announcement of the specific project terms.

Our team works closely with our customers to deliver customized solutions that fulfil their energy needs while also achieving the financial objectives of both parties. The projects we are undertaking today have increased both in terms of the number of projects as well as in terms of their complexity and magnitude.

Slide 9 highlights 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 69.4% and equity to total capitalization including short-term borrowings was 54.7% as of September 30, 2015.

We target to maintain a ratio of equity to total capitalization including short-term borrowings of 50% to 60%.

On Slide 10, we have summarized two new financing arrangements we entered into on October 8, 2015 to provide increased debt capacity given the planned level of capital expenditures and working capital requirements we are forecasting over the next few years.

First, we executed a five-year $150 million syndicated committed bank revolving credit facility with five participating lenders. Secondly, we entered into a $150 million private shelf agreement under which the Company may request funding that will allow us to align the financing associated with the larger capital projects with their in-service stage.

Earlier this year, the Board of Directors increased our 2015 dividend by $0.07 or 6.5% to result in an annualized dividend of $1.15 per share, as shown on Slide 11. We are firmly committed to dividend growth supported by earnings growth.

Given investors' expectations for broad total market returns, we understand the liable dividends are important for utility investors. The growth potential in our businesses is expected to provide superior dividend growth in the future. Slide 12 is a new table that we are introducing this quarter.

Our purpose in introducing this table is to provide a snapshot of the consolidated gross margin impact of major projects and initiatives completed since 2014 as well as new major projects and initiatives announced and underway.

As you can see, these projects and initiatives will add estimated gross margins of $18.4 million in 2015, $19.1 million in 2016 and $8.1 million in 2017. Our team is relentless in identifying and pursuing other opportunities that we expect to add to the gross margin trajectory in 2017 and beyond.

As shown on Slide 13, existing projects and initiatives generated $5.6 million and $13.2 million in additional gross margin for the quarter and nine months ended September 30 respectively. In terms of the full-year impact for 2015, we expect the incremental margin to represent $18.4 million.

As always, thank you for your support and interest in our growing Company. These are exciting times for Chesapeake Utilities, as exemplified through our strong financial results.

Now I will turn the call over to Mike who will expand on our strategic growth initiatives, long term performance results and our commitment to continued growth for shareholders..

Thank you, Beth. Good morning, everyone. Our financial results for the third quarter and year to date reflect the profitable growth opportunities that our employees have successfully cultivated in our energy businesses.

Our team remains committed to identifying and developing opportunities to provide future earnings and dividend growth for our investors. Before getting to any details, I thought it would be helpful to briefly touch on our strategic planning process that gave birth to our growth strategy. First, we update our strategic plan every year.

Second, we look for new ways to help support our employees and their community engagement efforts. Engaging our employees is a key component of our strategy. Every year we ask our business unit leaders and our strategic business development team to take a new look at market conditions and the new opportunities that are evolving in the market.

Finally, we ask our teams to figure out ways to grow at rates faster than they could if they simply continue doing what they are doing today. This keeps our thinking fresh. Turning to Slide 14, the key projects and initiatives that we are undertaking are intended to generate long-term sustainable growth.

Our execution of these projects and initiatives has been a direct result of our disciplined strategic approach to growth. The Aspire Energy acquisition is a good example of the results of our strategic planning process.

As a result of the acquisition, we now operate 16 gathering systems and over 2,000 miles of pipeline in the areas in and around the Utica Shale play in eastern and central Ohio. Over 80% of Aspire Energy's margins are derived from the sale of natural gas to two local distribution companies that serve approximately 30,000 end-use customers.

We believe that there are significant growth opportunities on and around our gathering systems. The addition of new producers or production to our system and the sale of that gas to customers is generating growth. We also own rights-of-way that we expect will present additional opportunities for growth over the long term.

The Aspire Energy team has moved quickly to align the business with our strategies and brand. Aspire Energy has adopted our brand, service excellence, safety and employee engagement strategies, while at the same time identifying and developing new growth opportunities.

As a result of our team's effort, we expect Aspire Energy to generate approximately $13 million in gross margin in 2016. We continue to be excited about the opportunities presented by the latest addition to Chesapeake family and expect that Aspire Energy will be accretive to earnings in the first full year of operations.

Slide 15 shows the progress we are making with the Florida GRIP. As you know, safety is the top priority in our Company. GRIP is intended to further ensure the highest level of safety for the communities we serve by accelerating the replacement of mains and services that are not made of coated steel or plastic.

The program enables us to earn a return on the investment we are making as well as recover certain program related costs associated with the replacement of the mains and services. We are forecasting total investments in this program to reach approximately $73 million by the end of 2015.

Accumulative margin added as a result of this investment is projected to be $7.4 million for 2015. To date, we have replaced approximately 200 miles of gas lines. Turning to Slide 16, in 2014 we filed a rate case for our electric operations in Florida which increased rates by approximately $3.75 million annually.

We have three more rate case filings that we are expecting to make in the next 18 months. We are preparing a rate case filing for our Sandpiper subsidiary operating in Worcester County, Maryland. We are required to submit this filing by the end of November 2015.

The filing was required as part of the Maryland PSC's approval of the Sandpiper acquisition and regulatory plan. We are also preparing to file a rate case in Delaware near the end of this year. Our last rate case in Delaware dates back to 2007.

Finally, our Eastern Shore Natural Gas Company subsidiary will file a rate case with the FERC for new rates effective February 1, 2017. The filing is required as part of the settlement of our last rate case. Slide 17 highlights the expected margin impact of several large initiatives.

These investments will be completed in 2016 and are expected to produce incremental gross margin of approximately $11.2 million in 2016 and $17.5 million in 2017. I'll take a few minutes to briefly summarize the projects.

Turning to Slide 18, the first of these three projects is the mainline moving to provide service to Calpine's recently constructed power plant in Dover, Delaware. Eastern Shore is investing approximately $30 million to build facilities to provide natural gas to the power plant.

These facilities are expected to go into service during the third quarter of 2016 and should provide $5.8 million in incremental annual margin. Turning to Slide 19, as part of our ongoing commitment and effort to provide safe reliable service to our customers, Eastern Shore Natural Gas has proposed a $32.1 million reliability project.

The project involves the installation of one compressor and 10.1 miles of 16-inch pipeline looping. These facilities are necessary to provide system reliability given the operational experience that we've had over the past two winter periods.

Eastern Shore has requested the FERC issue an order granting a certificate for the project by the end of the year. The project is targeted to be in service by the end of the third quarter of 2016 and will be included in the Eastern Shore's upcoming 2017 rate case filing.

Once the cost is included in our rates, the estimated margin associated with this project will be approximately $4.5 million.

As shown on Slide 20, on October 13, 2015, Eastern Shore submitted an application to the FERC to construct additional facilities that will enable Eastern Shore to increase natural gas receipts from Texas Eastern Transmission or TETCO by 53,000 dekatherms a day.

The project allows Eastern Shore to offer its customers diversification of supply and opportunities for securing the lowest cost natural gas available. Eastern Shore expects the project to be approved by the end of the year and in service the first quarter of 2016.

On an interim basis, Eastern Shore would generate approximately $2.1 million in additional gross margin. As you can see on Slide 21, our Eight Flags Energy subsidiary is constructing a combined heat and power plant located in our electric and natural gas distribution territory on Amelia Island, Florida.

The plant will produce approximately 20 megawatts of base load power which will be sold to our electric distribution system on the island. Steam from the plant will be sold to Rayonier Advanced Materials. The combined heat and power plant and related facilities will cost approximately $40 million to construct.

Site construction is moving forward on schedule. Recently, our management team travelled to California and participated in the final operational testing of the turbine prior to its shipping to Amelia Island. The testing was successful. The turbine is expected to arrive on the island on November 20.

In terms of timing, the project is expected to be online in the third quarter of 2016. In addition to generating approximately $7.3 million in incremental annual gross margin, the electric output from the plant is expected to generate savings for our electric customers of approximately $3 million to $4 million annually.

Turning to Slide 22, the environmental and economic advantages of natural gas and propane provide opportunities for their expanded use in our service territories and across the United States.

Natural gas is an abundant, clean, efficient, domestic and affordable fuel and the significant reserves we have here in the United States continue to provide security of supply, reliability and price.

As shown on Slide 23, natural gas and propane enjoy a price advantage compared to oil and are expected to maintain this advantage for the foreseeable future. This price advantage creates opportunities to satisfy new customer demand at affordable prices.

Turning to Slide 23, we believe that one of the keys to our success is our ability to deploy significant amounts of capital with attractive returns on investment.

As the chart on Slide 23 shows, Chesapeake continues to rank in the upper quartile of gas distribution, electric and combination utility companies in terms of capital invested and return on capital over the past three years.

Our ability to achieve higher than industry average returns while investing higher levels of capital relative to our size is a result of our ability to identify and develop profitable growth opportunities, our disciplined capital allocation process and is the cornerstone of our strong financial results.

As the shareholder return chart on Slide 24 slows, Chesapeake has produced top quartile total returns to shareholders for the past 20 years. For each of the five periods shown, Chesapeake shareholders have earned more than 12% return on a compound annual basis.

Slide 25 shows our financial performance over the past one, three and five years, and I'm proud to say that our employees have delivered top quartile performance in 19 of the 20 categories. Further, our 10 and 20-year compounded annual total shareholder returns of 12.2% and 13.9% respectively ranked first amongst our peers.

To conclude with Slide 26, we recognize Chesapeake Utilities' success story starts with engaged, dedicated and capable employees who are committed to expanding our infrastructure to meet the energy needs of our customers and communities. They construct and operate safe, reliable energy delivery systems, whether they are pipelines, wires or trucks.

Our employees do a remarkable job of identifying, developing and transforming opportunities into profitable earnings growth. We employ a very disciplined capital allocation process and manage regulation to produce superior returns to shareholders. Our financial discipline is at the cornerstone of our decision making process.

Our employees' determination for excellence and consistently high performance enables us to deliver clean, reliable, low cost energy solutions to our customers while achieving strong growth in earnings and returns on shareholders' equity and therefore delivering superior shareholder value. We will now be happy to take questions..

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

First off, congratulations on an awesome quarter here. I think we are all positively surprised..

Thank you and we are glad for positive surprise..

Just one quick one from me here, and thanks for the additional color on the slides, they were really helpful. Want to talk a little bit about Aspire there. If I heard correctly, you mentioned about 80% of gross margin is going to be in that first calendar quarter which we missed out this year.

My question is, I guess correct me if I followed you wrong on that step, but should we be thinking about profitability from an EPS standpoint to be 80% plus there in Q1 as well, or is there still pretty good potential to have that spread out a little more evenly?.

I think the 80% number I think that you heard was related to the margin contribution from the sale to LDCs, the sales of gas to LDCs. Aspire does have the typical I'm going to say pattern of a temperature sensitive utility business, driven by the sales results that you see as you would expect. So there is some seasonality.

And I don't know off the top of my head what the percent of margins come from in the first quarter, but it is quite high.

You recall that off the top of your head?.

Spencer, using is I gauge the disclosures that we have out there, what you'll see for the first nine months of Aspire, you will see basically $7.7 million factored in for this year and then when you look at it for 2016, the first calendar year, what we put out there is $13 million.

That's going to include some growth but it does give you kind of a baseline from a margin perspective to say, we're really talking something much less than 50% when you look at that..

Okay. Yes, that makes sense and I had actually thought of that initially to back into that..

And that's actually, you commented in the beginning, that's additional disclosures that we put out there this quarter..

Yes, perfect. And I guess more broadly, I know over the past, at least on the last call, you all noted that so far so good on the integration front on Aspire.

Is that still the case and just any more general color on that purchase?.

Yes, that's still the case. When we purchased it, we looked pretty hard at the company obviously and it was sales to the LDCs that we thought made it very similar to what we are currently doing with intrastate pipeline on Delmarva and also the intrastate pipelines that we are constructing down in Florida.

And so we felt pretty good with the business model. We've been able to bring on a couple – several employees in Ohio that have I think added a lot to the organization and we are very pleased with our hires there. So I couldn't be happier I guess.

The last – the FPU acquisition was a very big acquisition and very much more difficult because of the size, with all the employees that we had there. The last two that we have done, Sandpiper and Aspire, with a relatively small size, 45 employees or so, have been I'd say very smooth. FPU was very smooth as well.

[Indiscernible] It had great earnings just out of the gate, but it just was more, it was harder work but it was a great acquisition..

Yes, absolutely. I mean that turned out to be a real homerun. Thanks for the color there. Glad to hear things are progressing well. Thanks..

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Mr. Mike McMasters, President and CEO..

Thank you for joining our call today and for your interest in Chesapeake Utilities. We are proud of what our team has accomplished for shareholders in the past and we remain committed to working hard to deliver shareholder value. Thank you very much..

Thank you. And that does conclude today's conference. You may now disconnect..