Beth Cooper - SVP and CFO Mike McMasters - President and CEO Stephen Thompson - SVP, President and COO, Eastern Shore Natural Gas Company.

Spencer Joyce - Hilliard Lyons Greg Cox - Baker America Merrill Lynch.

Good morning. My name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities’ second quarter 2016 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, Senior Vice President and CFO, you may begin your conference. .

Good morning, everyone. I’d like to welcome those again that are in the room today. We are live today again at Salisbury University, and special thanks to the Perdue School of Business for hosting us again for our second quarter earnings conference call, and special hello to all those that are joining us on the phone.

We are here today to talk about our second quarter and year to date results ended June 30, 2016.

Before we begin, as always, I have to talk about the disclaimer that we have, that our presentation today may include discussions about forward looking information and we would like to refer everyone to our annual report on Form 10-K for 2015 where we discuss the factors that could cause our actual results to differ from our forward looking statements.

Turning to Slide 13 to begin. Our second quarter results were higher than last year by approximately $0.11 per share. We recorded earnings per share of $0.52 -- diluted earnings per share for the quarter. Both on a net income and on an EPS basis, our earnings and our net income were approximately 27% higher than the previous quarter of 2015.

You will see that, that was driven by higher operating income both in our regulated energy segment and in our unregulated energy segment.

Basically you will see approximately $2.6 million of higher operating income with about $1.6 million or 63% of the increase coming from our regulated energy segment and the remaining 37% coming from our unregulated energy segment.

There were lot of things that happened during the quarter that contributed to that increase, including service expansion, new services, customer growth, pricing amendments, pricing changes in terms and a lot of things that overall contributed from our lot of our businesses for us to achieve these higher results. Turning to Slide 4.

First, we’ll touch on the regulated energy segment. Recall that our operating income as I showed on the other slide, was up by $1.6 million for our regulated energy segment. That’s the result of our gross margin, you will see, which was up $4.8 million.

There were a lot of factors that contributed to that, including $2 million that came from service expansions and new services, $1 million that was generated by our Gas Reliability Infrastructure Program and we talked about that in the last couple of quarters, that’s a program where we're actually replacing qualifying mains in Florida.

To date we’ve actually spent about $92 million and by the end of this year we'll have spent close to $100 million under this program. In addition, we also had about $820,000 of customer growth that came from beyond service expansions and new services, actually from growth here on the Peninsula as well as growth in Florida and split it up 50:50.

Here on Peninsula we’re achieving anywhere from about 3.2% to 3.6% in terms of residential customer growth and also we’re achieving commercial growth as well. In Florida, we’ve got a lot of strong commercial and industrial growth that’s occurring.

The other thing that happened, we had about $555,000 in terms of additional margins of interim rates that we basically really implemented in our Delaware division. In February, we were authorized to implement $2.5 million of interim rates on an annual basis. And so that's the quarterly impact from the second quarter.

And lastly, our CHP plant began operating in June and actually was fully operational and selling steam to Rayonier in July but in June, it was actually electricity and natural gas margin that we generated on the regulated side that represented about $432,000 out of the total $551,000 of margin overall for the plant.

Moving to Slide 5, and turn to the unregulated energy segment. Once again you will see me talk on the very first slide about there being 37% of the increase in our operating income came from the unregulated energy segment of which it was about $1 million.

And that really came from several different areas, including about $708,000 from our Aspire Energy subsidiary [indiscernible] we acquired that one last year on April 1.

They added an additional $708,000 in the second quarter of this year versus last year, because of some amendments that we made at pricing contracts and some other pricing terms that we had.

In addition, we generated about $464,000 of incremental margin also from a sales agreement entered into by our natural gas marketing entity, the result of the transactions that they're pursuing, this happened to be with another Ohio LDC company and they're finding other opportunities to expand in terms of new customers.

And then lastly, our propane distribution operations also recorded increased margin of about $370,000 and that's primarily from increased deliveries, a result of timing but also certain of our rate classes also experienced higher volumes in terms of what we delivered to them.

So on a year-to-date basis you will see overall, we started out the year and I will show on the next slide, where weather really hit coming out of the first quarter with the result of the second quarter, we actually surpassed on a year-to-date basis where we were last year by approximately $0.02, and to me it’s pretty remarkable, specifically when we look at Slide 7 in just a minute, where you will see we had about $0.38 of what we call unusual items and our growth was able to overcome.

So as I mentioned, turning to Slide 7, $0.38 of unusual items comprised of $0.26 of weather, $0.05 from a gain that we had last year, largely from a customer billing system settlement, and then lastly, we predicted in 2015 retail margins were very -- much higher than they had been when you look back over a period of time.

And we actually expected those margins to begin to decline and they did and that represented about $0.07. So $0.38 that was actually impacting where we had in a sense started this year off.

You will see right below that we saw increased gross margins of $0.40 that we’re able to completely overcome that and then because we don't have a full calendar year for Aspire Energy, we’re also showing the full impact of Aspire Energy which you will see at the bottom was $0.09.

So overall we were able to fully overcome the weather and the other unusual items and right now we're sitting ahead of where we were on a year to date basis.

So with the growth that we've had and we talked about -- I talked about a little bit that came through certainly in the second quarter, what was there in the first quarter, that’s been accomplished because of the capital expenditures that we've been investing in for many years.

When you look at our past over the last five years and we’ve actually included this year in that number but when you look at a five year period we've invested, if we fully invested $180 million that we’re looking to invest this year, about $679 million and that's really remarkable given where book capitalization is with the company.

The CapEx that we have on the horizon for this year includes the dollars for workorder [ph] of the Eight Flags CHP plant which went fully operational, also an expansion of facility to serve the Calpine power plant in Dover.

We have a reliability project, both of those projects were recently approved by the FERC and so we're moving forward and beginning to look at the construction part of those projects. And then lastly I talked about the Florida GRIP program where as I mentioned at the end of this year we'll have close to $100 million.

82% of the investments that we're looking to make are in the regulated energy business but certainly we are also looking for opportunities to grow on the unregulated side as well. As we continue to grow we wanted to have a balance sheet that can support that growth and you’ll recall I've talked about us investing about $679 million.

When you look at where our balance sheet is at the end of June, our total capitalization -- book capitalization for the company is approximately $715 million. So we've really invested a lot to see where -- you can really see that when you look at where our balance sheet is.

In terms of our capital structure, we’re sitting at about 53% equity to total capitalization.

On a current basis, it’s about 73% and when you look at what this shows you, you will see that our balance sheet has been growing as a result of the capital that we've been investing in, and one of the things that we look to do, is to have a short term and long term facility that’s available that help us as we’re looking to finance that CapEx.

We've talked about this on the last quarter, we have temporary debt facility in place, both lines of credit as well as a revolver. They represent basically about $320 million in the aggregate. We also have a long term debt shelf facility that we've actually partially committed to take a draw off of that facility in the amount of $70 million.

So we put in place, Tom has done a great job of helping build and put into place those estimates that help us financing both on a short term basis as well as over the longer term from a debt standpoint and as we continue to make that happen certainly we will look at access to debt and equity markets as needed to finance those capital expenditures.

Ultimately targeting a capital structure, a 50% to 60% equity to total capitalization position. While we're certainly focused on growing as a company having earnings growth, we want a dividend growth that’s supported by earnings growth. Most recently in May, our board increased the dividend by 6.1% over the last five years at 5.8%.

Moving to Slide 11, so as we think about the CapEx that we talked about that’s out there on the horizon still yet to be done and as we think and look forward to the future trying to provide a picture or a snapshot of where the margin growth is going to come from, we have a couple of tables that we include in our press release that show what margin has been achieved in the past, well project as we've talked about the way to mainline.

So we're at -- all of those projects that are underway, those that are in the public domain we try to lay out what the margin growth is that we know so that, that is now appearing for the financial community to see.

And so for 2015 we reported gross margin of basically from new projects about $25 million and that came from Aspire Energy, that new acquisition on April 1 out of 6.3, we have some other natural gas transmission expansions on short term and longer term basically $7.7 million margin from those.

Script added $7.5 million electric rate case at $3.7 million compared to the prior year, of that $25 million, $19 million of that margin was incremental over the prior year.

As we look at where we’re sitting for 2016 with our projects that are either done or are in the process of being done, we expect to have gross margin from those projects of close to $48 million. So well in excess of $20 million incrementally from those new projects either recently constructed or soon being constructed.

We try to also show is we're moving out to 2017 and 2018. What does it mean in terms of increased margin? And some of what you are seeing is there’s products for example, we have those 2017 system expansion bringing to ensure, which will replace some of the temporary services that we're providing right now.

We're still in the process of negotiating for 15 agreements.

So the margin that results from that project isn't reflected in the table but we always how on trying to continue the margin growth that we've seen in the past and you will see there’s $9 million that’s already been identified of incremental margins from ‘17 over ‘16 and then another 3 million in ’18 over ’17.

But there's other projects that are in the pipeline, or maybe interim services that may also reoccur that aren't necessarily in here because we don’t know for certain that those are going to happen. And so with that, I'm going to turn over now to Mike McMasters, our President and CEO, and he is going to talk about our strategic platform for growth. .

Thanks, Beth. Good morning everyone. I guess, turning over to the next slide, this is a conversation I guess we have quite frequently with our investors and I’d like to maybe go through it little shortly here. The first thing is the bottom of the slide, the triangle, our engagement strategy for broad strategic infrastructure for sustainable growth.

What we’re really looking for here is that we’ve got highly engaged employees that are doing a lot of great things out in the field and ultimately it’s those employees that are making this up possible and we have strategies that will increase our employees, I am going to try to like here. How is that? Is that working? And we’re sorry about that.

At any event, as those engaged employees that are doing a lot of the great work is making the stuff possible and with that, we also expect a great deal of the work focused on safety. When you have that as a foundation that provides you with the opportunity to understate operator existing systems in reliable safe manner.

And then you start adding on to that engaging with the communities as actually thinking that we do and we position ourselves for growth. And once we've done that appropriately, then we are able to move up the chain, rub the triangle and get to developing new business lines and executing existing business unit growth.

And that’s been where Beth’s just been talking about, all of these growth opportunities we have been doing and executing on, and we are looking both in our existing territories – we’re looking to garner our existing territories and we’re looking for new services and then finally, once you do that properly, you get the results that we’re seeing.

One, safety awards, top workplace, and top leadership awards, community service awards, achieving top-quartile growth in earnings, and achieving top quartile growth in senior shareholder returns.

Moving to Slide 13, this just provides a little bit details on the conversion of hedge but as you can see as the employees strategic alignment, the execution and also those results in top core places with in as the key component of what we are doing.

Engagement with the customers, and the communities, on slide 14, safety and reliability, environment stewardship, community service and there is the [smartphone]. I guess just a couple of things here. More recently in the past month that I think we’ve had two different ribbon cutting ceremonies for things that we're working on one.

We're marking forms, basically a customer in Seattle County that we've recently sent a service to, and they basically have been able to expand the facility and save money while they're doing it. And we’re there with the governor Hogan from Maryland for that ribbon cutting.

And earlier this week, transit corporation where our partners cut the buses, they are going to convert to propane that will be fueling those losses and it’s that over two years probably with the toll or transit corporation to make that happen. Next slide, strategic planning and thinking. The key is that we’re constantly trying to grow.

We want sustainable long term growth. And so the process that we use to help facilitate that there is outline here. One, strategic thinking. It’s really more really about the thinking or additional planning you have to have a plan but as you know as soon as you have a client in the next day, something changes, you have to react to that.

So the strategic thinking that goes into the plan prepares us for types of changes and a slightly, even thought in a 5, 6, 12 ‘;probably on a 10, 12 million 10 or 22 years ago now.

You know we used to say strategic client because on the top is get together, comp with a strategic plan and provide everybody with their insights on what we should do moving forward.

And I'm also going to weigh quite frequently fail and so we decided to go out to the business owners and engage every one of our business units in 3D process and ask them to tell us what how can you grow the business.

And then when you move into the second pass, you’re seeing that we provide targets for them that exceed what they need to do is they can – what they can do as they can the same business as usual and after a couple of years it will start to say all of these opportunities start coming to the table, and then execute it.

And so that has been a significant change in our process and has led to was developing these opportunities and then probably the last thoughts. We have it every year. We also as we see changes that are significant will change the plan in mid-year. One of the key processes that we use is a funnel.

And this process and it grows counsel I guess really but the following if you will talk about that personal left hand side. With the work that we are doing, we’re out there gathering information, that it’s exactly full analysis, proposal to problem et cetera.

You’ll see the numbers, a few projects start at the top of the funnel and a very few make it to the bottom.

And that’s part of a discipline that we go through, we were in Boston a year ago in – and they asked us a question about well, how many projects that we rejected and that caught me by surprise a little bit, like correct the answer, and I started thinking about it, was correct on a few actually.

And their thinking was that maybe we take everything that we see and that's not the way the process works. The growth counsel, we committed that probably two or three years ago.

The whole process was that it was a complexity in the volume of projects that’s coming through the business, we wanted to get more people engaged in the review and so we sent it out and started including exactly some operations, engineering business development, that were financial and legal backgrounds to sit in on these projects evaluations and ask questions.

And so like Jack counsel of Florida will be involved in these conversations, that will be usually conducted in Dover, and Jack would tie in over the phone, we tie in outside legal counsel also, Jim who is here today general counsel, [indiscernible] Steve, other executives, and all of this is support for our sustainability.

If we are making smart investments in earning return, and we can get access to the capital necessary for us to grow.

Performance quadrant on Slide 17 just shows the results of what we've been doing for the last three years and you look at the I guess vertical axis, you'll see weighted average return on equity, the horizontal axis capital expenditures, total capitalization, both of these we think are key indicators for us.

And you can see our return on equity were significantly above the median which is the product line slightly under 105. If you look at capital expenditures, total capitalization you can see we're way up there in 25% to 26% of our capitalization we're spending on average every year.

And as Beth mentioned ago about the capital we’re deploying and so we’re deploying higher levels of capital and earning higher returns which you would think would drive shareholder returns. On the Slide 18, you can see shareholder return over the last 20, 10, 5, 3, 1, year and as you get shorter in five years, 23%, three years, 27%, and one year 25%.

So it's been working for us.

If I look at this another way as well, and we’ve been comparing ourselves to our peer group and we know that’s been performing very well, so they felt they looked at our broader group, and we decided we look at all the New York Stock Exchange companies, and did the same calculation, where do we stand, what percentile are we for the total NYSE, and we were pretty shocked the first time we did this, and actually outsourced the calculation just to make sure that they weren’t making mistakes but you can see in 10 years, 93 percentile, five years, second percentile, three year, 94 percentile and one year 85th percentile, and we're just hoping that this doesn’t change us, a lot of these numbers, they are very obviously incredibly high.

Beth mentioned earlier we took a project, the Eight Flags Energy project, and is fully operational in July of 2016. This is a pretty significant accomplishment.

A few years ago our customer approached us and indicated that they were going to make some changes at the plant and eliminate we provide electricity from us [indiscernible] on the year on the island. When that occurred, our team in Florida decided that he is looking to this thing a little harder, if they can come up different plant for a customer.

And so with the effort, going to the plant a few times, getting some consultants to help, and working with the customer, they were able to come up with a strategy to do a combined heating power plant that would save or the customer would save the electricity customers on the island and also generate returns on capital for us.

And so it turns out to be a very successful project that as indicated averaged $7.3 million of margin a year.

Now talking about executing our current strategies, Beth mentioned earlier a little bit that we have a pre-filing for the FERC right now and that project has about, you can see, a 50 miles of pipeline looping and extensions and we’re upgrading the interconnect Texas Eastern Transmission company and also adding to our compression in Daleville, Pennsylvania, and that’s up to 88,000 dekatherms a day of new capacity.

Now 86,000 dekatherms may not mean a lot to you but that’s the equivalent of 86,000 residential customers. So that’s a big increase in our capacity.

So again this is a pre-filing which basically enables us to work through a lot of permitting questions that exist and also subject to tuning a little bit as we learn more about the customers who are in the process of negotiating the contracts. The growth strategy.

If you think about the utility, they think that we face – or there’s two primary constraints on our growth. One, you get an assigned footprint, that’s good from one standpoint. You can enter your footprint. The other side of that is it's what you can do outside your footprint.

It also constrains your growth, if you're constrained within that footprint, then your growth rate will be a function of the growth rate of the community you are serving. So it’s a big constraint. And so what we've done is, we sort of say, well, look, we need to expand our ability to provide different new and different services.

And so we're looking to do that in 85 projects, this is a good example of that. The second thing that we're doing is we're looking beyond the footprint. Looking for territories that are not being served and trying to generate or develop opportunities there and build facilities there to serve new territories.

The second constraint that we face is rate of return regulation. When you think about it, a utility is basically allowed to earn roughly 9.5% on the equity they have invested in the facilities.

And so if you are doing a great job, you are able to earn 10, 11, 12, 15 but what’s happening is you reduce rates to compensate for that returns in a sense of what a regulator deems appropriate.

And so what we're doing is we’re saying, okay, if we’re doing a very good job of identifying and developing opportunities, then we should be able to earn these high returns, so how can we do that and so they looks at ways to do that on a unregulated basis or lately, regulated basis.

And that’s essentially what we're doing and you can see the variety strategies that we have laid out on the slide. And with that, we will take questions..

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

Beth, maybe a question for you here first. I know we saw a little bit of margin impact from Eight Flags and Rayonier venture which was a nice little surprise for me. I was a little surprised it came on the regulated side. I know some of that is, or ultimately I believe some of that will be unregulated margin.

And the question is what is the split between what the reg and non-reg gross margin will be from that whole consolidated project once it's at kind of a full run rate there?.

Basically, Spencer, right now the $7.3 million that we have out there includes the sale of the steam to Rayonier and also includes some of the regulated margin that’s also occurring.

So we need to provide – because there were incremental or as you mentioned early margins, we're going to go back and as we lay out, the third quarter will actually provide more specifics about the pieces.

But the pieces that you had for the second quarter included – it was about 432,000 on the regulated side and then a very small piece to get you to the 551,000 unregulated. .

So with Q3 and maybe Q4 we will see a little cleaner split there. .

Yes..

Okay, perfect. Shifting over to the CapEx budget for this year, I know we usually lag the whole budgeted amount.

But I was wondering if the FERC approval announced just this morning for the reliability expansion may push us a little closer to the full budgeted amount this year or, really in general just of that FERC approval has any shift on the outlook for the rest of 2016?.

As I showed on that one slide, right now the forecast is just under $180 million.

What we look at, Spencer, in terms of kind of looking at it month by month with the approvals that we have, I think what we're seeing right now is we at least should come in I think somewhere between 150 to 170 but because of that developmental capital of 30 million, that I also laid on that slide, but it should be fairly close, we’re 70 million to 72 million in for six months.

And when we compare that to our expanding and looking at last year, it’s tracking pretty close. So I don't think we’re going to be way far off but you could be somewhere between 160 to 180. .

And then finally on the long term capital side, I know we have an agreement now for the $70 million of long term debt. I may have missed it.

What is the -- or is there specific timing on that when we should model that in?.

We can take that long term debt. We basically have until the end of April of 2017, that will be at 3.25, and so right now we continue to monitor it, part of that will be based on spending result there. We have some regulatory proceedings and filings are underway.

And so we look at an overall project strategy and what are projects coming into service, coupled with our regulatory considerations, but at the latest we can draw that down it will be April of 2017..

So it's just on – essentially an as needed or as desired basis on your end. .

The 70 million is locked in. So we will draw 70 million of long term debt before or by April 28 of next year, and we have another 80 million that we have on a shelf with credential that goes out for three years from when we initially entered into that.

And so we can basically take that 80 million, we can negotiate that with the point that we decide based upon the timing of our CapEx, we can pull that down at a later time.

But 70 million is committed, we’re pulling it, the question is between now and April 28, when do we draw?.

Your next question comes from the line of Greg Cox with Baker America Merrill Lynch. .

My question piggybacks on Spencer's question relative to the FERC approval of the Eastern Shore Natural Gas $36 million reliability project. You talked a little bit about the capacity increase on Slide 21.

Have you had an opportunity to quantify the margin benefit that you expect from the project? It might be a question for Steve but any color that you can provide there..

Yes, Greg, I'm trying to get to the slide real quick here. But on that -- I think it was Slide 11.

There is a slide where we have a gross margin table and I have a line there, it's actually Slide 11 and on there we have shown that right now our assumption in the future martin table is that it will be approximately $4.5 million on an annualized basis and it could be approximately half of that, we're estimating for 2017, so $225,000 is right now what we've got in our margin projection.

.

Thanks, Beth..

Thank you. A further comment, part of that we got the rate case filing that we're undertaking with Eastern Shore, we’re required to come back in. And so with that reliability project, it’s included within the rolled in treatment, and this is our best estimate right now but it could change as we move through that process. Steve, would you like to –.

Beth, that’s exactly right. You’re exactly right, Beth. There is no new capacity associated with project, reliability project and we roll into the rate case and the FERC did authorize rolled-in treatments, so it will be recovered through the rate base. So we will be filing somewhere in the December or January timeframe. End of Q&A.

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mike McMasters..

Thank you. Thanks everyone for joining us. We appreciate your interest in the company. I can tell you everybody's dedicated to doing the things necessary to continue to drive our growth. We realize we’re responsible for generating capital that are attractive and we're committed to doing that. So thank you very much. .

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