Good morning. My name is Nina, and I will be your conference operator today. At this time, I would like to welcome everyone to Year-End 2016 Conference Call. [Operator Instructions] Thank you. Ms. Beth Cooper, you may begin your conference. .

Good morning, everybody. I'd like to welcome those that are on the phone call today. Today's conference call is being held at Delaware State University in Dover, Delaware. We're actually conducting a call in the Bank of America Building, which is the business school for Delaware State University.

We're thrilled to be here, and a special thanks to the dean, Dean Covington, the faculty and the students that are joining us, and thank you to all that are joining us on the phone. We're excited to talk today about our year-end results and to talk about our path forward for 2017. .

Turning to Slide 2. As usual, I just have to briefly mention that today's presentation may include a discussion of some forward-looking information, particularly as we talk about our gross margin growth. I will refer everybody to our Form 10-K, where we talk about the risk factors related to those forward-looking statements. .

Now I'm going to turn the call over to Mike to talk a little bit about 2016 and our results for the year. There you go, Mike. .

Thanks, Beth. Well, welcome, everyone. 2016 was a very good year for us. We had an earnings growth, a little over 5%. We had less than 31% of our total capitalization we reinvested in the business. We got return on equity of 11.3%, annualized dividend up 6.1% and shareholder return of 20.2%.

Taking all of these metrics, you're looking at a very strong performance and not to mention 10th consecutive year of record earnings..

Business highlights. We've got a lot of growth in the past year. We've got growth in natural gas distribution and transmission businesses, both up here on Delmarva, Florida and also in Ohio.

Eight Flags Energy combined heat power plant was completed -- construction was completed this year and placed in service, just in time for hurricanes ahead [indiscernible] with great success..

Higher operating income contribution from Aspire Energy. That's our company up in Ohio that's been [indiscernible] 2015. Continued investment in Florida and our GRIP program. The GRIP program is a reliability program [indiscernible] we've had in effect for several years, and we're making great progress.

Positive outcomes from several regulatory proceedings. I think we've [indiscernible]. And then PESCO's natural gas marketing business has started up new services in Ohio and elsewhere in the country [indiscernible]. So that's overall a very good year. .

Generating record results. Diluted earnings per share on the top left-hand side on Slide 4. You'll see we've started at $1.91 in 2011 and have consistently grown through 2016 to $2.86. Again, 5.1% EPS growth; 5-year compound annual growth rate of over 8%; and 10-year, over 9%. It's a strong performance no matter what period you're looking at.

And then record net income of $44.7 million. We started at $27.6 million in 2011 and growing to $44.7 million in 2016..

Dividend growth. [indiscernible] our dividend growth, when you think about this, our objective is to obviously provide superior shareholder returns to our investors.

And what we're doing here is basically identifying great opportunities to grow the business, make disciplined [indiscernible] investments and, therefore, getting returns on capital that are adequate to generate earnings per share growth..

We're committed to long-term growth. When you look at the numbers, you can see our 5-year compound annual growth rate of dividend is 5.8%, and that's a very strong dividend growth rate for a public utility..

Shareholder return. This is just a -- you take a broader look at our performance relative to the entire NYSE. We've been comparing ourselves to utilities for years, and we thought this might be a little bit more informative if you look at it broader, and so [indiscernible] for the last maybe 1 year, 1.5 years..

And on Slide 6, what you can see is that comparison. You can see that when you look at us on the left-hand side, for 1 year, we're 56.6% outperformance, [indiscernible] of the other companies out there. And over a longer period of time, you see 91.9%, 81%, 94%, 87%. So we've been pretty stronger over time.

If we look at annual compound shareholder returns, the same thing. You'll notice that in 2016, we were not as -- we had a very strong year at 20%. But the broader market, 75th percentile, was at 33%. The 75th percentile, that's still [indiscernible]. .

So [indiscernible], and I'm going to turn the hard work over to Beth. .

So just digging into 2016 a little bit further. I talked about that we had record net income of $44.7 million. And what you'll see is that represents about $3.5 million of an increase in net income for the year. .

The biggest part of that coming in the fourth quarter. Notice in the fourth quarter, we had net income growth there of about $3.2 million. From an EPS standpoint, Mike talked about our EPS is up 5.1%. You'll see that was a $0.14 increase for the year. $0.17, in effect, came through in the fourth quarter, and so overall, once again, a very positive year.

It was growth both in terms of our regulated businesses as well as our unregulated businesses. We had growth in gross margins for both, which we'll talk about in just a minute. .

So in terms of our Regulated Energy segment, we had an increase of $17 million in regards to gross margins for the year that ultimately resulted in about $8.9 million because of expenses to support that growth hitting the operating income line. There were various different avenues that this growth came in across the board.

The first thing -- service expansion. From a service expansion standpoint, we increased there about $7.2 million in terms of gross margins, principally a large result of the interim services that we provided to a power plant here in Delaware. .

Secondly, we added $4 million from a gas reliability replacement program. That's been in place for several years under Jeff's leadership. And that particular program, we've invested over $100 million in capital expenditures, $26 million this last year, and we've replaced about -- over 210 miles of pipes in the state of Florida. .

We added another $2.7 million from what we call organic growth. On the Delmarva Peninsula, that was about $1.5 million of that $2.7 million, and that came primarily from both residential and commercial growth, with residential being more than 50% and that growth rate being about 3.4%.

In Florida, we added $1.2 million primarily from commercial customers, those representing that $2.7 million that I mentioned. .

We had a Delaware division rate case during the year. Rates went into effect on an interim basis in February, so we have 10.5 months of rate relief from Delaware from the new rates in the year. That represented $1.5 million, a partial year in total. On an annualized basis, it will be $2.25 million. .

We generated $1.4 million in terms of services related to Eight Flags, our natural gas transmission, our intrastate pipeline in Florida and also our distribution system at FPU. Both of those delivered natural gas that enabled our CHP plant to operate beginning in June..

And then lastly, we've been in a conversion process both in Ocean City -- or excuse me, Ocean Pines and West Ocean City, and we've done quite a few conversions to date, and that added about $736,000. And just over a week ago, we announced that we had finally gotten natural gas to Ocean City itself, and so we'll be getting a conversion process there. .

On the unregulated side, what you'll see is that basically, we had gross margin growth at the top of $4.6 million ultimately because of the weather and the expected -- we had expected lower retail margins per gallon on the propane side. Ultimately, that growth was masked by those 2 factors.

And on the unregulated side, the results were down slightly for the year. .

one, 2015 only included 9 months of results because we acquired the business on April 1; and then second, as a result of some amendments to some contracts we made in terms of pricing, customer growth that was in excess of 10% and then also some additional fees that were placed into service. So ultimately, $5.9 million from Aspire.

In addition, our Eight Flags CHP plant went into service in June. That added $3.6 million, coupled with, I talked earlier about on the regulated side, another $1.4 million. So in total, $5 million for a partial year from that plant. .

Our PESCO operation, which is our natural gas marketing operation, also added $1 million because of new contracts and new services that they provided in their FERC areas as well as they've expanded also into Ohio.

Also in the increases I talked earlier were anticipated lower retail propane margins; the weather, which we'll talk about in a few more minutes; and then lastly, lower gross margins from Xeron. .

When we look at it on an EPS basis and reconcile it year-over-year, turning to Slide 10, what you will see is that the gross margin that I talked about was about an $0.83 increase year-over-year, which was offset by expenses to support that growth of about $0.44. Weather represented $0.15, so it negatively impacted the year's results by $0.15.

We talked a little bit about Aspire. It added $0.09. And we did an equity issuance in September, and that represented basically about $0.05..

Moving on to Slide 11. This just actually lays out those gross margin components that I talked about earlier. So those projects, in effect, added in total about $24 million for the year. Those projects are also going to have an incremental effect in 2017 that we've laid out here.

And so they are going to add approximately $5.2 million additionally, above what they contributed this year. And then there's also some projects that are in the pipeline, so to speak, for completion that will add slightly to '17 but on a larger basis in terms of 2018..

So this includes the system reliability project, which we're in the process of constructing and will have complete by the 1st of April. Our assumption here in the projects and initiatives underway is that project, we will get rate recovery as part of the rate case that we're currently involved in.

And so we've got a partial year of about -- almost $2.3 million. The other project that is being factored into here is our 2017 expansion projects, which, when completed, you will see will add an incremental $17 million, coupled with the system reliability project next year..

To talk a little bit about the 2017 expansion project, it's the biggest project that we've done in our history in terms of a project from the ground up. With that project, we are meeting our customers' demand to bring low-cost, reliable clean energy, more of that to the Delmarva Peninsula.

What it will do for us as a whole is to increase our FERC transportation deliverability by about 25%, and we're meeting the needs of customers. There's about 5 customers, one of those being ourselves, our distribution entities, our 3 distribution entities. We made our initial filing with a prefiling in May of last year.

We filed our CP application in December, and it's currently, right now, sitting before the FERC. .

Our goal, moving to Slide 13, is that, that project would be, hopefully, be approved by the FERC in May, and we would begin construction shortly thereafter and complete by the end of the year, with the margin most likely beginning in 2018. The margin is $15.7 million from this project.

It will represent an additional 61,162 dekatherms, which is about equal to 60,000 customers, normal residential customers that we serve today. On the Delmarva Peninsula, we currently serve about 74,000 customers, so this is a pretty significant project when you look at it from that vantage point.

It's just shy of being a $100 million project, so very significant, once again, overall..

To be able to finance that project and to also support the other projects that we're looking at right now and be able to finance those on a go-forward basis, it's been very important to us to have the balance sheet that can support that growth. And so if you look at our balance sheet today, our total capitalization is about $805 million.

Comparing that to 2012, we were at about $428 million. .

On an enterprise value, as a company today, we're just shy of $1.5 billion overall, but we've had access to the equity market. Just last year, we did an equity offering in September. We have capacity under some of our existing debt agreements. Right now, we utilize lines of credit. We have a revolver.

And in total there, we still have another $180 million that we can access there to support our growth. .

We also have a shelf facility with Prudential. We're accessing part of that in April to do a long-term debt placement of $70 million, so that leaves another $80 million. And so we're constantly looking at what ways can we continue to add additional access to capital to support our growth. In addition, I mentioned the equity.

Our current equity to total capitalization is about 55% at the end of the year. So very important to us. .

And now I'm going to turn it over to Mike, who's going to talk about our strategic platform for growth. .

Thanks, Beth. I'm grabbing the microphone here [indiscernible]. I guess I want to talk about this platform for growth, and really, the key here is how and why are we growing so fast, how we're able to do that, and it starts from the bottom up. This is a pyramid of various engagement strategies [indiscernible]. There's engaging employees.

They're engaging with customers, engaging with the communities. We have a brand strategy to support that, and we have strategic [ph] thinking to support that. .

In addition, when you think about this [indiscernible] for reliability, high quality of service to customers, high levels of safety. And once we do all of these things right, then we're in a position where we can grow the company. Without these things, we don't have the credibility or the time spending on the growth side.

So if you look at the next layer in the blue, we're developing new lines of business, executing business growth, et cetera. And again, it's all being [indiscernible] by the availability of our time created by getting the foundation correct. And at the top of the pyramid, you'll see the results.

And that's where we're given safety awards, top workplace awards, leadership awards, et cetera. So the model is working for us, and we're working it very hard, and we're investing in the bottom of that foundation continuously..

The performance quadrant on Slide 16. You'll notice that we are staying in top right-hand quadrant of that graph. What you'll see looking at the left-hand side, clearly, the average return on equity. The line, the dark line is marking the 10%.

Over to the right-hand side is the peer group [indiscernible], and you'll see that we are significantly higher at 12%. [indiscernible] 11%, still 10% higher than the median.

And if you look at the capital expenditures, which is on the horizontal line at the bottom, capital expenditures/total capitalization, you can see we're deploying a lot more capital than most of our peer group, more capital but one of our peers.

And the combination of the higher returns on equity and the deployment of capital is creating earnings growth..

So capital expenditures, basically, our investments in growth over the last few years. The bottom right-hand side is probably the easiest way to explain this thing. But if you look at the 2 green lines that are running left to right, one says target and one says range.

Essentially, we know that if we can invest capital in the next 2 targets, we can grow earnings around 5% if we just maintain an ROA of somewhere in the 10.5%, 11% range. And so you can see that we're exceeding those levels, which is enabling us to grow at higher rates..

Slide 18. Looking forward, you'll notice 2017 $260 million capital budget. If you go back, we had about $169 million in 2016, so you can see there's a significant increase in our capital expenditures.

And so we have to keep those returns as strong as we can and above the cost of capital, and we'll get the earnings per share growth [indiscernible] total shareholder return expansion [indiscernible]. .

Key elements of our strategy. There are several here. Executing on capital investments that generate returns higher than cost of capital. I mentioned that. Expanding our energy distribution and transmission businesses organically, and that includes expanding to new geographic areas.

Expanding our footprint in growth markets through strategic acquisitions. We're always looking at acquisitions. We're very disciplined in that process, and so it takes us a long time to get that done. We've been very successful with those because of that discipline.

Enter new Unregulated Energy businesses that complement our existing operating units and growth strategy, so we are looking at new opportunities, different services from an unregulated side. And again, this is all about figuring out how we can grow our company. .

Differentiate Chesapeake as a full-service energy supplier/partner/provider through a customer-centric model.

I guess the Eight Flags project was a good example of that, where we had a customer that was thinking about putting up their own power plant, and we figure out how they can do that more cost-effectively and provide them additional services as opposed to just [indiscernible]. .

Seek to leverage our pipeline capabilities, skill sets and assets and be a preferred owner and operator of pipelines systems. We've worked pretty hard to try to figure out how to serve the customers' needs. Being a relatively small company, I think that gives us a bit of competitive advantage. .

Key initiatives for growth. We've talked about these, kind of what we've done in the past. In utility, customer growth, conversions, reliability projects, service expansion, the big projects. White Oak project completed. 2017 expansion is underway, probably be completed [indiscernible] the last couple of months of this year or probably be '18.

Expansion to Ocean City [indiscernible] pipeline expansion in [indiscernible], rate cases, et cetera. There's a whole variety of things. .

You go to the fiscal '18, and new things are popping up. What's being highlighted, acquisitions or opportunistic midstream opportunities, which are quite more [indiscernible]. Combined heat and power plants, gas pipelines for power gen and acquisitions again on the unregulated side. .

Investment highlights. We have a diversified base, and that includes our utilities, our regulated and also unregulated operations, our propane business, our Aspire Energy of Ohio [indiscernible] services company and [indiscernible]. .

Strong financial performance and consistent track record. We've talked about that. Attractive 5-year annual compound rate of 21%. .

Balance sheet that supports growth. We've maintained a strong balance sheet. We'll continue to do that. We know that if we maintain returns at a good level, we'll be able to access capital. And if we have access to capital and we deploy it effectively, we should be growing. .

The last, on the bottom, $260 million in budgeted capital expenditures for '17. It's a very big number for us. .

I think we are at the point where we're going to take questions.

Any questions?.

So Nina, if you would open it up for questions?.

[Operator Instructions] Your first question comes from the line of Sarah Akers from Wells Fargo. .

So first, on propane margins. As you expected, there were some pressure in 2016.

Are we still at above normal margin levels? And if so, do you expect any additional pressure into '17?.

I think we're getting pretty close to normal levels. There may be some more or slightly more pressure in '17, but we're pretty close to normal. .

Great.

And then of the $65 million of Unregulated gross margin in '16, how much of that was the propane business?.

In terms of the propane business itself, the propane business, there was basically about $2.4 million, Sarah, in terms of the retail margins, in terms of the decline or from the retail margin side. And then on the consumption side, we actually -- there was a positive impact there on the consumption side of just under $2 million.

So those were the 2 biggest drivers that impacted that business. .

But on an absolute basis, can you give us a sense of what the propane business is contributing to the overall Unregulated gross margin?.

Overall, when you look at it on a normal basis, now with Aspire being factored in, it's probably going to be somewhere in the -- and I'm thinking off the top of my head, it's somewhere probably in about the 60% range of the overall on a normal basis. .

Got it.

And then on the system expansion project, are you concerned that the current situation at the FERC with just 2 members might slow down the approval there?.

I think at this point, we've not -- I mean, we're not, I wouldn't say, at a worried state. I mean, we're just moving forward with the project and our interactions with them. And right now, I think we're still optimistic that, hopefully, they'll review it in May, and we will be in a place to complete it by the very end of the year.

And so the margin impact will happen in 2018. .

Are you booking AFUDC on that in the meantime?.

Yes. I would just say, Sarah, the only thing to keep in mind, if you look at our balance sheet, which I know you have, we have -- we're carrying a lot of short-term debt right now. So it's very -- we are booking AFUDC, but it's being done at a short-term rate. .

Got it. And then last question. Beth, you mentioned the balance sheet strength. When we look at the $260 million CapEx plan for '17, it's quite a big step-up.

Are you able to finance that with long- and short-term debt without going below that 50% equity ratio threshold? Or do you expect to need additional equity?.

I would -- Sarah, what we've historically done is we're going to try to think of that long-term financing as close as possible with the in-service date of the project. As we look at it right now, I think we have the capacity with our debt facilities to be able to handle that project.

At the same time, there's other projects that are included in that $260 million. And so I think on the back end, once we see -- if everything gets expended, then we'll see if some minor equity issuance might be necessary in 2018 or so. .

Your next question comes from the line of Michael Gaugler from Janney Montgomery. .

Just wondering, given the positive environment for the midstream projects in the Mid-Atlantic, been very favorable recently from a regulatory perspective, if you're seeing any additional new opportunities for ESNG.

And also, kind of a secondary question, given the investments being made currently in ESNG, what kind of capacity in terms of percentages would be left after the upgrades are completed?.

I guess as it goes to the Pennsylvania stuff, yes, we are seeing a lot of activity there, and things are changing. You still also have some local -- or appearance of local protesters are involved. But we've got opportunities in mind in Pennsylvania and Ohio that we're looking at right now.

And so we're cautiously optimistic that we'll get some of those done. We also have opportunities down in Florida that are maybe a little bit more -- a little further along, again, pipeline opportunities. I'm thinking this next question was -- I forgot what the second question was. .

I think he mentioned that -- Michael, I think you asked about the Eastern Shore capacity?.

Oh, the capacity of Eastern Shore. Typically, Michael, what the FERC's looking for is all that capacity fully subscribed. And so what we're doing is when we get firm contracts, we build the facilities to serve those firm contracts. So there's not really any vacant capacity on the system that we'll get occasionally. Somebody will turn back capacity.

They may have a little bit of capacity, but there's not a lot there, Mike. .

Okay. Okay, so then that leads to my next question.

So if something comes along beyond these planned expansions, are you getting to a point with Eastern Shore that you just can't increase compression anymore, and you basically have to upsize the line in certain areas? I'm trying to get a feel of what the line can still do because you had a lot of capacity expansions on that line the last couple of years.

And just wondering what it can take at this point. .

Well, we're even, in '17, going to be doing some looping and also some compression. So that looping and compression strategy will continue. And we'll look at the economics every time we have an expansion to make a determination as to what's -- which is the most economic.

And we'll think about not just the economic impact on that particular project but also longer term with the economics. So right now, again, we've got about 2 different projects going on, the reliability project and also that expansion. So we're not concerned about not being able to expand once this project is done.

We'll be the same place we were before this project. .

Your next question comes from the line of Tanner James from Ladenburg Thalmann. .

Just a question about your 2017 capital expenditures budget. I'm just curious. Could you, perhaps, elaborate as to what extent those expenditures will be captured in rates? I know they're pretty heavily tilted towards your Regulated operations. .

So you have -- I mean, you have quite a few of the projects that are in there, like the Eastern Shore 2017 expansion project. There's been contracts there that have been entered into with the customers.

There's a couple of other projects that are finishing up, so like the White Oak and the system reliability that are going to be captured in Eastern Shore's existing, so to speak, rate case. And then you have some projects that -- what I would like to call projects in development that we need to bring to fruition and close out.

But there may be new contracts that are executed with customers on a one-on-one basis, for example, if we had additional pipeline expansions in Florida or up here that aren't announced and aren't finalized at this time. .

All right, great. And most of my other questions have been asked and answered, but I just wanted to hear your thoughts on the potential for a tax reform and how that might impact your business given your mix of Regulated and Unregulated businesses. .

Sure. I mean, I'll probably make just 5 just bullet points in that regard. So the first one is when I think about the tax reform, certainly, the first thing that's going to happen is the reevaluation of our existing deferred taxes. And that's going to happen at the effective date of the new tax rate.

And so in my mind, on the utility side, what's going to happen there is that impact's going to be -- that's going to be, basically, we set up a reg liability, and ultimately, that's going to be amounts due to the customer. On the nonutility side, certainly, there's going to be a favorable impact at implementation there.

So that's the first part of that, reevaluation of the deferred taxes. The second part of it is that I would expect that the utility rates would adjust to reflect any reduction in the tax rate, and we just have to see how quickly and the time period that those go back to the customer.

The other thing on the nonutility side, if we just look at the impact, there is a slight positive impact. But I don't know if the market -- and those are competitive products and services that we're providing. The markets may adjust for that, so our competitors may adjust for that.

But I would say there is a potential slight favorable opportunity there. The third thing is certainly, there would be a cash flow benefit from the full expensing of the CapEx that we've seen already.

And I've looked at it from the perspective of -- I'm responding to, assuming a loss of interest deductibility, full expensing of CapEx, and I'm kind of looking at that 20% corporate tax rate.

The next thing I would comment on is that I think that our current cost of debt, coupled with if we're able to sustain the level of investments like we're talking about, to me, limits the exposure that's out there as it relates to the loss of interest deductibility. So preliminarily, at the end of the day, I don't see it as being a negative.

I think -- could it be a neutral to slightly positive? I think we have to see. So I don't know, Mike. .

Your next question comes from the line of Spencer Joyce from Hilliard Lyons. .

Just a quick one for me, and I apologize for kind of beating the dead horse here as far as the capital budget goes past 2017. But I have an older note here in my model, a base level for you all, excluding any major expansions, is somewhere in the $60 million to $80 million range.

And I guess my question is, is that still a fair point for us to build up from? Or with the company having grown so substantially over the past couple of years, including the Aspire purchase and even the Eight Flags plant, are we looking at, perhaps, $80 million to $100 million on a go-forward basis and then add up from there? Or how should we be thinking about maybe just that base level of CapEx?.

I think, Spencer, at this time, I mean, I would use as a base still that $60 million, kind of that $60 million, I would say $60 million to $70 million base. I think what Chesapeake has tried to do and has done successfully is to continue to look for additional opportunities that can add to that.

But if you strip out growth projects and not knowing when they're all going to fall into place, if you want to a base level of CapEx, you're really talking that $60 million to $70 million level. .

[Operator Instructions] There are no further questions at this time. Please continue. .

Well, thanks, everyone, for your interest in the company. We do -- or continue to do and dedicated to generating shareholder value. That pledge will continue, and that requires that we invest capital prudently and stay on the course. Thank you very much. .

Thank you. .

Ladies and gentlemen, this does conclude our conference for today. Thank you all for participating. You may now disconnect..