Good morning. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities Second Quarter 2018 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. And welcome to Chesapeake Utilities second quarter 2018 conference call. Thank you for taking the time to participate in our call this morning. Joining me today is our Company’s President and CEO, Mike McMasters.

Also there’re many other members of our management team present today joining us at our new Energy Lane Campus here in Dover, Delaware. This new state-of-the-art facility houses [indiscernible] natural gas distribution operations, our Eastern Shore pipeline operations, our customer care group and our information technology team.

Turning to Slide 2, before we begin, I would like to remind you that today’s presentation may include forward-looking statements that involve risks and uncertainties.

Please refer to our 2017 Annual Report on Form 10-K for a discussion of those risks and uncertainties that could cause our actual results to differ from these forward looking statements.

Please also note that both in our filings as well as in our presentation today, we include certain non-GAAP measures that we believe are meaningful to understanding our business. Now I would like to turn the call over to Mike McMasters, President and CEO, for him to make some opening remarks on the quarter..

Thanks, Beth. I guess this was a very strong quarter for us since after the strong year for us so far to-date. We’re on target to hit the 17% EPS growth that we talked about earlier this year and are pretty -- are very comfortable with that forecast, so that continued superior earnings and dividend growth.

Second quarter net income rose 5.6%, EPS about 5.5%, year-to-date net income rose 32%, EPS the same 32%. We increased our dividend by 13.8% in May. Key earnings drove growth drivers so far in ’18. Our natural gas transmission operations had system expansions in Eastern Shore settlement rate case.

Our gas and electric distribution operations we got strong customer growth, increased sales and safety -- and increases in sales and safety reliability programs. More normal weather so far in ’18 has also helped us. Growth in the Propane operations and Aspire Energy of Ohio, have contributed to the growth as well.

Finally, lower federal income tax rates partially offset by rate reductions and our regulated entities have helped. On the capital spending side, we’ve completed the Northwest Florida project pipeline expansion in the second quarter.

It’s in service now and generating returns, Eastern Shore Natural Gas pipeline expansion on track for completion and margin contribution in 2018 and a further increase in ’19. CapEx forecasted to increase by 34 million given accelerated spending on projects. With that, I’ll turn it over to Beth..

Turning to Slide 4, just touching on the numbers a little bit more.

One of the things particularly in this quarter when you look at our results year-to-date, it’s a little complicated from the tax reform perspective and so we thought it would be helpful to look at what our both our gross margin and our operating income as well as our net income and EPS growth have been both for the quarter as well as on a year-to-date basis.

You’ll see on this slide that we do highlight that our EPS growth on a year-to-date basis is a 31.8% growth rate that too is also the growth that we’ve experienced on a year-to-date basis as well at 32%. Driving those increases are gross margin growth as well as operating income growth that are double digit growth across the board.

On a consolidated basis, our gross margin growth year-to-date is 13.4% basically generated from our regulated operations of 12.3% and our unregulated energy operations of 16.4%.

A large part of this gross margin made us to the operating income line and we were able to generate operating income growth of 20.2% on a consolidated basis, 23.9% from the regulated energy segment and 22.4% from our unregulated segment.

When you look at this quarter in particular, we also achieved double digit growth in terms of gross margin as well as operating income with gross margin increasing 15.1% on a consolidated basis, our regulated energy segment growing 12.7% and our unregulated energy segment growing 23.1%.

Once again a large part of that gross margin growth made it to the operating income line or we achieved double digit and higher in terms of operating income growth with consolidated operating income growing 10.5%, regulated being 17.8% and really it’s not meaningful when we look at the unregulated segment because we had a loss last year and it was profitable operating income for this year.

When you get to the net income and also the earnings per share, both were in excess of 5% for the quarter.

Recall that for things like interest expense where we’ve had financing there’s a flat cost that basically throughout the year, so in a non-weather quarter when you get to the net income and the EPS line, those are slightly less than the growth at the operating income line.

When you do look at our quarter though adjusted for the non-recurring items that we’ve included in our Q and in our press release, you’ll see that our EPS actually grew 30% excluding those non-recurring items. Moving on to Slide 5 there’s just a couple of things that I’d like to talk about as it relates to on a per share basis.

You’ll see that overall EPS increased by $0.02 quarter-over-quarter. There was a big driver in terms of gross margin and that increased basically by $0.32 with $0.27 coming from our utility operations. That's being comprised of service expansions and core growth which were $0.14.

Eastern Shore settled rates as a result of the rate case were $0.10 per share and GRIP and other regulatory mechanisms represented $0.03 per share. Lower income taxes benefitted us by $0.08.

You’ll see on the slide at the top, you’ll note that the regulated side was basically a $0.10 impact, offsetting that were some non-deductible expenses as we looked at our tax provisions offset by $0.01 that was contributed from the unregulated operations during the quarter. Lastly PESCO on a net basis added $0.05 for the quarter.

Turning to the next slide, one of the things that we thought would be useful would be to breakdown our other operating expenses. And so what we’ve done on this slide is actually carve out depreciation, amortization and property taxes as well as those non-recurring expenses that we talked about during the second quarter.

And what you can see for the quarter when you take out some very large factors in regards to growth that we’ve experienced in Eastern Shore, growth in infrastructure that we’re putting in place for PESCO and higher incentive compensation costs given our performance, very easily you’ll see that our cost expense drops from 15% down to 7% for the quarter, and when you look at it on a six months basis drops from 8% to under 3%.

Moving to Slide 7, we wanted to highlight where we’re in regards to our regulated jurisdictions as it relates to the tax rate reserves. In two of our jurisdictions, we’ve actually completed refunds to the customers those include Eastern Shore with the FERC and also our Maryland operations.

In the case of Delaware and Florida, we have dollars reserved and are actively involved with filings before those two jurisdictions.

At the bottom, we have included a reconciliation of our year-to-date impact as it relates to TCGA the same thing happened on a year-to-date basis where overall we got really an $0.08 increase when you look at it on an overall basis, but of that the unregulated operations have added about $0.11 that being offset by some expenses that we know will be not deductable.

Moving to Slide 8, we wanted to just highlight as you think about our business on a year-to-date.

You will note that we generated about 54 million in term of operating income with about 79% of that coming from that we call basically our utility operations, pipeline operations and then the balance still being part of our core operations on the unregulated by making up the other 21%.

As we try to continue to position ourselves for future goals, we’re constantly looking at where our capital structure is at the end of June, our equity to total capitalization that still around 51%, pretty consistent to where we ended the year 2017.

We’re in a process later this year of completing another long-term debt placement of $50 million net schedules for November at a cost of 3.58%, and we will continue as necessary to access the capital market for permanent financing as new projects are identified.

In terms of what projects are out there Mike spoke briefly earlier on in today’s presentation that we have increased our capital forecast from a 182 million to approximately 216 million at the end of June. This is a result of looking at those projects and time line of some projects actually being accelerated.

It also includes some smaller projects that we see on the horizon.

When you look at us as a company over the last five years, easily, we have invested on average about 25% of our average capitalization, so significant growth in the Company whether you look at it on the previous slide and you see our capitalization on doubling over the last five years or whether you look at it on this slide and recognize that we’re investing about 25% of our capitalization a year.

In terms of what those investments are translating into from a gross margin prospective, I wanted to just highlight on Slide 11 some of the bigger project what you will see is that for 2018, 2019 we're expecting to add 32.7 million of incremental margin from the projects that are either recently constructed and process to be constructed or finalize later this year or into early 2019.

What’s interested of that 32.7 million is that 21.4 million of that will be generated in 2018 and we expect another 11.3 million to come in 2019.

What are the big drivers this year well certainly we are continuing to invest in our grid program and that’s adding about 800,000 this year in addition to that Eastern Shores new rate will add an incremental 6.1 million before the electric reliability and modernization program that went into effect with meter reads in January of this year well add a 1.5 million.

Several projects and Florida listed here, Mike mentioned earlier the North West project and that had a substantial impact in the quarter adding about 870,000 of margin this year to add 3.5 million in total and before everything is said and done next year, it will add an incremental 3 million for total of $6.5 million.

There is also several other projects in Florida that were well on the way including the New Smyrna Beach as well as the Belvedere project. And then lastly our 2017 system expansion Mike will talk in a few minutes. This year will add 7.7 million incremental margins and then again next year we will add an additional and additional 7.6 million.

Now I’m going to turn the call back to Mike for him discuss some of these key projects that I mentioned..

Thanks Beth. Just returning to slide, when you look at slide what you can see on the capital investment side this total project for Eastern Shore natural gas expansion, it's a $117 million so far we’ve invested approximately $90 million with the 25 million more to spend this year.

When you look at the margin side of things, 15.8% in total in the first full year of operations 2019 as Beth just mentioned about half of that goes in effect in ’18, you’ll this affect into ’19.

When you look back at TETCO the service, we upgraded the service in December ’17 incremental margins of 859,000 and incremental margin year-to-date of $2 million.

The project description 23 miles of pipeline looping, 17 miles of mainline extensions, upgrades to TETCO interconnect; 3,750 horsepower of new compression at the Daleville Compressor Station; two new pressure control stations as well increased capacity by 26%.

Turning to Slide 13; the Florida pipeline projects, Beth just talked a little bit about these as well, so I am going to go here pretty quickly.

The Northwest pipeline project 36 million in capital, 38 miles of transmission and 5 miles of distribution pipeline; customer commitments of 68,500 dts per day with total capacity of 80,000 dts per day, we’re currently looking for new opportunities to sell out rest of that capacity and feel relatively -- feel very good about the fact that we can drive this growth.

6.5 million of estimated annual gross margin, 870,000 of margin in the second quarter of 2018. New Smyrna pipeline expansions, 9.1 million of capital, gross margin of 352,000 in the second quarter and 704,000 year-to-date. Annual margin estimated 1.4 million.

Belvedere pipeline, same type of numbers 3.8 million of capital, 1.1 million of estimated annual gross margin and 2 miles of pipeline. Turning to Slide 14, our natural gas distribution growth, when you look at our natural gas distribution growth, I want to talk year-to-date.

Residential growth 1.719 million 51% growth, commercial industrial growth 1.630 million 49% growth -- I am sorry 49% of the growth, excuse me. New service in Northwest Florida 35,000, 9% of the growth and other unbilled revenue down by effectively 9% of the growth as well; so in total 3.342 million and six months ended June.

Turning to Slide 15, Slide 15 is really just kind of lays out a picture of how do we -- how we look at our growth and how we’re trying to manage our growth to some degree. When you look at this, you’ll see that the weighted average return on equity is the green line running from the left hand side of the document to the right hand side.

You’ll see that we’re above the median the median 9.35. We’re going to get 12.02% ROE for strong returns.

At the same time, you can see that Beth just mentioned as 25% of capital expenditures, total capitalization, we’re averaging again 25% and so that is also -- those two things combined are driving our growth and it requires that for us to remain very disciplined and making these investments and we’ll continue to do so.

Turning to Slide 16, above average dividend growth when you look at our dividend growth over the years, you could see 6.2%, 4.9%, 6.1%, 6.6% and or recently 13.8% and these are obviously very strong dividend gross.

When you look at the payout ratio where you can see that our payout ratio remains conservative that’s driven by the strong earnings growth. Turning to Slide 17 shareholder return, we’ve shown these slides quite a bit.

The 20 years, we’re above the 75th percentile from 20 years to today, 10 years we’re above the 75th percentile; 5 years we’re above the 75th percentile, its slowed down slightly in the three year and one year on the shareholder return. We’ve been -- I guess our stock price have been fairly flat almost say the last 12 months.

Chesapeake percentile ranked amongst all S&P companies. You can see 80th percentile for 20 years, 87th percentile, 81st percentile, 69th percentile and more recently 47th percentile. The unregulated -- or the rest of the industry really is a having faster growth right now in terms of faster higher shareholder returns right now than the utility.

Moving to Slide 18, when we think about our strategy, our strategy overall is pretty solid total shareholder return by profitably reinvesting capital to maintain growth in our existing businesses while deploying incremental capital related opportunities that leverage our skills and energy expertise.

We’re constantly seeking new development projects to serve new customers provide new services and expand into new service areas. We’re investing in pipeline systems that provide natural gas service to downstream customers such as LDCs cooperatives, municipalities, industrial end-users and power plants.

We’re perusing projects, to serve long-term commercial and industrial customers. These renewal projects include natural gas. We're investing in propane opportunities to access new markets with significant growth potential. Finally, our engagement strategies are important.

Our engagement strategies to employees provide strategic infrastructure for a sustainable growth. We’re investing in our talent and targeted development plans and training. We're engaging with communities where we work and live. We’re pursuing brand excellence through safety awards, top workplace and Chesapeake care events.

This ultimately is the foundation of our growth. It is a key for our employees who are driving the growth. Turning to slide 19, we’re probably looking to identify growth opportunities that we can develop into executable projects that will continue to drive our future earnings growth and increase shareholder value.

We are proud of the fact that we are finding strategic opportunities that are producing superior total returns and as driven by earnings and dividend and therefore it drives dividend growth. Our team is energized.

We have a very strong team, excellent team, strong culture, capital discipline and entrepreneurship, and we're looking at everything from innovative perspective. We want to be safe and environmentally responsible. We want to generate competitive returns. With that, we will open it up and take questions..

[Operator Instructions] Your first question comes from the line of Mark Levin from Seaport Global Securities. Your line is now open..

Two quick questions. One has to do with the CapEx hike. Maybe some more color around the projects and opportunities that are being accelerated? And then the second question is more the big picture question around one of your last lines that talked about some opportunity to some of the opportunities that you look at going forward.

Maybe if you can talk about where you think -- where you expect to be active in those sub-segments may be over the next year to her where you're seeing the greatest opportunity?.

So, Mark, I will talk about the first one and then Mike can talk about a little bit about the second question. So in terms of the capital expenditures, we’re constantly looking at our forecast and when we feel that projects are at a stage where they are likely to happen and that can include small projects.

And so, included in the dollars that we added here are some smaller projects that we’re moving forward with, there won't be projects where we will be including dollars in the margin table at this time because they are smaller projects.

And then there is also projects that came as we look at the time line in terms of when the dollars are to be spent, there is some acceleration on regards to that..

And I think it's first to say that it's not driven by cost overrun what's significant things going on. So when we think about where we going to be growing over the next year, two years, three years, it's really more of the same with the exception of good hard look at the renewable.

Again, we want to do that in a very disciplined manner, so it's not just doing it for doing it basically to do this by earnings, but also it has to be disciplined.

So our natural gas distribution operations are continuing to grow with pretty strong rates, we’re pretty comfortable with that continuing the transmission side, the same the transmission side, we've got the both the Delmarva area and also Florida and I’m look at the opportunities in Ohio that we will evolve.

And we are still looking at some of those right now in Ohio well as traditional Delmarva in Florida. On the propane distribution side, again, we've seen some very strong growth on the propane distribution side and we’re very comfortable with that.

What we’re doing, the community gas system strategy that we’ve implemented years ago, has been very effective strategy generating good returns. In addition to that more recently we’re doing a propane for fuel -- for fueling vehicles, which has been also been very effective, it’s helping us get into new territories that we would not otherwise be in.

So we’re pretty -- we’re very comfortable with that stuff and we’re also doing exploratory project with one of the [indiscernible] companies in on the Peninsula.

Electric distribution, as you know the electric distribution stuff a little bit tougher than the natural gas when it comes to growth, but we’ve the electric distribution operation coupled with the CGS -- excuse me the CNG facility in Florida and are continuing to look for opportunities for the CHP stuff as well.

And so, I think that we’ll see some CHP growth over the next few years and hard to when these things are hard to bring to closure, but ultimately we’re continuing to look at those trying to drive those..

One follow-up on to Beth regarding the CapEx question, when we think about 2019 and beyond and I know the budget has been -- you have to go to the board and get the budget, we’re still only in the middle of the year, but anything to extrapolate from the sort of revised CapEx budget in 2018 in terms of how that might affect the outlook in 2019 and beyond from a CapEx perspective?.

We’re in the process right now of going through our budget for the next five years in terms of those being prepared, but I would say from -- I think our standpoint we have a pretty good track record, if you look over the last five years in terms of what we’ve spent and I would indicate that our maintenance level for us just the pure maintenance level is going to be about $60 million and we know that we’ve got some projects that are going to be finishing up in early next year like little bit of the 2017.

There’s also some normal construction and expansions that we’re doing in distribution operations. So, I think as a placeholder for now you look at kind of the low end as a book end for over the last five years and then as we have more information out there in the public domain, you’ll be able to refine that.

But certainly, we’re focused on capital and driving additional investments and certainly we'd like to keep pursuing that 25% that we’ve been achieving..

[Operator Instructions] There’re no further questions. At this time, I would turn the call back over to Mike McMasters..

Thank you. I want to thank everyone for spending some time with us here this morning. We’re committed to providing excellent service to our customers, supporting the communities that we serve and driving earnings per share and to generate superior total shareholder return over the long term. Have a great week end..

Thank you..

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