Beth Cooper - SVP, CFO & Assistant Secretary Mike McMasters - President & CEO.

Analysts:.

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities Third Quarter 2018 Earnings Call. [Operator Instructions] Thank you. Beth Cooper, you may begin your conference..

Good morning everyone. And thank you for joining Chesapeake Utilities third quarter 2018 earnings conference call. We appreciate all of you taking the time to join us this morning.

We're hosting today's call live from our Silver Lake office in Dover, Delaware, and joining me on the call today is Mike McMasters, President and CEO; as well as other members of our Management Team.

Before we begin, I would like and the team would like to extend our recognition and appreciation to all veterans who have served this great country of ours. We honor and salute all who have served in the military on this day being recognized as Veteran's Day.

Now turning to Slide 2, before we begin, I would like to remind you that today's presentation may include forward-looking information. We would refer you to our Annual Report on Form 10-K that discusses those factors that may cause actual results to differ from forward-looking information.

Turning to Slide 3, in terms of our year-to-date performance you'll see that our earnings year-to-date remain very strong, up over 21% compared to the nine months ended September 2017. The key drivers of our growth year-to-date include our regulated energy business being up $7.5 million in terms of net income again or approximately 29% year-to-date.

The key drivers of this higher performance include our Eastern Shore rate case and our 2017, system expansion project, our Northwest pipeline project and several other Peninsula Pipeline expansion projects, a return to more normal weather, natural gas distribution growth, and finally our Florida GRIP and electric reliability program.

On the unregulated energy side, we're also up on a net income basis when you look at it 8.7% year-to-date. This is being driven largely by continued propane customer growth, AutoGas, and also increased service revenues and wholesale margins. They too had a return to more normal weather and finally continued growth in our Aspire Energy business.

Some other things to keep in mind as you look at our third quarter, that in particular overall we as a Company see our results being in line with our internal forecast that we talked about earlier in the year and I'll touch on that in just a minute, and also our previous communications regarding the year.

And for the third quarter where you continue to see year-over-year is that we have ongoing fixed costs that are highlighted given the seasonal revenues in the second and third quarters. Lastly again, we continue to reaffirm our forecast of 2018 earnings per share growth of 17% over adjusted 2017 EPS of $2.89.

And that does include, I'll talk about in a minute, some potential very minor impacts from hurricane Michael. Turning to Slide 4, when you take a look at the quarter once again the third quarter results were in line with our internal forecasts for the quarter. Net income was $5.5 million or $0.34 per share.

We saw continued growth in the regulated energy segment before the impact of the tax, the TCJA, the Tax Creation and Jobs Act, you'll see that our operating income was actually up $2.4 million or 15% for the quarter.

We had continued profitable growth in all of our businesses on the regulated side with the biggest factor for the quarter being our pipeline expansions adding $3.6 million in terms of margin.

On the unregulated energy side, once again, as those businesses continue to grow you see the seasonality of the third quarter coming out in this particular quarter.

Turning the Slide to Page 5, in terms of our year-to-date performance I talked in the beginning about our 21% growth in net income, that represented about $6.8 million or $0.40 per share driving us to $38.8 million on a year-to-date basis.

Continued profitable growth across the natural gas value chain including sales, distribution and transmission, as well as strong electric distribution and propane distribution growth are driving the year-to-date result. Eastern Shore's $117 million system expansion project remains on-track and Mike will talk about that a little bit later on.

And then lastly once again at the bottom you see the overall impact of our regulated energy segment adding in terms of operating income growth 21.6% on a year-to-date basis.

Digging into the quarter and looking at it from a per share standpoint, once again the key drivers from the gross margin perspective I talked a little bit about Eastern Shore and Peninsula Pipelines expansion that added $3.6 million, Eastern Shore as the outcome from the rate case added $1.2 million, our reliability programs added about $800,000 for the quarter, and finally our natural gas growth and expansion also added about $734,000.

On the unregulated energy side in those businesses, there were slight declines on the margin side driven by lower retail propane margins per gallon, lower consumption, and also some true-ups of some imbalanced positions related to our natural gas marketing subsidiary.

Our operating expenses were slightly higher than quarter-over-quarter to the tune of about $6.7 million, those once again are largely driven by growth and become more pronounced in the third quarter due to the seasonality.

And finally, overall from a tax perspective, you'll see that the overall impact when you look at it on a quarterly basis was about a penny with a shift being from the TCJA and the gross margin side offset by the income tax side. Turning to the next Slide, we wanted to talk a little bit about Hurricane Michael.

And we'd first like to began by saying that we are extremely grateful to our employees and volunteers for the dedication that they showed to both our customers and our colleagues during its most expansive restoration effort in our history.

Our commitment to the safety and wellbeing of our customer, colleagues and communities has been and will continue to be until we’re done at the forefront of each and every action that we’ve taken to restore service and recover from the storm.

At one point more than 1,200 employees, contractors and volunteers were engaged in this restoration effort working around the clock, rebuilding several miles of power lines, replacing over 2000 electrical poles and 100s of transformers with more resilient storm-hardened equipment capable withstanding extreme weather.

Our FPUs subsidiary work closely with federal, state and local emergency management officials to ensure that all communities impacted received the necessary resources. It truly was as I mentioned before the most expansive restoration effort that we ever had in our history.

And as shown on Slide 7 we actually included some of the pictures of this effort and we have also included a hyperlink that you can copy into your browser and actually see a video that was put together regarding these efforts.

In terms of the impact on us, on Slide 8 what you will see is that first off we have restored power to all customers who can access power and overall more than 13,000 customers in our particular situation were impacted.

In addition to those who have excessive power and are now backup and using electricity we are working with those customers who are repairing or rebuilding to restore service once they are able to take service per month. Our current estimate is that our repair and service restoration, cost will exceed $50 million.

Those types of costs have historically been recovered through rates.

At the present time we reserve approximately 122,000 every year in Florida for potential storm damage and while we think about the impact of the storm, we are at great place overall and expect there to be minimal impact on our earnings per share of $0.01 to $0.03 per share at most and once again we are still reaffirming our earlier year guidance in regards to 2018 EPS.

Turning to Slide 9, in addition and I am going to talk in a few minutes about the margin that we are expected to generate on the project that we've undertaken but it's important to note that continues strong organic margin growth that our natural gas distribution operations are achieving.

I talked earlier about to the quarter that this represented 734,000 for the quarter but on a year-to-date basis you will see that through September we've added $4.1 million of incremental margins largely two-thirds of it being driven by customer growth.

Customer growth through our all rate classes in Delmarva and in Florida and with additional growth that has been generated by our expansion as well in Northwest Florida. In both regions we are experiencing customer growth that exceeds the industry average. On Delmarva it's basically 3.8% when you look at for the quarter.

In Florida while it doesn’t mean as much in terms of we’re really looking at the margin contribution but there is not a lot of residential heat load but regardless still customer growth of anywhere between 2.2% and 2.6% depending on whether you look at it on a quarter or year-to-date.

Turning to Slide 10 in regards to where do we stand in regards to the TCJA and working with our various regulatory jurisdiction. From the first standpoint basically our customer rates have been adjusted associated with TCJA for Eastern for Eastern Florida.

We refunded 902,000 year-to-date when we have our next rate case basically at that time there will be an establishment as it relates to refund associated with the regulatory liability as a result of the deferred tax reevaluation. In Delaware, we’ve made a filing and the PSC is currently reviewing our filing.

In Maryland, we basically filed and reached a settlement we’ve already refunded 783,000 rates have been adjusted and there is a methodology in schedule and place as it relates to the regulatory liability associated with the deferred tax revaluation.

In Florida we have filed on a natural gas side and hearing are tentatively scheduled in the fourth quarter for all natural gas utilities.

On the electric side we have reached an agreement with the PSC and is currently a hearing scheduled in December with a proposed combination of reduction associated with the fuel cost recovery base rate as well as applications of the storm reserves over the next several years.

Turning to Slide 11 always paramount to our continued growth is ensuring that we have a strong balance sheet in place to support our growth. You’ll see at the end of September our equity as a percentage of total capitalization sat at approximately 50%. Our short-term debt was approximately 26% and our long-term debt the remaining 24%.

We already have scheduled to convert and refinance part of our short-term debt to long-term debt with 50 million schedule to happen later this week. And another $100 million to be refinanced no later than August of next year at cost of 398.

This financing has ensured that we can continue to invest for the future for 2018 our forecast is still 260 million this does not include any impact from the Hurricane restoration effort that I talked about earlier and to-date we’ve already expanded for new investments $176 million.

So those investments that we have been making have continued to propel our earnings growth, Michael will talk a little bit about that later on but as you can see on Slide 13 there is investments as well as various regulatory initiative had added incremental margins for the quarter of $6 million on a year-to-date basis $16 million and for this year $20.6 million.

And if you recall looking back over time Chesapeake historically over the last five years has generated total incremental margin year-over-year between $18 million and $22 million. So from these projects alone we’ll generate just under $21 million this year.

And now I’m going to turn it over to Mike to touch on some of the projects that are currently underway..

Thanks Beth. Yes turning Slide 14 I guess the first project we’re going to talk about is the Eastern Shore projects essentially we had the largest project in our history this year 23 miles of looping in Pennsylvania, Maryland and Delaware. 17 loss of new mainline extension and two pressure control stations at Sussex County.

We've also upgraded the interconnect with PESCO with 3,750 new compression for compressor stations, two pressure control spaces as well. Total capacity increased to 61,162 dekatherms. Estimated capital investment $117 million we spend about $103 million to date.

Capital spend in years for 2017 through 2019 the annual margin $13.8 million for the first five years and $13.2 thereafter. As I mentioned earlier it's the largest project in our history.

We’ve introduced 24-inch pipeline into our system which is the first time and we hope to plan on complete the construction of remaining loops and place all segment into service by the first quarter of 2019. Turning to Slide 15, we’ve got Del-Mar Energy Pathway Project underway.

We’ve made the filing with the FERC the pipeline is six miles of pipeline looping in Delaware, 13 miles of new mainline extension in Sussex County, Delaware and Somerset County. The pressure control stations, new delivery stations at Sussex County, Delaware and Somerset County, Maryland.

Estimated capital investment of $37.1 million the capital spends expected to occur for 2018 to 2021. There is really two pieces to this project the first one in Sussex County for $2.8 million of margin and the second one is Somerset County for $2.3 million.

Note that the next steps that we filed with the FERC on September 14 to get our certificate application but we continue to develop the project’s facilities and successfully obtained all required permitting.

The FERC process is ongoing and is subject to approval by participating in the Maryland - the Maryland bidding process of Somerset County, we basically had a bid of - we generate $2.3 million of annual margin but is dependent on the State of Maryland awarding the contract, we are the leading candidate for the contract.

Turning to Page 16, Peninsula Pipeline Company and CFG, the Northwest pipeline expansion, this also is a very significant expansion, $6.5 million in annual margin, $44.3 million in total capital investment went into service in May of 2018.

This project has not only the existing capacity that we're serving today but we also have significant opportunities to add additional customers. Turning to Slide 17, The PPC New Smyrna Beach pipeline, $1.4 million of annual margin, $9 million of total capital invested, partially in service - fully in service during the fourth quarter of 2018.

Peninsula Pipeline 14 miles increased pressure and volume for FPUs distribution system, results in pipeline capacity constraint. The Western Palm Beach County expansion on Slide 18, $3.4 million annual margin, we expect to see $2 million of that in 2019. $20 million total capital invested we expect to be in service mid 2019.

Turning to Slide 19, Slide 19 really speaks of that quadrant that we talked about for several years now strategic plan execution.

What you're going to see with Chesapeake is that when it comes to capital expenditures, we are among the highest - in this particular case we are the highest in the group, we are approximately slightly less than 25% of our capitalization, 23.14% of our capitalization is what we've spent in capital over the last three years.

On average, when you look at us from an ROE perspective, you'll see the median is 9.4%, but you’re going to see Chesapeake up at 11.62%, so we are in basically the 80th percentile when it comes to ROE and 84th percentile when it comes to EPS growth over the three year period until 2018, so again, strong results. Total shareholder return on Slide 20.

If you look on the right hand side you'll see that we've had significant success over the years - for 20 years 75 percentile performance in total shareholder return, 73 percentile performance for 10 years, 82 percentile for 5 years, 60 percentile when it comes to 3 years and the most recent year 12 or 12 months - three years, excuse is 45% - 46%.

When you come to TSR annualized for CPK shareholder returns against the performance peer group what you'll see in the first year, 9% total return that is above the 50th percentile slightly below the 75th.

If you moved to the three year average, you'll see Chesapeake is at 19th percentile and again 24 percentile, 75 percentile slightly below that again.

When you look at the five year you're going to see us at 22 percentile - see 22% which puts us above the 35th percentile and it continues there from the 10 year and the 20 year, again exceeding the 75th percentile. Turning to Slide 21, annualized dividend and payout ratio.

You can see from the graph from 45% pay out in 2013, we've covered around the 45% to 42 percentile for the entire term period most recently back to 44 percentile in 2018. We're looking to increase dividends at a rate slightly lower than our EPS growth. We want our long-term our dividends to be sustained by earnings per share growth.

Turning to Slide 22, we'll talk little about our strategy. We are consistently looking to identify new opportunities to drive our future earnings growth and increase shareholder return. Now we're doing this through a variety of methods by seeking new development projects to serve new customers, provide new services, and expand into new service areas.

This includes distribution, transmission, marketing and CHP. Investing in pipeline systems that provide natural gas service to downstream customers such as LDCs, cooperatives, municipalities, industrial end users, and power plants. We are pursuing expansion project to serve long-term commercial industrial customers.

We’re investing in propane opportunities to access new markets with significant growth potential. Our Engagement strategy with employees to continue - continually build our strategic infrastructure for sustainable growth this is a critically important topic.

Investing our talent and targeted development plans and training, engaging with communities where we work and live pursue brand excellence through safety awards, top workplace and Chesapeake Cares Event.

Turning to Slide 23, we are very proud of our track record and we’ve done a fine strategic opportunities in producing superior total return driven by earnings and dividend growth. We're energized by our team, our corporate strategy and execution, our financial and operating performance and our future growth plans and objectives.

This is a result of our excellent team and culture that values both capital and discipline and entrepreneurship. We are driven to find innovative ways to serve our customers while honoring our obligation to serve in a safe and environmental responsible manner and provide investors a competitive return on our investments with us.

With that I guess we’ll take questions..

[Operator Instructions] At this time there are no questions in queue. I’ll turn the call back over to the presenters..

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Thank you very much. Well thank you everyone for your continued support of our company. We are continuing our effort to identify opportunities and to drive our growth and increase our shareholder returns. Thank you very much for your attention. Good night - good day..

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