Chesapeake Utilities Corp (CPK) 2016 Q1 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator today. At this time I would like to welcome everyone to the Chesapeake Utilities first quarter financial results conference 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. I would now like to hand the conference over to Beth Cooper. Please go ahead, ma'am.

Thank you, and good morning everybody. I would like to welcome you to our first quarter 2016 Earnings Conference Call. Joining me today is Mike McMasters, President and CEO, and in addition to Mike, we're joined by other members of our Management Team. For those on the phone today we're actually hosting today's call live from Salisbury University in Salisbury, Maryland. The call is being held within the Purdue School of Business, both Mike and I are alumni of that school, and we owe a special thank Dr. Weer for enabling us to have the call here today, and included within our meeting, we have members of the local financial communities here in Salisbury. We have a Board Member. We have distinguished faculty, and also many students here in the room. We're very happy to be here as I said.

As usual today's presentation can be found on our website under the Investors section, the Events and Webcast subsection, or you can access our presentation via our IRF. One of the things I would like to point out on page one of the presentation, when trying to think about the themes, and typically at the beginning of each year we try to look at what's our theme going to be for this year's presentation. I pulled something from actually Mike's President's letter in the Annual Report, and basically within his letter, he talks about that we're driving growth by focusing on long-term sustainable growth opportunities, and hopefully today you will see that's really been the case our past, in terms of our past success, as well as what we think in terms of our future opportunity for continued earnings and dividend growth

Turning no Slide 2, this is a typical forward-looking and other disclosure section. This presentation today will include Forward-Looking Information. I encourage everyone to take a look at our Form 10-K. There's a section called Safe Harbor for Forward-Looking Information, because some of the information that we talk about may actually differ from our actual results, and we discuss those factors that could cause our forward-looking information to differ from the actual results.

Turning to slide three, I'm now going to begin to touch on the first quarter results, and so what you will you will see is for the first quarter we reported net income of $20.4 million as compared to last year of $21.1 million. A slight decline of about $740,000 over the prior quarter of last year. On the surface, earnings were down yes, but certainly it's driven by the weather. Weather represented for us about $0.27 in terms of decline in earnings per share for the quarter. Our growth that we experienced across a good part of our businesses, helped offset the weather impact ultimately resulted in net income only being down by about 3.5% for the quarter. Pretty remarkable.

And that's really being driven by we'll talk about it a little bit later on growth in our natural gas businesses, service expansions, and customer growth, and also the contribution of a new acquisition that we did last year. I am next going to touch on our results by our segments, and included in our press release that we filed on Wednesday, as well as in our Form 10-Q that was filed yesterday, we provide detailed information about the accomplishments and results for our segments, and so I encourage you to take a look at that for more detailed information.

In terms of our regulated energy segment, you will see that we generated an increase in gross margin growth of about $1.9 million. That $1.9 million of gross margin growth actually made its way to the bottom line to generate $2.1 million in terms of increased operating income. Overall we saw an increase of $4.3 million in gross margin, that was driven by $1.9 million related to natural gas service expansion, our Florida gas reliability and infrastructure program which we refer to as GRIP, generated an additional $1.1 million of margin, and natural gas customer growth driven basically about half on the Delmarva Peninsula and half in Florida, contributed to an additional $745,000. The gross margin was up about $4.3 million, weather that was much warmer than the prior year, offset that by about $2.4 million, resulting in that $1.9 million of margin increase that we saw. You will see expenses were pretty flat year-over-year. Actually a slight decline which resulted in a $2.1 million increase in our regulated businesses, that once again helped offset that significant weather impact in the first quarter.

Turning to our unregulated businesses which are certainly more weather sensitive, and you will see that here in the results, our gross margin was down by $2.2 million. That was comprised of basically lower volumes or propane gallons sold, which represented about $4.3 million. Our margins per gallon, anticipating that those would begin to return to more our normal levels, and we saw that start to happen. That represented about $1.8 million, and then weather basically the combination of those two, when you think about first the $4.3 million, and then the lower margins per gallon, that's about $6.1 million. That was partially offset as mentioned with the inclusion of Aspire Energy's results in the first quarter. We acquired them last year on April 1st, April Fool's Day, and so we didn't have them in our results for last year, and they add about $4.2 million. So ultimately ending in the $2.2 million decline that you see here. Additionally we had about $1 million of higher expenses. Those were a result of Aspire being part of our operations.

So overall this business was down about $3.3 million and operating income for the quarter, but all driven by the weather and then the lower retail margins which we had anticipated. The next page is actually a summary of a chart that we include within our 10-Q, and also within our press release, looking at the factors from an earnings-per-share standpoint. And you will see once again I have started offer by saying that earnings last year for the quarter were $1.44, weather contributed basically to a decline of $0.27, but you will see that growth in our regulated businesses added back $0.15, and the Aspire which is basically $0.06 also added to our earnings. So really a $0.27 per share decline was offset with the exception of $0.11.

This is another chart turning to slide seven, that actually shows the weather impact, and on this chart we actually show a comparison relative to normal weather, because it's one thing to show a comparison relative to the prior year, but compared to normal what you will see is that we were down in Delmarva by 13%, and down in Ohio by 10%.

So we talked a little bit about the growth that we have experienced as a Company. Strong growth in our natural gas businesses. I know this year somewhat offset in the first quarter by the weather, but that growth has really been driven by the capital expenditures that as a Company have made. Those investments have been made to earn either our target returns or greater than our target returns, and the dollars that we have invested have been very substantial. If you look at last year we invested approximately $195 million in capital expenditures. $52.5 million of which was related to the entire Energy of Ohio acquisition. This year we're projected to invest another $179 million. And when you look at that just a couple of key points relative to benchmarks about those numbers. First the $179 million this year represents just under 30% of our total book capitalization, our equity long-term debt and short-term debt. They are very substantial. When he you look at this over the five year period you will see that we will have invested $679 million. Our total book capitalization today once again is about $700 million. So huge investments that have happened over the last five years and that are continuing this year. Our projects this year are comprised of about 82% regulated investments in our natural gas and electric businesses, and the key projects that are under way include our Eight Flags combined heat and power plants that we expect to complete mid-year this year.

Also we're expanding facilities to serve Calpine's power plant in Dover, Delaware. We have a reliability project that's under way and our gas reliability and infrastructure program which replaces the qualifying pipes and mains in Florida, is another large component of our capital expenditure budget this year. So very substantial projects. The largest of which is our CHP plant, that's about $40 million. And there are other projects that we're constantly looking at to hopefully add to our pipeline, to add further earnings growth as we move from this point forward. Some of those projects we know will not necessarily be incurred this year, but may be incurred next year and we're constantly looking for new opportunities.

So while we have all these capital expenditures it is very important for us to have a balance sheet that supports those levels of expenditures. So as you look at our balance sheet as I mentioned we're sitting with about $700 million in total book capitalization at the end of March. Breaking that down, when you look at it from a permanent capital perspective, our equity represents about 71% of that balance. When you look at it from a total capitalization, we're capitalized about 53% equity, and our target is 50% to 60% equity to total capitalization. Wanting to have that strong balance sheet, so we can make the investments that we need for continued future earnings growth. Last year we put into place several facilities with the amount of capital that we have expended we want to try to align as much as possible the financing with those projects, and those projects coming online. We executed a $150 million revolver agreement with five different banks, currently at the end of March we have borrowed $40 million under that $150 million revolver, but it's very important as we're expending the levels of capital, that we are that we have that short-term debt capacity available. We also entered into $150 million private placement shelf agreement with Prudential, and that enables us to basically take that shorter-term debt, and as those projects are placed into service we can then finance them long-term.

And so we'll seek to utilize those mechanisms, those particular options that we have, as well as access the equity markets as needed, to always ensure that we're looking towards that target capital structure that I mentioned. Given the growth opportunities we have, we talked a little bit about on past conference calls and a little bit earlier here into the room, that we recognized last year our ninth consecutive year of record earnings for the Company. And we're hopefully going to continue that trend, but looking at what we have accomplished and always trying to align our dividend growth so it is supported by earnings growth. Earlier this week our Board increased our dividend by $0.07, which represented a 6.1% increase in our dividend, moving it from $1.15 to $1.22.

What is important also to note is that this was the 13th consecutive year of dividend increases upon the prior year. So it's not that we're just increasing our dividend at the prior year's amount. We're actually stepping it up beyond that. We have paid a consistent dividend for over 55 years, but the last 13 they have been constantly increasing each year, and as I mentioned, our focus is on dividend growth that is supported by earnings growth, and we expect a significant growth potential that we see in our businesses, to continue to provide the opportunity for superior dividend growth in the future, just as it has in the past. Just a little bit of information turning to slide 11 in regards to our gross margin. I talked a little bit about our growth. You will see that last year in the middle of the chart basically we recognized about $25 million from projects that we had placed into service in 2014 and thereafter. Those projects coupled with new projects that are coming online, are expected to result in gross margin this year of about $44 million. So we have identified $19 million of margin increase that we're expecting this year, and those same projects are going to add an additional $7 million beyond that next year.

So where is some of that gross margin growth coming from? I talked a little bit about the Aspire Energy transaction that we did, and you will see on here that basically that added third column in, a variance it added about $4.2 million of gross margin for the quarter, serving the Calpine Power plant in Dover, has added considerable margins. They're operating right now under a short-term service agreement, and ultimately, when we placed additional services into place next year at the beginning of the year, they will be under a long-term contract for approximately 20 years. That added additional margin for us, and then last the gas reliability infrastructure program added $1.1 million that I talked about earlier.

So you will see from projects that have really already been done, or are set into motion $15 million, we have two additional projects that are under way that are going to add some incremental margin, the Eight Flags project, combined heat power plant that is going to add $3.7 million, and then next year we'll add $7.3 million on a fully annualized basis. So a lot of growth has happened in the last several years. A lot of growth that we see happening from here on out, in terms of projects that we have identified, and there are also many other projects on the drawing board. As always, thank you for your support and interest in our growing Company. I believe these continue to be very exciting times for Chesapeake, as exemplified by our strong financial results, and certainly the weather was a downer in the first quarter, but the amount of growth that the Company experienced masked, was able to mask a large part of that weather impact. Now I will turn the call over to Mike, who will expand on our strategic growth initiatives, our long-term performance results, and our commitment to continued growth for our shareholders.

Thanks Beth. I will turn to slide 13, 14, I guess. Slide 14 I am going to start with talking about our strategic platform for growth. This is a pretty important slide for us as a Company. We actually show this to our employees quite a bit, in addition to the Board and investors. We start at the bottom and work our way up, engagement strategies. Basically what we are trying to do is get our employees more engaged in the Company's efforts, and we do that by allowing them, I guess, the opportunity to get more engaged in the communities that we're serving, and so what we're finding, I guess, with our efforts to do that, is that we're getting I'm going to say improved community relations, we're getting improved productivity, and therefore, improved growth.

One of the key things that we have to do as a Company, I guess the first really is safety, and so if we can maintain a safe system, we can maintain a reliable system, we take care of our customers and the communities, then we're positioned for growth. Without those key ingredients growth becomes more difficult. It's fairly easy to sell services when they look at your track record, and see that you're doing a very good job. The next step in the process, moving up the triangle is developing new business lines and executing existing business unit growth. When you think about a utility, it is as a utility matures, it becomes more and more difficult to grow. We have seen that a lot in the electric industry today.

So what we're having to do is let's think about things differently, let's not just stink to the same services we're providing now. Let's expand the services that we can provide. In addition, let's look beyond our current service territories, to see if we can grow outside of our territories, to help increase our growth and that's how you get numbers like $100 million worth of CapEx, et cetera. And then finally all of that shows up in the results, you can see safety awards, community service awards, achieving top-quartile growth in earnings, achieving top-quartile growth in shareholder return. Turning to Slide 15, I hit several things here just a moment ago. I want to point to the last bullet on the slide. This is the fourth consecutive year that Chesapeake is recognized as a top workplace. The significance of that just says that hey, the engagement strategies are working. It is allowing employees to participate in communities service activities. Our executives generally I want to say almost every time are also participating, whether it's a food bank, Steve is on a couple of different Boards. Pat [Freemanly] works for building homes, also I guess the food bank Steve joined that Board as well. The Nature Conservancy. So there's a lot of good things that our executives are doing, and our employees are doing, and that's driving team work and engagement

Turning to Slide 16, I guess to the community side, I am getting a little ahead of myself here, but one of the things I will point out here there's several awards in here that were pretty important to us. The second bullet, the Central Delaware Chamber of Commerce Excellence in Business Award for Corporation of the Year. Again, that was based on our community contributions, and the last bullet, this last few months we got an award, a Jefferson Award in Delaware for Outstanding Service by a Major Company. So it's these types of awards that are telling us that hey, we're accomplishing something with our employees, our employees are doing great things, and the communities are recognizing what we're doing.

Strategic planning and thinking. As one of the key processes that we have for growth. The way we attack strategic planning and thinking is that we set very high growth targets in our strategic planning process, targets that really we could not hit if we kept doing the same thing. So it forces us every year to say okay, what are we going to do differently tomorrow to help accelerate our growth. We involve every business unit. Just about every employee in the Company at some point in time is involved in the strategic planning process. Every business unit is very much involved in the strategic planning process.

If you roll the clock back probably 10 years, maybe 15, I don't know how far back it was, we used to do strategic planning in the corner office, and so the smartest people are getting in the room, and we would talk about all this stuff, and we would make this plan up, and then put it on the shelf, and then next year we go pull it off the shelf, do it again, and nothing ever really happened.

So we have changed the whole way we approach that, and said okay, let's get the business units in here, let's ask them what do they see happening in their markets, and how can we grow the Company, and through that change in the process, it took two or three years, but we all of a sudden started getting great ideas coming in the door, and the business units were engaged, and empowered to execute those plans. That's a significant change for us. We monitor the conditions, or the assumptions that we had in the strategic plan constantly. We update the Board on that constantly, and we make changes to the plan if necessary when circumstances dictate. Turning to Slide 18, this is another part of our growth process. We formed a growth council several years ago. The growth council, same type of approach. We wanted to get all of the business units involved in the growth council. What that council does, is it evaluates the strategic objectives or plans, or actually initiatives that we're working on. If you bring in specific projects they're involved with challenging the business unit leader that brought the project in, asking good questions, forcing a real thorough evaluation of the project, and that council we have, legal counsel, we have got engineers, accountants, every business, just operations people.

The whole variety of people that can look at this variety of perspectives, and that actually is part of our key to sustaining our growth as well. If we're making good investments we're going to get good returns we're going to be able to continue to attract capital, and obviously, you can't grow if you're not getting the capital. We have dropped a funnel in here to give you an idea of how we look at this thing. This is more of an illustration, but you can see start with information gathering, identifying opportunities, about 50% of the projects that we're looking at are in that category. You weed out some of those, we get down to the feasibility analysis about 20% of the projects are expected to be in that category, and then petroleum development, offer negotiation, and execution as you can see we're weeding projects out of the opportunities that we see as we work our way down.

It was probably a year ago I think Beth and I were in Boston, and somebody asked me if we ever rejected a project. I was sitting there actually stumped for a minute, and we reject almost all the projects, but I couldn't think fast enough, and it occurred to me then, I guess that would be a question if you're doing a lot of capital investments, the expectation might be that from the other side, well, you guys are just doing everything that comes across the table, and we do have a strategic fit criteria for all these projects as well, so we're not just doing anything that looks likes it could be profitable. We're making sure it's things that we understand, and that we know-how to our do, and it fits with our strategic plan. Turning to Slide 19, so we start thinking what are the results of all of this stuff. We gave you a pretty good picture of that. This is just something that we look at all of the time. So you're looking at the ROE, which is the vertical access, and you have got capital expenditures horizontally, and you will see Chesapeake in the top right hand quadrant, which simply means we are above the 50 percentile in both ROE and also CapEx, so we are deploying a tremendous amount of capital, and we're maintaining returns, and that's a pretty big challenge. You can see how few companies are over there near us, and when you do that, you're going to drive EPS growth.

All of these other dots are just a variety of companies, electric companies, a combination of companies, it's also an industry index, or people that we use in our index for monitoring our performance, and then Chesapeake. So it's not a cherry picking of peer group. It's actually a broad range of companies. So then what happens. Beth talked about nine years of record earnings. So if you look at the blue line, I am on Slide 20, if you look at the blue line, that record earnings per share, the blue line climbing from roughly $1.20 up to almost $2.80, over this time period ROEs maintain actually climbing a little bit, which is pretty hard to do in that type of environment, too, up to a little over 12. So it has been a very successful process that we have been implementing, and it requires a lot of discipline.

So also shareholder returns. So what happens with this. We have looked at broader comparisons. This was something Beth was just thinking about one day and did a lot of work to come up with some numbers, and when we looked at them, we thought these numbers are a little scary, they're a little high. We said well, nobody is going to believe us, so we asked one of our investment bankers to tell us, help us with the analysis, and they put together their own, and so we used theirs. The numbers are consistent. But as you can see 84th percentile in five years, and then after that you have got 86 percentile for one year, 88 percentile for three, and then 89 for 10. So a substantial amount of excellence is being measured there. Look at annualized shareholder returns you will see the median, we joke around about this too. The Utility business sometimes is pretty tough to grow as you get bigger, so you will see a negative 5.1%, it could be weather related, it could be pricing related type of thing, and you can see Chesapeake over the 75th percentile in all four periods. Once again, we go to the S&P 500 we thought, okay maybe the NYC is not a big enough peer group. We go to the S&P 500 similar type results were 73% over five years, and then up over 75% in the other periods. So it's just against a measurement of our discipline.

This is a table that we use periodically on Slide 23. The lightly shaded blue are those metrics where we didn't hit the 75th percentile. All of the others we were at the 75th percentile. We have another table that shows that we have basically made 18 out of 20 times with the 75th percentile. So again things that we're pretty proud of, and again you can go back through the process that we talked about earlier, that are responsible for that, obviously we are executing on those processes. So now what are we doing tomorrow? We talked about what we did yesterday.

One of our key brand values is simply that we don't rest on our laurels and so we like to celebrate the victories, but we know that really it's about what we do today and tomorrow that's going to count. So here's a few of the projects, Beth actually mentioned these. You can see we have got three projects here that are on Delmarva, the White Oak expansion we talked a little bit about the impact of that over earnings, that's obviously a significant project for us. We will be constructing that soon. We are still working out the FERC to get approval to do that.

The TETCO capacity expansion is second row is an interesting opportunity that comes and goes really. With the TETCO it is obviously it's connected to TETCO Texas Eastern, and there's lower cost of gas on Texas Eastern, than there are on other pipelines that are nearby, and so what happens is customers may not have subscribed to move gas on that pipe, that section of our pipe, but when those prices change, and TETCO becomes significantly cheaper than the other pipes, all of the major companies, or major companies are interested in trying to get more gas off of TETCO, to all subscribe to either long-term capacity, or just use short-term interruptible capacity to do that. So we get some earnings supplements from that line. The next box down -- natural gas system liability went back to the polar vortex. That showed some weaknesses in some upstream systems and that flowed through to us. And we also learned some things about our system, so we have been working on our distribution systems to improve that. We're also have a filing with FERC to approve our transmission system, and we have to be ready for low gas pressures coming into our system. Lower than we have seen in the past. So it is an important thing, and reliability is obviously a pretty critical issue for us. Florida and Ohio Florida Public Utilities has a gas reliability infrastructure program. Beth talked about that. Once again, that's about safety and reliability. With very low natural gas prices now, for an opportune to look at strengthening your systems, and so we're doing that.

Eight Flags, Beth talked about that as well. That project is expected to come online in June or July of this year so it's I think over 90% complete was the last number we heard, just earlier this week actually. As far as Ohio, that was the acquisition we did last year. So all of these things if you look at these, Eight Flags is a completely new service we have never provided. Aspire Energy of Ohio completely new service territory. We weren't serving and the services are slightly different than what we have provided. So you are getting two out of the six big projects are either a new service or a new territory. Next slide, Eight Flags, a picture of Eight Flags. This is actually the picture was taken with them celebrating safety, I mean there was I forgot the number of days now or hours, 60,000 hours without an injury, without an incident. So there was some safety. So they were having a little celebration going on there. But the significance of Eight Flags. First it's a new service. We didn't know how to do that. I'm going to go back even to the beginning. We got a phone call that hey, we're considering, this is Rayonier, that we're considering going off of the grid for the electric utility onto the island. And so that means okay, we're not going to use your electricity, and so we were looking at things, concerns about earnings deteriorating. So the team in Florida walked into the plant just did a tour, brought some experts in, got some experts involved to help us look at opportunities in the plant, and they came up with the idea well, we could build a power plant here and lower your steam costs, and we can scale it up on the electric generation side, because we're the electric utility, we can buy the power cheaper from this facility than we can buy from on the grid. On the grid. So we turned what was a loss into a win.

So as a result of this Rayonier is saving money, they're actually expanding their facility now. Two big wins there for Rayonier. For us they have lower cost power coming into our electric system. So that's going to help the customers on Amelia Island, which means a dollars associated with that, and then thirdly, we have higher earnings. And so it was a very big deal, very creative, completely new service, a good job. And then on top of all of that, we used a lot of our different capabilities.

Obviously, the electric utility was involved, we had to build a pipeline, reinforce a pipeline there, that we had a gas pipeline so our gas, our distribution company, gas distribution company was involved, and then also we have a company that, a natural gas marketer that was involved in solving the problem as well. So we took a variety of skills that we had across our entire Company, to help solve that problem. So that really talked about our strategy plan and what we're trying to do, be flexible, be able to it a lot of different things, solve customer problems, has been a key factor in our success. So with that, I will turn it over to questions.

Thank you. (Operator Instructions). Your first question comes from the line of Nathan Martin with BB&T Capital Markets.

Good morning everybody. Thanks for taking my questions.

Yes. Good morning.

Good morning.

Just kind of given the current gas LDC M&A environment, and obviously your clear goals to grow, would it be reasonable to assume you guys would execute possibly another deal or two by the end of this year? And kind of if so, you mentioned you're continuing to look at outside of your current territories. Are there any certain types of geographies you are prioritizing, or would you basically consider anything, if the returns and strategic fit are there?

Well, I guess let me do the first question first. When it comes to acquisitions, we are constantly looking for acquisitions and how that works. You have a hard time, you can look at 10, 100, you look at a lot of acquisitions, and it's very difficult to get any one in particular to the finish line, and so forecasting out, it's just extremely difficult to do that.

Sure.

And so we just don't do that, but we are looking at several opportunities in that regard, and we're probably always going to be looking at several opportunities. The funnel you had that first top piece of the funnel, and you will have a lot of things in there that really won't come to fruition. Very few actually get to fruition. So we can't really forecast that. I'm trying to think of the second question now.

Basically as far as geographies. You guys are continuing to look at opportunities outside of your current territory?

Yes (Multiple Speakers). Yes. There's maybe a natural tendency for us to be focusing on primarily the East Coast. We have been in Florida since the 80's so we're comfortable in Florida. When we're comfortable in Florida then we're going to be comfortable as we move up to Georgia, et cetera, contiguous states. So we're I think primarily the focus is on the East Coast, if we saw something good that was, East Coast I am including Ohio in the East Coast in that definition, but as we get much further west of Ohio, it maybe become, I don't recall ever having seen anything over there, so we don't spend a lot of time looking that far West, but that's not to say that tomorrow we don't find something that's attractive. It's a strategic fit, then we would look at it. Right. Okay. And then thanks for that color. And then I guess just in the same vein I mean looking at these opportunities, just trying to figure out would you lean more towards regulated, unregulated or again does it just come down to strategic fit?We're in different the regulated and unregulated. Aspire Energy of Ohio has basically its gathering system right delivering gas to either intrastate pipelines or delivering gas to LDCs, and so we're perfectly comfortable in that business. Obviously there's some commodity risk associated with that business, but we're comfortable with that. So it's not whether it's regulated or unregulated. It's really what's the opportunity and strategic fit.

Great. All right. Thanks again for the time.

Thank you.

Thank you. (Operator Instructions). There are no further questions at this time. I would like to turn the call back over to President and CEO, Mike McMasters.

Thanks everyone for joining us on the call today and for your interest in Chesapeake Utilities. We're here in Salisbury with members of the local community at our meeting, and we want to thank Salisbury University again for allowing us to use their facilities. We are proud of what our team has accomplished for shareholders in the past, and remain committed to working hard to deliver superior shareholder returns in the future. Thank you.

This does conclude today's conference call. You may now disconnect.