Chesapeake Utilities Corp (CPK) 2016 Q3 法說會逐字稿

Good morning. My name is Denise, and I'll be facilitating today's call. I'd now like to turn the call over to Beth Cooper. Please go ahead.

Thank you, and good morning, everyone. I'd first like to thank those that are joining us on the call today, and then secondly thank those in the room. We're today doing our earnings conference call live from Delaware State University in our home town of Dover, Delaware. And we appreciate so many of the faculty, the dean, so many of those individuals being able to join us, as well as students. It's a great opportunity for us to be able to get out and work with the university in these types of settings.

I'm going to begin today's call first moving to slide 2. I know everyone on the call is familiar. We have our standard disclosures around forward-looking statements. Certainly, I would refer everyone to the forward-looking information that we provide in our Form 10-K.

We will talk about various projections, which you should always look at those in light of those disclosures that we provide around them in our public documents.

We thought today a good place to start the call, we've had quite a few questions from the financial community, would be to discuss the most recent hurricane, Hurricane Matthew, and what impact that may have had, if any, on the Company.

And so I'm going to turn our call over to Mike McMasters, President and CEO, and he'll discuss that.

Thanks, Beth. I mentioned earlier that we did have that hurricane a little while ago. And I'm just going to brief everybody real quickly on what's happened. We've gotten a lot of questions about this.

There was a tremendous amount of work that was done upfront to prepare for the hurricane. I'm skipping over that just in the interest of time here.

But basically, I'm going to just pick up from where the hurricane was, I guess quickly approaching the island.

We had a mandatory evacuation of the island at six a.m., on Thursday. We shut down our Combined Heat and Power Plant on the island shortly thereafter.

The hurricane impacts Thursday, from October 6th to Saturday, October 8th. On Saturday morning at 8:30, our trucks were lined up at the bridge to get back on the island to go check out the facilities and get customers turned back on service to the extent that it was lost.

Our trucks were actually the first group of people back on the island. They lined up early. And as soon as the Florida Department of Transportation ruled the bridge was safe, we drove across to the island and started our work.

When we got there, we found that 90% of our electric customers were without power. There was fortunately minimal damage done to our natural gas and propane systems. No damage to the storm hardened transmission poles. No damage to our Florida FPU operations center on the island.

This is a pretty big deal. There's a lot of stuff that had been done over the last five or six years by our Florida Public Utilities team to strengthen the poles on the island to make this more able to withstand storms.

The most important thing -- I can't really -- I can't say -- I'll say another important factor is there was no damage to the Eight Flags Combined Heat and Power Plant. It's an elevated platform on pilings where the plant sits. It's designed for a hurricane category 4 storm. So we were pretty well prepared.

It had been, I guess a category 4 storm earlier in the week. We were fortunate, I guess, that it came in at slightly below that.

Restoration, once they got back on the island, we had the power plant up and running within three hours. We had 12,000 of the 14,000 electric outages fixed in the first day. The next day, we increased that to 1,800 more customers. By the time we got to Monday, we only had 200 without power, and were able to get that done on Monday.

It was a very quick restoration with approximately a million dollar cost, plus or minus. We do have storm reserve in place, so that does not impact earnings.

And there were no accidents or injuries. A lot of work done quickly, no one hurt, and everyone back on service. So it was a very good thing.

I think the only -- I did miss one piece of damage that was done. I think Jeff Householder's dock was torn up. And so that was (inaudible). So he'd have to add any details to that situation.

Guess I'm going to jump, hit a couple slides here real quick while I've got the floor. When you think about -- when I think about what we're doing as a company to try to grow the Company, we look at a lot of this, I guess Company performance and directions. Strategic platform for sustainable growth is how we refer to it.

And we look at this from the bottom up. And if you look at the bottom, you'll see engagement strategies providing a strategic infrastructure for sustainable growth. You'll see safety, reliability, customer satisfaction, et cetera.

But really, what it is, we've got a lot of topnotch, high-quality employees. And they're highly engaged. And so they'll build relationships with our customers, with the communities we serve. They're going to make sure that our systems are safe and reliable. And with that, I'm going to say as a foundation, we create a good reputation in the community. And that frees up a lot of time for us, whether you're executives or whether you're on the front line with the customers, to focus on growth.

And so with that, we're looking very aggressively for growth opportunities, whether it's inside our footprint on the peninsula of Florida, Ohio, or it's outside. We're going to look to anywhere that a growth opportunity makes sense for us. We're going to try to make sure that we're participating in that growth opportunity.

If you look at the top of the triangle, you'll see results, safety awards, top workplace and top leadership awards, community service awards, achieving top quartile growth in earnings, and top quartile total shareholder return. So we're proud of all those things.

Real quickly, I'll hit this first slide, and I'll hand it back over to Beth. The third quarter and year-to-date results exceeded our expectations. So we are very comfortable with where we are today. We know that our growth is working. Our forecast indicated that we would not get earnings as high as we are right now, both on a year-to-date basis and also for the quarter.

We're getting growth from expansions, as well as customer growth within our territories.

The Eight Flags was a critical contributor in our third quarter by generating margin operating income as expected. We're very pleased with how that project has worked out and how it's working today.

On November 2nd, we announced we had signed all the preceding agreements necessary for us to make a filing with the FERC to do an expansion with our Eastern Shore Natural Gas pipeline. This will be the largest expansion in our history, approximately a $99 million project, about $50 million here in [marva].

I mentioned Florida operations were minimally impacted by Hurricane Matthew.

And then finally, we issued stock during the quarter, netting $57.3 million. I'd say it's a fairly large stock issuance for us in our history, but nowadays, it's fairly small. It's kind of amazing how much we've grown and how things have changed.

With that, I'm going to turn it back over to Beth.

Now really just to dig in and take a look at the financial results, first, beginning with the quarter, I'm turning to slide 10 for those on the phone.

For the quarter, we reported $4.4 million of net income, which basically represents $0.29 per share. Recall, and I know many of those on the phone know that the third quarter for us in terms of overall contribution for the Company, is typically the lowest when you look at where and when our earnings fall, due to the seasonality of our businesses.

So $0.29 for the quarter. As Mike mentioned, there's a lot of growth in here, though, that really is going on that we want to highlight and walk you through.

So turning to slide 11, beginning with our Regulated Energy segment, that segment had higher gross margin of about $4.7 million that ultimately translated into about $1.3 million of increased operating income.

It didn't really come from just one area, though. And consistent with what we've been talking about for the last several quarters, there were multiple areas where we had growth throughout the Company.

First and foremost, included are our natural gas expansions that we made on the transmission and distribution side. Those generated about $1.6 million in terms of incremental margin.

Above and beyond that, we had $943,000 of new customer growth. That's customer growth in our distribution operations, as well as additional margin that we're generating in our transmission operation.

We also generated $920,000 incremental margin from our Gas Reliability and Infrastructure Program. That's a gas pipe replacement program that's been in place since August of 2012, in Florida. By the end of this year, we'll have invested close to $100 million in that program. So very substantial in terms of the contribution that it's making each quarter in terms of gross margin.

Beyond that, we've also been, and we'll talk in a few minutes about we've been involved in our Delaware rate case. We've implemented interim rates to the tune of overall $2.5 million on an annual basis. The impact for the quarter was $469,000. I'll talk about year to date in a few minutes.

And then lastly, service by our natural gas distribution and transmission companies in Florida to bring natural gas to that combined heat and power plant that Mike talked about, added close to another $0.5 million.

On the Unregulated side of our business there was also growth. Our Eight Flags CHP plant went into operation. That generated incremental margin of $1.6 million.

When you look at gross margin, though, for this particular business on slide 7, though, or this particular segment, what you will see, though, is gross margin is relatively flat. And that's because year over year, we had some non-recurring items and we also had lower retail margins for now in our propane distribution operation, which we've been talking about for a very long period of time of those margins returning to more normal levels.

So when we break that down and look at some of those factors that offset that $1.6 million that was contributed by Eight Flags, the retail propane margins decline was about $414,000. The timing of costs that we had related to one of the contracts that we've entered into by our PESCO subsidiary, we incurred about 20% of costs associated with an annual contract. And basically we have volumes of about 5% during that quarter.

Lastly, we had some non-recurring imbalance positions that Aspire had in 2015.

But overall, once again, there's growth, a lot of growth in this segment. We see the $1.6 million and overall year to date. We'll talk about the other growth throughout this segment.

In terms of the nine months, where are we? One of the things that I like to take a look at shown on slide 13 is, as we started this year, we moved through the year. We had over $10 million of gross margin that we needed to overcome, $7.5 million of that coming from the weather, $2.2 million of that coming from expected lower retail propane margins per gallon.

We overcame all of that and we're moving beyond that. So as you see on slide 13, our gross, in terms of our operating income, we're up by about $700,000, which is being led by gross margin increases.

We've experienced gross margin increases of $5.5 million, coming from a natural gas transmission and distribution expansion, $3.1 million coming from GRIP. I talked about that earlier. Another $2.6 million of gross margin growth coming from other customer growth within our natural gas distribution and transmission operation, $2 million coming from our interim rates in our Delaware Division. That's about $1.35 million of that $2 million. And then we've also implemented and improved our systems, improving our rates in our Sandpiper operation. That's about $600,000 to $700,000.

And then lastly, our Eight Flags service from our distribution and transmission operation generated just under $1 million.

On the unregulated side of the house, we also generated $4.5 million of incremental margin from our newest subsidiary, Aspire Energy. Additionally, the Eight Flags CHP plant added $1.7 million in terms of what it's selling to Rayonier in terms of the steam generation. And then lastly, $1.1 million was generated from PESCO marketing company, due to the opportunity to serve new customers, as well as favorable supply management.

So overall, year over year, when you look at us, our net income is up, we've overcome $10 million-plus in terms of gross margin from the weather, which we can't control, as well as the expectation of lower retail margins. And so overall, when you factor in a higher level of shares year over year, our earnings per share is at $2.14 compared to $2.16 last year.

Taking a look at it from an earnings per share standpoint, this is where it really stands out for myself. You'll see I talked about the weather. This is on slide 14. Weather is basically $0.31 per share.

In addition to that, those lower expected retail margins were $0.09, and we had a recovery from a billing system settlement in 2015. The net impact of that is basically $0.06 per share.

So $0.46 downward pressure on earnings. So it's been more than overcome by $0.67 of gross margin increases for the reasons that I just went through.

Additionally, Aspire Energy was accretive in its first year. And looking at the nine months, has added $0.08 per share.

So where has this growth that I talk about -- so many different factors of growth coming from all different parts of the business? Well, based on our results of the investments that we've been making, shown on slide 15, on a year-to-date basis, we've invested about $106 million in new capital expenditures this year. Our original budget was $179 million.

We believe right now, we put kind of a range in our public documents of $150 million to $170 million. So we've taken the midpoint here and said, basically, we're targeting, and we believe right now we'll be close to about $160 million.

We've completed that CHP plant. That's done. So that capital's already been spent. We're in the process of constructing our reliability project, as well as our mainline expansion project. Those are underway, each just under $40 million.

And in addition to that, we've been doing the GRIP replacement program, as well as some other initiatives.

Turning to slide 16, just in terms of having a balance sheet to be able to support those capital investments, we've positioned ourselves and, hopefully, as we move forward, we have the balance sheet in place that will support our continual growth.

When you take a look at where we sit at the end of September, we're approximately $750 million of book capitalization as a company. Of that amount, we've got approximately $438 million of equity, which represents that just under 59% equity is total capitalization.

Our target as a company is 50% to 60%, so well within our target range.

Moving to slide 17, Mike talked briefly about that equity issuance, and we wanted to just highlight that.

We were very pleased with how well received the equity placement was in the market. The equity issuance was led -- we had two book runners, Wells Fargo and RBC Capital Markets. We also had six managers that participated, including Janney Montgomery, Baird, Hilliard Lyons, Ladenburg Thalmann, BB&T, and US Capital.

What was interesting for us was when we initiated the equity offering, there was an interest that represented more than 300% of what we were trying to raise. And so a very good sign that we are hopefully developing and continue to develop a great relationship with new markets, new investors. Our existing investors continue to hopefully be pleased with our results and where we're headed in terms of our strategy.

And so we were able to raise that. We issued the stock at $52.26. Our allocation was 69% retail, 31% institutional. We had existing institutional investors participate. We had new institutional investors get involved. And we placed our stock throughout the Company through various channels.

So we believe a win-win. We exercised a greenshoe. So from our perspective, hopefully, also well received by the investment community.

Turning to slide 18, we continue to be focused on our dividend growth, most recently in May our Board increased our dividend. Our annualized dividend is $1.22. Earlier this week, the Board declared a quarterly dividend that equaled that annualized amount for now. Paying dividends for 56 consecutive years, and all of those years either maintaining or increasing our dividend.

Our most recent dividend increase represents a 6.1% increase, or 5.8% over the last five years.

What's important to us, though, is that when we have dividend growth, we want that dividend growth to be supported by sustainable earnings growth. And that's really what we have been looking for and trying to achieve throughout the years.

Moving on to slide 19, we talked a lot about the various components of the gross margin increases. And this is a table in our press release where we try to lay out the projects that are underway, projects that have been completed, so that we can define where we feel there is future opportunity in growth in terms of the margin from these projects that are done, as well as those that are to be completed.

If you take a look at 2016 compared to 2015, our expectation is that gross margin from those projects will have represented incremental margin of $22 million for us as a company.

As we look into 2017 right now, that estimate is right around $10 million of incremental margin that we've identified from just these projects.

Please keep in mind when I talked earlier about organic growth, that's not in this table. We'll have a filing forthcoming as it relates to our Eastern Shore Natural Gas operation. At this time that's not in this table.

As things become more firm in regards to expectations, we include them on this table, or if they're projects that are going to be put in the public domain, they get added at that time.

And then lastly, right now our projection is for 2018 over 2017, we would have incremental margin of $17.5 million from these projects that we've identified.

Some of the notes that are included on that slide on slide 19 relate to rate cases. And we wanted to update everyone as it relates to those.

So our Sandpiper filing in regards to that particular rate case, the settlement agreement was approved on October 29th. The new rates go into effect on December 1st. Initially it will be a revenue neutral situation. Over time, those rates to customers will decline. But many of you will recall that we've also implemented a process where we're converting customers. And in conjunction with that, the rate and global churning on that process will offset, to some degree, those lower returns and earnings as coming out of the rate case.

In our Delaware Division, we're in the process of settlement discussions. There's been a two-phase approval process by the PSC as it relates to interim rates. The first tranche was $2.5 million, which we have implemented. And recall, earlier I talked about that our margin reflected both for the quarter and year to date incremental margin from the Delaware rate case.

In the case of the quarter, it was under $0.5 million. In the case of year to date, it's about $1.35 million.

There was a second tranche of rate increases to bring it up to our full request. We have reserved for that second tranche of rate increases, pending a final PSC approval.

And lastly, I made reference to our Eastern Shore Natural Gas subsidiary. We're going to be required to come back in there and file a rate case, and we're targeting by the end of January for that, with rates proposed to be effective on March 1st.

So with that, I'm going to turn it now back to Mike.

I guess you've already seen this slide, slide 21. So I'm going to skip over that. I'm going to try to move through these things pretty quickly.

Eight Flags, we talked about that a lot a little bit earlier. I'm just going to skip over this thing and just mention a couple things. One, a $40 million investment in the project. Annual margin expected to be, with some other stuff that we're doing on that project, $8.2 million. And savings to the residents on the island of $3 million to $4 million a year in power cost.

The Eastern Shore expansion, I just talked about that somewhat. You can see pretty much our map of the peninsula, see where that covers. We still have some FERC work we have to do, the Federal Energy Regulatory Commission. The pre-filing process is underway, and so we're getting moving. And we also have all the preceding agreements, so we can start putting together our filing for FERC to get approval to construct the [line].

Real quickly, as I mentioned, $99 million capital investment, $15.7 million in the first full year of operations after it's in service. It'll go in service in the fourth quarter of 2017, late in the fourth quarter, so most of the margin impact or a great majority of the margin impacts will be in 2018, as opposed to 2017.

This performance quadrant's a pretty important slide for us. You'll notice weighted average ROE is on the vertical axis and capital expenditures, total capitalization is on the horizontal axis.

And what we're looking at here is basically, if we tend to -- I want to talk about capital expenditures first, the horizontal axis. We can deploy a lot of capital, make the investments. And we can do that right now. You can see in this peer group, there are only two companies higher than us. And this is basically a pretty broad group of the peer group. There was no, I guess you'd say cherry picking in here. You can see two companies greater than we are.

Then if you look at the ROE, you can see we're about fifth. So when you do that, you can deploy a tremendous amount of capital and get higher returns, that should drive earnings per share growth. It does take all the work by the business unit to identify all those opportunities. But from a financial perspective, as you can see on slide 26, that it can really drive returns, grow shareholder return.

So if you look to the left-hand side, for example, one year, 53% ranking on the group. But I think that's basically about a 17.4% shareholder return. If you look at the three-year, 23.1% shareholder return, five-year, 21%, and 10-year, 15.5%.

And this is compared to the [broader] New York Stock Exchange. And you can see we're hitting 75th percentile numbers three out of those four periods. And so there's some high performance coming out of those financial results.

This is just a table of metrics, financial metrics that we look at periodically. As you can see, in all but three periods or categories, we're hitting the top quartile performance.

So it's a pretty big deal for us, and we're working hard to maintain this or actually continue to accelerate our growth.

With that, I'll turn it over if you have any questions.

+++ questions-and-answers

Good morning, Denise. We wanted to go ahead and open it up for Q&A.

(Operator Instructions). We'll pause for a moment as questions come into queue. Spencer Joyce with Hilliard Lyons.

Just one really quick one for me here, and I actually have to hop off onto the South Jersey call. But I did want to ask about this Sandpiper rate case and the new rates going into effect in December. I know you mentioned revenue neutral.

I know Sandpiper we've talked about kind of on the periphery for a few years now. And is that revenue neutral about what you expected? I know, Mike, you've mentioned that's kind of a long game there, as we get those customers converted over the next few years.

I'm just wondering how the ultimate outcome there kind of jived with your initial kind of hopes and expectations.

Actually, Spencer, it might sound strange, but it is a very good outcome for us. I think it's a very fair outcome. Probably a little bit better than we had expected.

What you have here with the Sandpiper, as you know, it was a propane underground distribution system, unregulated. And when we bought that, we knew we had a complex, I guess, series of events where we'd basically be trying to convert that to natural gas. And if we were trying to convert that and have customers that were going from unregulated to regulated as we were doing the conversions, there was going to be a lot of friction, I guess, with the residents that were still on propane.

And so we wanted to blend the cost so that everybody was in the same boat, and we could focus on getting this conversion done as quickly as possible.

And so with that creates a complex what's the rate of return question. So we have propane customers, we have natural gas customers, rate of return do you use? And we had been achieving fairly high rates of return, maybe very high rates of return.

But fairly high rates of return, so we knew that that was at risk. And so we felt like the balance that we met, that we made with the [Maryland] Public Service Commission was about -- it was a good (inaudible) place. So we're going to be continuing to convert customers and getting properly compensated for that with a reasonably good -- the effect is to have a reasonably good return.

Okay. Perfect. Thanks for the color there. And congrats on a good year this far, and we'll talk soon. Thanks.

(Operator Instructions). There are no further questions queued up on the phones. I turn the call back over to the presenters.

Well, I want to thank everybody for joining us here today and your interest in our Company. We'll continue to be dedicated to drive earnings in a manner that's responsible, both saving customers' money and also safety. So thank you very much.

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