Chesapeake Utilities Corp (CPK) 2018 Q1 法說會逐字稿

Good morning.

My name is Nicole, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the fiscal earnings Chesapeake Utilities Corporation conference call.

(Operator Instructions)

Beth Cooper, you may begin your call.

Good morning, everyone.

And once again, as Nicole mentioned, we'd like to welcome you to the first quarter earnings conference call.

We appreciate you joining us today.

On the call with me today will be Mike McMasters, President and CEO.

We also have other members of our team joining us in the room today.

And today's call is being hosted from Dover, Delaware, live from the company's corporate office.

Turning to Slide 2. Before we begin, I would like to remind everyone on the call that today's call will include a discussion of some forward-looking information.

Please refer to our 2017 annual report on Form 10-K for a discussion of risk factors that could cause our results to actually differ from this forward-looking information.

You will note in the presentation today that our discussion will include certain non-GAAP measures, including, but not limited to, gross margin and adjusted EPS.

We have described on Slide 2 why these and other non-GAAP items are meaningful from our perspective as we review and discuss our performance.

Now I would like to turn the call over to Mike McMasters, President and CEO, and he'll briefly talk about the first quarter highlights.

Thanks, Beth.

This first quarter highlights [adjusted] GAAP earnings per share of $1.64 for the first quarter of '18 compared to $1.17 for the first quarter 2017.

It's a 40% increase in the first quarter earnings, the most profitable quarter in the company's history.

We achieved growth across the business units, led by propane, Eastern Shore Natural Gas, natural gas and electric distribution and Aspire Energy.

The Board of Directors declared a 13.8% dividend increase, reflecting strong growth and lower income tax rate.

Regulated business units served $3.2 million in estimated -- excuse me, reserved $3.2 million in estimated refunds for customers due to lower tax rates.

Eastern Shore and Florida expansion major projects, under construction.

Regulated distribution and transmission growth and Eastern Shore rate settlement generated $0.15 and $0.13 -- $0.15 for growth and $0.13 for the settled rates.

And propane and Aspire Energy, growth of $0.07, net impact of lower rates of $0.10 generated $0.17 increase in earnings per share.

Colder weather, although still warmer than normal by $1.7 million or $0.07 a share, generated $0.17.

Lower contribution from PESCO, negative $0.10; and higher depreciation, operating expenses and interest to support growth, negative $0.09.

I'll turn it back to Beth.

On Slide 4, you will see that it wasn't growth in one particular area but across both of our segments, both in the Regulated and the Unregulated Energy segments were very strong.

Overall, from the company's standpoint, gross margin growth was $10.3 million or 12.2% growth, and operating income growth was $5.3 million or 15.1% growth.

Looking at it in terms of each segment.

In the Regulated Energy segment, before any impact from federal tax reform and the reserves for estimated customer refunds, our gross margin there grew 12%.

The estimated amount for refunds have a dollar-for-dollar offset in our income tax line, as reflected in lower tax expense.

As our expense growth was low during the quarter, operating income for this segment grew 14.2%.

For the Unregulated Energy segment, our results were also very strong.

Gross margin growth was $3.5 million or 13%, and our operating income growth was $2.1 million or 18.2%.

Moving to Slide 5. This slide shows the EPS or earnings per share reconciliation from the first quarter of 2017 to the first quarter of 2018.

There are a couple of points that I'd like to make regarding this slide.

First, regarding the weather, colder weather generated $3.9 million of additional margin or $0.17 per share.

As Mike mentioned, if weather had been normal, we would have generated another $1.7 million in terms of additional margin or $0.07 from an incremental EPS standpoint.

Beyond the weather, the Regulated Energy segment generated additional gross margin of $6.1 million or $0.28, and the Unregulated segment generated additional gross margin of $1.7 million or $0.07 per share.

Finally, federal income tax reform reduced our income tax expense by $0.28 per share.

And this is broken up into really 2 big pieces: $0.10 is generated from our Unregulated Energy segment; and $0.14, which has an offset, as shown on the slide, in conjunction with that estimated reserve for customer refunds to our regulated customers.

Moving on to Slide 6. We've provided a reconciliation in terms of our reported GAAP EPS and what we refer to as our adjusted non-GAAP earnings per share.

The adjusted non-GAAP earnings per share includes a $0.24 per share mark-to-market adjustment associated with the unrealized loss that we recognized in the fourth quarter of 2017 and a large portion of which was the exception of $300,000 we saw reverse in the first quarter of this year.

With the results that we've seen coming out of the first quarter, we continue to affirm our previous year-end guidance in regards to our expectations for 2018 earnings per share, and we basically affirm a 17%-plus EPS growth over the 2017 adjusted EPS of $2.89 per share.

Moving on to Slide 7. It's been important to us as a company to continue to have the balance sheet that will support our future growth in terms of new incremental investments.

At the end of March, you will see that our balance sheet included total capitalization of just under $1 billion at $966 million.

In terms of the equity-to-capitalization, in terms of total capitalization, equity-to-total capitalization represented approximately 52%, and equity-to-permanent capitalization represented 69.5%.

During the month of May, we're undertaking our first of 2 long-term debt placements that we will fund this year.

That $50 million will increase the amount of long-term debt we have outstanding by reducing the amount of short-term debt currently on our books and, therefore, increase our equity-to-permanent capitalization to 62.6% on a pro forma basis.

Overall, as a company, we continue to target an equity-to-total capitalization ratio of 50% to 60%.

Moving on to Slide 8. We have an update on this slide in regards to our tax reform discussions with our various regulatory authorities.

And on the left-hand side, you'll see that we basically laid out each of our regulatory jurisdictions and, as of the end of the March, the amount of dollars that we basically established as a reserve for refund to our customers.

Beginning in Florida, our limited proceeding that was finalized at the end of '17 actually includes provisions in it with regards to the amount and timing of the customer refunds, and those are to occur within 120 days.

On the natural gas side, dockets have been opened up by the PSC related to our gas operations, but no hearing dates have been set at this time.

On the Delaware side, we have filed our preliminary estimated impact of the tax reform with the proposed rate schedule.

At this point, no procedural schedule has been designated.

In Maryland, on April 25, the PSC actually issued an order and established that as of May 1, 2018, the new rates would go into effect, reflecting the tax reform.

And that would also include, basically, a onetime credit associated with the months from January through April.

And lastly, in terms of our pipeline operations for Eastern Shore, the settlement rates that were established and negotiated and finalized reflect the change in the federal corporate income tax rate.

And as it relates to any deferred tax liabilities, those will be handled in our next rate case.

On Slide 9, we have forecasted this year that our CapEx will continue the pattern that we have seen over the last couple of years.

We expect to expend approximately $182 million.

Through the first quarter of March, we've actually expended $63 million or about 1/3 of that total amount, so we still feel that this preliminary estimate is a very likely outcome for the year.

As you look at over the last 6 years, you will see, as a company, that we've expended close to $1 billion.

And actually, as a result of those investments, you've seen our total capitalization double.

Moving on to Slide 10.

We provided an update in regards to the gross margin and our estimates of that impact from the investments that we're making.

In the first quarter, these investments and these initiatives generated an incremental $5 million of margin, recall, out of that $10 million of overall margin growth that we saw in the first quarter.

As we look at the year, our expectation is that these projects will add an incremental $21 million to 2017.

And then '18, as compared to '19, there will be an additional $11 million generated from these projects, so $32 million of incremental margin over the '18 to '19 time span from the investments that are already underway.

And now I'm going to turn it over to Mike, who's going to talk in detail about some of these projects.

Thanks, Beth.

Turning to Slide 11.

So let's talk about Eastern Shore Natural Gas.

As you know, we've been working on a system expansion project for quite some time.

We expect this to go in service sometime during this next year.

It's a $117 million project, 60,000 dekatherms per day.

The project is approximately -- this brings our total investment in Eastern Shore about 5x what it was back in 1998, some 20 years ago.

It's got 23 miles of pipeline looping, 17 miles of mainline extension, 3,750 horsepower of new compression and 25% more capacity.

Estimated annual gross margin is $15,800,000.

Turning to Slide 12.

In Florida, the Northwest pipeline expansion is now in service.

It's a $36 million capital investment with $6 million of estimated annual gross margin.

New Smyrna project, one slide below that -- or one layer below that, $9.1 million of capital investment, $1.4 million of estimated annual gross margin, fully in service in September of 2018.

14 miles of transmission pipeline.

Belvedere pipeline expansion is $3.8 million of capital expenditures, $1.1 million of estimated annual gross margin, expected to be in service end of the third quarter of 2018 and has 2 miles of pipeline.

Moving to Slide 13.

Let's talk about our propane operations a little bit.

Our propane delivery operations - additional customer consumption related to weather increased gross margin by $1,956,000; the increased margin driven by growth and other factors, $1,392,000; and then margin -- propane margin sales, $379,000.

All of this is based on warmer weather, as I mentioned earlier.

We continue to execute our multipronged growth strategy in the propane operations: organic growth, expanded growth in new territories, acquisition opportunities, targeted marketing to commercial and industrial customers to convert to propane, we're still targeting new community gas systems with high growth rates, expansion of propane vehicular platform through Sharp AutoGas.

Our propane business units provide a higher return on capital than we can get in the regulated operations.

We have approximately 54,500 customers.

We have 800 independent customer vehicles at 42 fueling stations in Delaware, Maryland and Pennsylvania.

Turning to Slide 14.

PESCO's natural gas marketing operations, just a little brief summary of what's going on last year with the weather -- or actually, December and January with the weather, as indicated by the graph.

If you look at the lowest line on the graph, that is basically the cost of capacity or cost of gas from both Mont Belvieu and also M2 in Ohio.

The other lines on the graph are closer to Southeastern Pennsylvania, and you can see the dramatic increase that we saw in 2 days in the last month -- sorry, in January.

PESCO natural gas marketing on Slide 15.

PESCO first quarter of 2017, $3,467 -- $3,467,000.

We reversed that unrealized mark-to-market loss, picked up $5.7 million.

And then from supply agreement not renewed, down $2.1 million; impact for the Mid-Atlantic wholesale portfolio, $3.3 million; and then a loss for the Mid-Atlantic retail portfolio by $2.3 million, ultimately resulting in increased -- or excuse me, in total margin of $1,175,000 for the first quarter.

We've taken some action to address some of the events that we've seen in the first quarter.

We've reassessed our peak day demand analysis and stress tested it under more extreme weather conditions.

We've modified our capacity management and operational plans.

We've secured firm transportation and/or delivered dekatherms to mitigate interstate pipeline operational constraints that we've experienced.

Actions taken improved February and March results and better position us for the remainder of 2018.

We've also enhanced our risk management policy.

Turning to Slide 16.

Slide 16 recaps, really, some of the, I guess, key indicators that can help determine whether how we're performing.

Now when you look at this graph, you'll see on the top right-hand side, Chesapeake Utilities.

If you look down, you'll see we're running at about 24.5%, 25% of investment in new capital relative to our total capitalization.

And you can also see that we are earning a 12% approximately ROE.

And both of those numbers are above median and contribute to our -- or explain our success and earnings per share growth.

Shareholder return on Slide 17.

If you look at the left-hand side, annualized total shareholder returns for the performance peer group, you saw on the right-hand side of that the 14% 20-year number.

It's been 14%, significantly higher than the 75th percentile and higher than the median.

The 10-year 17% total shareholder returns and 14% 75th percentile, still above that.

5th-year, the same results, 24% total shareholder return, 21% 75th percentile; and then 19% and 19% for the 3-year and the 1-year in terms of total shareholder return.

And you'll see that, over the time period, as you get closer to the current year, you'll see that the peers have increased their total shareholder return, thus, tightening that bandwidth.

Dividend growth on Slide 18.

As you can see on the dividend growth starting in 2008, $0.81 a share, increasing to $1.48 a share in 2018, significant increases.

$1.48 annualized dividend per share in 2018 is a result of the positive energy of our team's track record in delivering superior earnings growth.

This year's annualized increase of $0.18 per share or 13.8% also reflects the positive impact of the Tax Cuts and Job Act on earnings from our unregulated businesses.

Chesapeake's 5-year annualized dividend growth rate is 7.6%, in line with our 5-year CAGR in adjusted earnings through 2017 of 7.7%.

Our goal remains to provide above-average growth in dividends, supported by our engaged team, continued disciplined approach, investment opportunities and resulting strong earnings per share growth.

Turning to Slide 19.

We're proud of our track record of identifying strategic opportunities and producing superior total returns, driven by earnings and dividend growth.

We are energized by our team, our strategy and execution, our financial and operating performance and our future growth plans and objectives.

This is the result of our excellent team and culture that values both capital discipline and entrepreneurship.

We are driven to find innovative ways to serve our customers while honoring our obligation to operate in a safe and environmentally responsible manner and to provide investors a competitive return on their investments with us.

With that, we'll open it up for questions.

(Operator Instructions) Your first question comes from the line of Insoo Kim from RBC Capital Markets.

Maybe just starting with the PESCO business.

I understand there were various moving parts, including significant weather that impacted the quarter on a year-over-year basis.

But I know -- I saw that you did have a negative impact from a supply contract that was not renewed.

Is this just part of the normal volatility of the business as contracts roll off and you sign [huge] contracts?

Or is there something else that we should be aware of?

No.

It's a normal part of the business.

We had a 1-year contract, and when we got -- when we [reevaluated] this year, we drew a line on the sand where we want to go and decided not to go any further than that.

And so that's what's happening there, just basically having the discipline to walk away from the contract.

It wasn't the right price.

Understood.

And then just looking at your CapEx, obviously, you guys mentioned how CapEx has been very robust, especially the past few years.

How much visibility do you see in the pipeline of projects in the next few years or so to give you any sense of whether that level should continue?

Or is this has been more, not an anomaly per se but just a period of higher growth versus what you should -- what we should see on a normal basis?

Yes.

I would say, Insoo, there's multiple projects, opportunities that we're looking at, at the present time.

We haven't formalized that number for 2019, but our goal, hopefully, for it to be at a level that approximates that.

But at this time, those projects are still coming to fruition.

I think the important thing that we -- that, hopefully, we got across also is that when you look at our margin table, even for this first quarter, when you think about us as a company, there is organic growth.

There's growth in the unregulated businesses, and there are lots of pieces that are feeding that gross margin growth that the company is achieving.

But certainly, a lot of projects in the pipeline, a lot of projects that we're pursuing.

And hopefully, we'll be providing some more information as those projects get finalized.

Yes.

This isn't really unusual for us.

Every year, just about every quarter, just about -- when you look at it, you'll see a little falloff on the second year.

And so it's not unusual.

It's something we have to work on all the time.

Right, right.

Yes, I understand.

And then, perhaps, lastly, I guess in hindsight, it definitely makes sense, the impressive dividend growth that you guys just announced at maybe close to 14% given the various items driving robust year-over-year growth in '18, as expected.

Are you -- but I guess given this is kind of a jump in EPS unlike some of the other years we've seen, are you still sticking to -- I believe it was the low 40s in terms of a payout ratio, longer term.

Or are you thinking that maybe that could trend higher?

Well, I guess we're thinking somewhere between 45% and 50% payout.

We typically have been growing at a rate higher than we expected, and so it's been diluted down to the 40%.

But what we're trying to get to -- we're trying to be around the 45% to 50%.

The key there is, at below 50%, then we're basically getting higher EPS growth than we are in dividend growth.

And so as long as we can maintain that dividend -- EPS growth at rates that are that high, then we'll be able to keep dividends fairly high.

But again, it's something we look at every year, reassess and spend a lot of time, actually, just going through this and studying whether we've got the right numbers.

And we feel good about where we are.

Your next question comes from the line of Tate Sullivan from Sidoti.

Beth, can we talk about the Unregulated Energy operating income result of $13.7 million in the first quarter?

But then I think it was the previous quarter, you backed out the mark-to-market change from that number in terms of PESCO.

Is that available?

Or did I miss that?

No, you are correct.

In the fourth quarter, we actually -- when we looked at adjusted earnings per share, we made an adjustment to look at our results, and that's where I spoke about the $2.89.

That includes -- basically, that includes -- or excludes both the tax reform impact of last year as well as the unrealized loss.

And so then this year, what we did in -- when we came out of the first quarter was we felt, from a purpose -- we needed to also remove that from the first quarter results because it's really just a timing issue between the fourth quarter and the first quarter.

Do you have -- adjusted for that mark-to-market, do you have an adjusted operating income margin for your unregulated segment, though?

I think it was 10.5% in the first quarter.

We have not looked at it like that because when you think about that business, as we talked about earlier, when Mike went through the results of that particular business, there are factors each year, contracts that are maybe not being renewed, new ones that are being added.

But overall, from this business standpoint, Tate, one of the things that Mike mentioned in his comments is that when it comes to our unregulated businesses, our goal is to earn returns that are going to be above those that we can generate on the regulated side.

And that continues to be the case across the portfolio of unregulated businesses.

Okay.

Yes, I'll have to take another look at how I forecast the operating income margin for the Unregulated Energy piece.

I'm just trying to get -- back out the mark-to-market and sort of see what a sustainable base is.

Okay.

Thank you.

(Operator Instructions) There are no further questions at this time.

I turn the call back over to the presenters.

Well, thank you very much, everyone.

Thank you for your continued interest and support in our company.

Our engaged employees are committed to providing safe and reliable service and our continued growth.

Thank you again, and have a great weekend.

Thank you.

Bye-bye.

This concludes today's conference call.

You may now disconnect.