Chesapeake Utilities Corp (CPK) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Chesapeake Utilities Second Quarter 2018 Earnings Call.

(Operator Instructions) Beth Cooper, Senior Vice President and CFO, you may begin your conference.

Good morning, everyone, and welcome to Chesapeake Utilities' Second Quarter 2018 Conference Call.

Thank you for taking the time to participate in our call this morning.

Joining me today is our company's President and CEO, Mike McMasters.

Also, there are many other members of our management team present today joining us at our new Energy Lane Campus here in Dover, Delaware.

This new state-of-the-art facility houses our Delmarva natural gas distribution operations, our Eastern Shore pipeline operations, our customer care group and our information technology team.

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

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

Please also note that both in our filings, as well as in our presentation today, we include certain non-GAAP measures that we believe are meaningful to understanding our business.

Now I would like to turn the call over to Mike McMasters, President and CEO, for him to make some opening remarks on the quarter.

Thanks, Beth.

I guess this was a very strong quarter for us, and it's actually been a strong year for us so far to date.

We're on target to hit the 17% EPS growth that we talked about earlier this year and are pretty -- are very comfortable with that forecast.

So we've got continuous superior earnings and dividend growth.

Second quarter net income rose 5.6%, EPS about 5.5%.

Year-to-date net income rose 32%; EPS, the same 32%.

We increased our dividend by 13.8% in May.

The earnings growth [big] drivers so far in '18 are natural gas transmission operations, consistent expansions and Eastern Shore settled its rate case.

Our gas and electric distribution operations, we've got strong customer growth, increased sales and safety -- and increases in sales and safety/reliability programs.

More normal weather so far in '18 has also helped us.

Growth in the propane operations and Aspire Energy of Ohio have contributed to the growth as well.

Finally, lower federal income tax rates, partially offset by rate reductions on our regulated entities, have helped us.

On the capital spending side, we've completed the Northwest border project, pipeline expansion in the second quarter.

It's in service now and generating returns.

Eastern Shore's natural gas pipeline expansion on track for completion and margin contribution in 2018 and a further increase in '19.

CapEx forecasted to increase by $34 million, given the accelerated spending on projects.

With that, I will turn it over to Beth.

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

One of the things particularly in this quarter and when you look at our results year-to-date, it's a little complicated from the tax reform perspective.

And so we thought it would be helpful to look at what our -- both our gross margin and our operating income, as well as our net income and EPS growth, have been both for the quarter as well as on a year-to-date basis.

You'll see on this slide that we do highlight that our EPS growth on a year-to-date basis is a 31.8% growth rate.

That, too, is also the growth that we have experienced on a year-to-date basis as well at 32%.

Driving those increases are gross margin growth as well as operating income growth that are double-digit growth across the board.

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

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

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

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

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

Recall that for things like interest expense where we've had financing, there's a flat cost that's basically throughout the year.

So in a non-weather quarter, when you get to the net income and the EPS lines, those are slightly less than the growth at the operating income line.

When you do look at our quarter though, adjusted for the nonrecurring items that we've included in our Q and in our press release, you will see that our EPS actually grew 30% excluding those nonrecurring items.

Moving on to Slide 5. There's just a couple of things that I'd like to talk about as it relates to on a per share basis.

You'll see that overall EPS increased by $0.02 quarter-over-quarter.

There was a big driver in terms of gross margin, and that increased basically by $0.32, with $0.27 coming from our utility operations.

That being comprised of service expansions and core growth, which were $0.14, Eastern Shore's settled rate as the result of the rate case were $0.10 per share, and GRIP and other regulatory mechanisms represented $0.03 per share.

Lower income taxes benefited us by $0.08.

You'll see on this slide, at the top, you'll note that the regulated side was basically a $0.10 impact.

Offsetting that were some nondeductible expenses as we looked at our tax provision, offset by $0.01 that was contributed from the unregulated operations during the quarter.

Lastly, PESCO on a net basis added $0.05 for the quarter.

Turning to the next slide.

One of the things that we thought would be useful would be to break down our other operating expenses.

And so what we've done on this slide is actually carve out depreciation, amortization and property taxes, as well as those nonrecurring expenses that we talked about during the second quarter.

And what you can see for the quarter, when you take out some very large factors in regards to growth that we've experienced in Eastern Shore, growth in infrastructure that we're putting in place for PESCO and higher incentive compensation costs given our performance, very easily, you will see that our cost expense dropped from 15% down to 7% for the quarter, and when you look at it on a 6-month basis, dropped from 8% to under 3%.

Moving to Slide 7. We wanted to highlight where we are in regards to our regulated jurisdictions as it relates to the tax rate reserves.

In 2 of our jurisdictions, we've actually completed refunds to the customers.

Those include Eastern Shore with the FERC and also our Maryland operations.

In the case of Delaware and Florida, we have dollars reserved and are actively involved with filings before those 2 jurisdictions.

At the bottom, you'll see we've included a reconciliation of our year-to-date impact as it relates to the TCJA.

The same thing happened on a year-to-date basis where, overall, we've got really an $0.08 increase when you look at it on an overall basis.

But of that, the unregulated operations have added about $0.11, that being offset by some expenses that we know will be not deductible.

Moving to Slide 8. We wanted to just highlight, as you think about our business, on a year-to-date basis, you'll note that we generated about $54 million in terms of operating income, with about 79% of that coming from what we call, basically, our utility operations, pipeline operations, and then the balance still being part of our core operations on the unregulated side making up the other 21%.

As we try to continue to position ourselves for future growth, we're constantly looking at where our capital structure is.

At the end of June, our equity to total capitalization sat still around 51%, pretty consistent to where we ended the year 2017.

We are in a process later this year of completing another long-term debt placement of $50 million.

That's scheduled for November at a cost of 3.58%.

And we will continue as necessary to access the capital market for permanent financing as new projects are identified.

In terms of what projects are out there, Mike spoke briefly earlier on in today's presentation that we have increased our capital forecast from $182 million to approximately $216 million at the end of June.

This is a result of looking at those projects and the time line of some projects actually being accelerated.

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

When you look at us as a company over the last 5 years, easily, we have invested on average about 25% of our average capitalization.

So significant growth in the company, whether you look at it on the previous slide and you see our capitalization almost doubling over the last 5 years, or whether you look at it on this slide and recognize that we're investing about 25% of our capitalization a year.

In terms of what those investments are translating into from a gross margin perspective, I wanted to just highlight on Slide 11 some of the bigger projects.

What you will see is that, for 2018 and 2019, we are expecting to add $32.7 million of incremental margin from the projects that are either recently constructed, in process, to be constructed or finalized later this year or into early 2019.

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

What are the big drivers this year?

Well, certainly, we are continuing to invest in our GRIP program and that's adding about $800,000 this year.

In addition to that, Eastern Shore's new rates will add an incremental $6.1 million.

The Florida Electric reliability and modernization program that went into effect with meter reads in January of this year will add $1.5 million.

Several projects in Florida listed here.

Mike mentioned earlier the Northwest project and that had a substantial impact in the quarter, adding about $870,000 of margin.

This year, it'll add $3.5 million in total.

And before everything is said and done, next year, it will add an incremental $3 million for a total of $6.5 million.

There's also several other projects in Florida that were well on the way, including the New Smyrna Beach as well as the Belvedere project.

And then lastly, our 2017 system expansion Mike will talk about in a few minutes, this year will add $7.7 million incremental margin, and then again, next year, will add an additional $7.6 million.

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

Thanks, Beth.

Just turning to Slide 12.

When you look at Slide 12, what you can see on the capital investment side, this total project for the Eastern Shore natural gas expansion.

It's $117 million.

So far, we've invested approximately $90 million, with the $25 million more to spend this year.

When you look at the margin side of things, $15.8 million in total.

In the first full year of operation in 2019, as Beth just mentioned, about half of that goes into effect in '18, the other half goes into effect into '19.

When you look back at TETCO, the service, we upgraded the service in December of '17.

Incremental margin of $859,000, an incremental margin year-to-date of $2 million.

The project description, 23 miles of pipeline looping, 17 miles of mainline expansions, upgrades to TETCO interconnect.

It's 3,750 horsepower of new compression that's available at the compressor station, 2 new pressure control stations as well, increased capacity by 26%.

Turning to Slide 13, the Florida pipeline projects.

Beth just talked a little bit about these as well, so I'm going to go here through pretty quickly.

The Northwest pipeline project, $36 million in capital, 38 miles of transmission and 5 miles of distribution pipeline.

Customer commitments of 68,500 dts per day, with total capacity of 80,000 dts per day.

We are currently looking for new opportunities to sell out the rest of that capacity and feel relatively very good about the fact that we can drive this growth up.

$6.5 million of estimated annual gross margin, $870,000 of margin in the second quarter of 2018.

New Smyrna pipeline expansions, $9.1 million in capital, a gross margin of $352,000 in the second quarter and (inaudible) $704,000 year-to-date.

Annual margin estimated $1.4 million.

On the Belvedere pipeline, same type of numbers, $3.8 million of capital, $1.1 million of estimated annual gross margin and 2 miles of pipeline.

Turning to Slide 14, our natural gas distribution growth.

When you look at our natural gas distribution growth, I'm going to talk year-to-date.

Residential growth, $1,719,000, 51% growth.

Commercial industrial growth, $1,630,000, 49% growth -- I'm sorry, 49% of the growth, excuse me.

New service in Northwest Florida, $305,000, 9% of the growth, and other unbilled revenue down effectively 9% of the growth as well.

So in total, about $3,342,000 in 6 months ended June.

Turning to Slide 15.

Slide 15 is really just kind of lays out a picture of how we look at our growth and how we're trying to manage our growth to some degree.

When you look at this, you'll see that the weighted average return on equity is the green line running from the left-hand side of the document to the right-hand side.

You'll see that we are above the median, the median 9.35%, we're running at 12.2 -- 12.02% ROE for strong returns.

At the same time, you can see that Beth just mentioned this, 25% of capital expenditures to total capitalization.

We're averaging, again, 25%.

And so that is also -- those 2 things combined are driving our growth.

And it requires us to remain very disciplined in making these investments, and we'll continue to do so.

Turning to Slide 16.

Above-average dividend growth.

When you look at our dividend growth over the years, you can see 6.2%, 4.9%, 6.5%, 6.1%, 6.6%, and more recently, 13.8%.

These are obviously very strong dividend growths.

When you look at the payout ratio, you can see that our payout ratio remains conservative.

That's driven by the strong earnings growth.

Turning to Slide 17, shareholder return.

We've shown these slides quite a bit.

In the 20 years, we're above the 75th percentile from 20 years to today.

10 years, we're above the 75th percentile.

5 years, we're above the 75th percentile.

It slowed down slightly in the 3-year and 1-year on the shareholder return.

We've been -- I guess, our stock price has been fairly flat almost in the last 12 months.

Chesapeake percentile ranking amongst all S&P companies.

As you can see, 80th percentile for 20 years, 87th percentile, 81st percentile, 69th percentile, and more recently, 47th percentile.

The rest of the industry really is -- have faster growth rate now in terms of -- or faster, higher shareholder returns right now than the total.

Moving to Slide 18.

When you think about our strategy, our strategy overall is produce solid total shareholder return by profitably reinvesting capital to maintain growth in our existing businesses, while deploying incremental capital into related opportunities that leverage our skills and energy expertise.

We're constantly seeking new development projects to serve new customers, provide new services and expand into new service areas.

We're investing in pipeline systems that provide natural gas service to downstream customers such as LDCs, cooperatives, municipalities, industrial end-users and power plants.

We're pursuing projects that serve long-term commercial and industrial customers.

These renewable projects include natural gas.

We're investing in propane opportunities to access new markets with significant growth potential.

Finally, our engagement strategies are important.

Our engagement strategy with employees provide strategic infrastructure for sustainable growth.

We're investing in our talent and targeted development plans and training.

We're engaging with communities where we work and live.

We're pursuing brand excellence through safety awards, top workplace and Chesapeake care events.

This ultimately is the foundation of our growth.

It's a key to our employees who are driving the growth.

Turning to Slide 19.

We're constantly looking to identify growth opportunities that we can develop into executable projects that will continue to drive our future earnings growth and increase shareholder value.

We're proud of the fact that we are finding strategic opportunities that are producing superior total returns and that is driven by earnings and dividend -- and therefore drives dividend growth.

Our team is energized.

We have a very strong team, excellent team, strong culture, capital discipline and entrepreneurship.

And we're looking for -- and we're looking at everything from an innovative perspective.

We want to be safe and environmentally responsible.

We want to generate competitive returns.

With that, we'll open it up and take questions.

(Operator Instructions) Your first question comes from the line of Mark Levin from Seaport Global Securities.

Congratulations on all the good work year to date.

Two quick questions, one has to do with the CapEx hike.

Maybe some more color around the projects and opportunities that are being accelerated.

And then the second question is more of a big picture question around one of your last slides that talked about opportunity -- some of the opportunities that you look at going forward.

Maybe if you can talk about where you think -- where you expect to be active in those sub-segments maybe over the next year or 2 or where you're seeing the greatest opportunities?

So Mark, I'll talk about the first one and then Mike can talk a little bit about the second question.

So in terms of the capital expenditures, we're constantly looking at our forecast.

And when we feel that projects are at a stage where they're likely to happen, and that can include small projects.

And so included in the dollars that we've added here are some smaller projects that we're moving forward with.

They won't be projects where we'll be including dollars in the margin table at this time because they are smaller projects.

And then there's also projects that can -- as we look at the time line in terms of when the dollars are to be spent, there's some acceleration in regards to that.

Yes.

And I think it's fair to say that it's not driven by cost overruns.

That's correct, that's correct.

That's a significant thing as well.

So when you're thinking about where are we going to be growing over the next, let's just say, a year, 2 years, 3 years, it's really going to be more, I'm going to say, more of the same with the exception of us taking a good hard look at the renewables.

And again, we want to do that in a very disciplined manner.

So it's not just the do it for doing it.

It's basically to do this to drive some earnings, but also it has to be disciplined.

So our natural gas distribution operations are continuing to grow pretty strong rates.

We're pretty comfortable with that continuing.

The transmission side, the same.

Transmission side, we've got -- we've built the Delmarva area and also Florida.

And also, there could be opportunities in Ohio that will evolve, and we're just looking at some of those right now on Ohio, as well as our traditional Delmarva in Florida.

On the propane distribution side, again, we've seen some very strong growth on the propane distribution side, and we're very comfortable with that.

What we're doing with Community Gas System strategy that we've implemented years ago has been a very effective strategy, generating good returns.

In addition to that, more recently, we're doing the propane for fuel and vehicles, which has then also been very effective as it's helping us get into new territories that we would not otherwise not be in.

So we're very comfortable with that stuff.

We're also doing an exploratory project with one of the poultry companies on the peninsula.

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

And so I think there's still -- we'll see some CHP growth over the next few years.

Hard to tell when.

These things are hard to bring to closure, but ultimately, we're continuing to look at those and are trying to drive those.

That's great.

One follow-up to Beth regarding the CapEx question.

When we think about 2019 and beyond, and I know the budget has yet to get to the board and get the budget, we're still only in the middle of the year.

But anything to extrapolate from the sort of revised CapEx budget in 2018 in terms of how that might affect the outlook in 2019 and beyond from a CapEx perspective?

Well, that's a great question, Mark.

We are in the process right now of going through our budgets for the next 5 years in terms of those being prepared.

But I would say from, I think, our standpoint, we have a pretty good track record if you look over the last 5 years in terms of what we've spent.

And I would indicate that a maintenance level for us, just a pure maintenance level, is going to be about $60 million.

And we know that we've got some projects that are going to be finishing up in early next year like a little bit of 2017s.

There's also some normal construction and expansions that we're doing in our distribution operations.

So I think as a placeholder for now, if you look at kind of the low end, as a book end for over the last 5 years and then as we have more information out there in the public domain, you'll be able to refine that.

But certainly, we're focused on capital and driving additional investments.

And certainly, we'd like to keep pursuing that 25% that we've been achieving.

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

I will turn the call back over to Mike McMasters.

Well, thank you.

I want to thank everyone for spending some time with us here this morning.

We're committed to providing excellent service to our customers, supporting the communities that we serve and driving earnings per share and to generate a superior total shareholder return over the long term.

Have a great weekend.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.