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Northwest Natural Gas’ (NWN) CEO Gregg Kantor on Q4 2015 Results – Earnings Call Transcript

Operator Good morning and welcome to the Northwest Natural Gas Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Nikki Sparley, Investor Relations Manager. Please go ahead. Nikki Sparley Thank you, Andrew. Good morning, everyone and welcome to our fourth quarter 2015 earnings call. As a reminder some of the things that will be said this morning contains forward-looking statements. They are based on management’s assumptions, which may or may not come true. You should refer to the language at the end of our press release for the appropriate cautionary statements and also our SEC filings for additional information. We expect to file our 10-K later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note these conference calls are designed for the financial community. If you are an investor and have questions, please contact me directly at (503) 721-2530. Media may contact, Melissa Moore, at (503) 220-2436. Speaking this morning are Gregg Kantor, Chief Executive Officer and Greg Hazelton, Senior Vice President, Chief Financial Officer, and Treasurer. Mr. Kantor and Mr. Hazelton have some opening remarks and then will be available to answer your questions. Also joining us today are other members of our executive team, who are available to help answer any questions you may have. With that, I will turn it over to Mr. Kantor for his opening remarks. Gregg S. Kantor Thanks Nikki, good morning everyone and welcome to our fourth quarter and year-end earnings call. I will start today with highlights from the year and then I will turn it over to Greg Hazelton to cover our 2015 financial performance. Finally I will wrap up the call with a look forward. In 2015 Northwest Natural successfully navigated a number of challenges while still achieving our key financial and operational goals. Our financial challenges came early in the year with Oregon experiencing the warmest winter on record. The impact was substantially mitigated by our weather normalization mechanism which has been place since 2003. However, we experienced lower volumes and revenues as about 20% of our customer base is not covered by the mechanism. In addition in February 2015, the Oregon Commission approved a mechanism that allows us to recover, prudently incurred environmental clean-up cost allocated to Oregon associated with our historic manufactured gas operations. We began collection of our environmental expenditures through this mechanism known as the SRM in November of last year. However, as part of the February 2015 order, the OPUC disallowed environmental expenses totaling $15 million based on the application of an earnings test for past years when the company earned above its allowed rate of return. As a result, we took an after tax charge of $9.1 million in the first quarter of 2015. In response to the warm winter and the disallowance, management instituted a number of temporary cost saving measures. Through these targeted efforts we reduced budgeted O&M levels by approximately $5 million or about $0.11 per share. And I am proud of our employees whose hard work and commitment allowed us to accomplish this while still remaining dedicated to exceptional service and safety. Despite the financial headwinds our core utility performance remained solid with higher margin and continued customer growth. Part of this performance stems from the strength of our region’s economy and you can see that strength in a number of trends including in migration and housing growth. Oregon is experiencing strong population gains particularly attracting college educated workers between the age of 25 and 34. In fact Oregon ranks sixth in the nation for in migration of degree holders who are beginning or mid career. These young working age households are considered vital for both regional economic development and longer term growth. In the last year average monthly employment in the Portland Vancouver metro area increased by about 35000 new jobs equating to an annual employment growth rate of 3.2% which exceeded the average national rate by more than 1%. Over the last 12 months the unemployment rate in the Portland and surrounding metro areas sell 100 basis points to 5.3%. We’re also seeing strong housing growth in the Portland Vancouver area with a 25% increase in single family building permits in the last 12 months. And in the last year, home sales were up about 20% in Portland and average home prices increased by 6.5%. In Park County [ph] Washington where about 11% of our customers are located, home sales were up 19% for the year and average home prices were up 8.6%. All of these factors contributed to a fast growing Oregon economy. In fact Oregon’s economic health index rose the most in the nation through the first three quarters of 2015 according to the latest Bloomberg economic evaluation of states report. These were all good signs our economy continues to move in the right direction. On the operations front we had an excellent year with a continued focus on safety and reliability. We hit a milestone in the fourth quarter when we removed the final known bare steel pipe from our distribution system making our system one of the most modern in the nation. This achievement was supported by trackers established with the help of the commission more than three decades ago. In 2015 we once again reached our emergency response goals of answering 90% of emergency calls within 10 seconds and responding to damage and protocols onsite within 30 minutes on average. During the year we also began several multiyear infrastructure projects to ensure the continued reliability of our system and support customer growth. These ongoing investments include improvements totaling $25 million at our Newport LNG facility to modernize that plant and $25 million of upgrades are being made to our system in Vancouver, Washington also over the next several years to increase pressure levels to support our service territories fastest growing community. Safety and reliability coupled with affordability make natural gas a very competitive fuel source. In 2015 we were able to strengthen that position by reducing residential customer rates in Oregon by 7%, by 14% in Washington. This rate reduction was a reflection of the lowest natural gas commodity prices we’ve seen in 15 years. And finally for the sixth time in nine years we posted the highest score among large gas utilities in West in the 2015 JD Power Residential Customer Satisfaction study. This also marked the eighth time in nine years of ranking among the top two highest satisfaction scores in the nation. These results reflect our continued commitment to operate reliably, safely, and with high quality customer service in the communities we serve. With that let me turn it over to Gregg to cover our financial results and provide the 2016 guidance. Gregory C. Hazelton Thank you, Gregg and good morning everyone. Today I’ll start with a review of the fourth quarter results, followed by a discussion of our annual performance, and close with 2016 earnings guidance including key assumptions for the year. For the fourth quarter we reported improved consolidated results with net earnings of $1.08 per share or $29.7 million compared to $1.04 per share or $28.5 million for the same period last year. Consolidated results were driven by higher utility margin and other income, partially offset by increased O&M expense. Looking at our segment results, for the quarter our utility segment net income increased $1.1 million based on a $2.6 million increase in utility margin and then $1.8 million increase in other income, offset by a $2.4 million increase in O&M expense. The utility margin -– the increase in utility margin was predominantly driven by customer growth with over 3,300 new meter sets installed in the fourth quarter, which is nearly 1% higher than the prior year. In addition, utility margin benefited from the gas cost sharing gains as a result of lower actual gas prices than rates in Oregon -– in the Oregon purchase gas adjustment mechanism. Utility O&M for the quarter increased primarily reflecting higher incentive compensation, retirement, and healthcare costs. During the quarter, our gas storage segment earnings improved slightly reflecting some positive trends. Our Mist gas storage facility continues to perform well and operating results remained strong and comparable to the prior year. Gill Ranch realized an uptick in revenues reflecting higher contract prices for both firm and optimization contracts. Additionally, operating expenses decreased as we managed the business to a lower cost structure which we expect to benefit from in 2016. Also in December we redeemed the remaining Gill Ranch note, prior to its November 2016 scheduled maturity. Turning to our annual consolidated results, net income was $1.96 per share or $53.7 million compared to $2.16 per share or $58.7 million in 2014. As previously discussed, the company recognized a non-cash, after-tax $9.1 million environmental disallowance related to the February 2015 SRRM order. This charge was reported as O&M expenses in the first quarter of 2015. Excluding this charge consolidated earnings were $2.29 per share or $62.8 million, an increase of $0.13 over 2014. Annual results were largely driven by higher utility margin and other income, offset by increased O&M expenses. For the year utility net income increased $3.9 million, excluding the impact of the $9.1 million charge. Higher net income was largely driven by a $5.3 million increase in utility margin, a $6.6 million increase in other income, and a $2.4 million decrease in interest expense, offset by $7.2 million increase in O&M expense, and a $1.8 million increase in depreciation expense. In November we began collecting revenues from customers through the environmental mechanism or SRRM. For the -– for 2015, these collections totaled $3.5 million and are included in operating revenues with a corresponding offset for the amortization of environmental regulatory asset. For the year, utility margin increased primarily driven by strong customer growth with the addition of more than 9,700 customers and gains from our gas cost incentive sharing mechanism. These increases were offset by lower margin from customers not covered by weather normalization as the region experienced exceptionally warm weather. The $6.6 million increase in utility, other income was primarily due to the recognition of equity earnings on deferred environmental expenditures as a result of the February 2015 order. Excluding the regulatory disallowance, utility O&M expense increased over last year, primarily due to an increase in compensation and benefit expense, which included higher employee incentive compensation, retirement and healthcare costs, as well a new union labor contract that was effective June 2014. In addition, non-payroll expense increased from higher professional service and insurance cost. In the second half of 2015, management implemented a number of temporary cost saving initiatives to mitigate the unplanned effects of warm weather and the disallowance. These targeted initiatives resulted in approximately $5 million or $0.11 per share of O&M savings. While these measures help the company meet its 2015 financial targets, they are unsustainable and we do not plan to continue them in 2016. Utility interest expense decreased $2.4 million over the last 12 months with the redemption of $40 million of debentures without reissuance. For the year net income for gas storage improved mainly due to a reduction in operating expenses reflecting lower repair and power cost at our Gill Ranch facility. As well as permanent expense savings I previously mentioned. Despite improvement in the fourth quarter, gas storage annual operating revenues declined as a result of higher contracted storage prices in the first quarter of 2014. In addition interest expense increased reflecting the early redemption of the Gill Ranch note. Cash flow from operating activities declined $31 million compared to last year due to over $100 million of environmental insurance recoveries in 2014 offset in part by the decrease in cash flows from changes in deferred gas cost balance. Now I’d like to briefly mention two regulatory updates. In January 2016 we received an order from the OPUC resulting all open matters in our SRRM docket. The order confirmed the recovery of environmental cost eligible to Oregon rate payers under the SRRM and disallowed interest earned on the original $15 million charge from the February 2015 order. As a result we recognized a non-cash $3.3 million pretax charge in January 2016. Also we continually assess our business and economic environment to determine the need for future rate cases. Based on rate based growth since our last Oregon rate case in November 2012 and increases in operating expenses, we are evaluating the need to file in Oregon general rate case within the next 12 to 24 months. And a potential Washington rate case sometime thereafter. Moving to 2016 guidance, capital expenditures are expected to range from a $155 million to $175 million including approximately $15 million of capital expenditures associated with our North Mist expansion. For the five year period ending 2020, we estimate utility capital expenditures to range from $850 million to $950 million excluding any potential future gas reserve investments. This range also includes a $125 million of CAPEX for our North Mist expansion. At this time we expect cash savings from the extension of bonus depreciation to total approximately $90 million through 2019. We are evaluating the impact of this extension on the mix and profile of our investments. Our CAPEX range does not include any potential additional capital investment that may result from this evaluation. We currently do not anticipate the need to issue equity until 2018 with the completion of our North Mist expansion. In addition we are utilizing open market purchases for a dividend reinvestment program as well as certain share based compensation programs. The company initiated 2016 earnings guidance today in the range of $1.98 to $2.18 per share which includes the $3.3 million pretax or $0.07 after tax charge from the January 2016 order. Our adjusted guidance range excluding the charge is $2.05 to $2.25 per share. With that I’ll turn it back over to Gregg for his concluding remarks. Gregg S. Kantor Thanks Gregg, as we turned to 2016 we continued to focus on our regulatory agenda and on growing our company. On the regulatory front we were pleased to reach conclusion on the implementation of our environmental mechanism with the commission’s order this January. Although the additional charge in 2016 is disappointing, this was a complex docket and we believe the mechanism provides a good path forward for all stakeholders. This year we will continue working with the commission and other gas utilities in Oregon on the policy docket exploring commodity hedging. This includes what role gas reserves could play in a balanced natural gas supply portfolio. We’ve also been working with the Oregon Commission and stakeholders on a carbon solutions program under Oregon’s Greenhouse Gas Reduction Legislation. As we’ve discussed before, Senate Bill 844 allows the OPUC to incent natural gas utilities to undertake projects that will reduce emissions. Our first proposal was submitted in June and is designed to further the use of combined heat and power in Oregon. We filed our last briefs a few weeks ago and expect a decision from the commission in the next few months. On the customer growth side, we are working hard on expanding our multi -– our market share in the multi-family housing sector. As I mentioned, the Portland area housing market has seen an upturn, particularly in multi-family apartments. To further our efforts, we have created a cross-functional team to evaluate every aspect of the apartment rental market, a market that is typically underserved with natural gas. Results of a recent market study show that 80% of renters in Portland prefer natural gas entities. This shows a clear gap between what renters want and what’s available and we’ve begun developing a comprehensive marketing program targeting apartment developers. We view rental apartments as an untapped growth opportunity and a priority segment for us moving forward. Now let me give you a quick update on the potential expansion project at our underground storage facility in Mist, Oregon. As you know in 2014 we received approval from Portland General Electric to move forward with the committee and land acquisition work required for the expansion project. The project would provide no notice storage services to PGE’s natural gas power generating plants at Port Westward. It would include a new reservoir providing up to 2.5 billion cubic feet of available storage, an additional compressor station, and a new pipeline. Last April, we submitted an application to the Oregon Energy Facility Siting Council for an amendment to our existing Mist site certificate, a step required to support the expansion. In early October, we held an open-house with the local community near the expansion site and received positive feedback from attendees. And then on March 5th, just a few weeks ago, the Department of Energy published a proposed order. Public comment processed on that order will end on March 7, just a few weeks from now. If there are no challenges to proposed order through the comment process, we could receive the EFSC permit approval later this spring. And currently, we’re in the process of rebidding the EPC portion of the project. Following the approval of the permit and the rebidding process we expect to receive a notice to proceed from Portland General later this year. We continue targeting an in-service date during the 2018, 2019 winter season, a target that depends of course on the permitting process and construction schedule. And the current estimated cost of the project is approximately $125 million. Over many years Northwest Natural has demonstrated the careful planning essential to finding and retaining the talent necessary to drive success. Detailed succession plans are an integral part of the company’s business activities and this past year the benefits of that work were clearly visible. I would like to mention two key changes; first, in June of last year Greg Hazelton joined the management team as CFO and was also recently named Treasurer. And second, this past December, I announced my retirement at the end of 2016 and that David Anderson would be promoted to Chief Executive Officer effective to August 1. I will be working with the Board in Advisory role until the end of December. A smooth transition at the top is critical, but as important is developing the talent for succession in key positions across the organization, and that has been a long held commitment at Northwest Natural, one, that in my opinion, is the true mark of a Board and the management team with foresight. David is an excellent example of this talent. He is a strong leader and he brings great experience and a diverse skill set to the CEO position. I’m confident our company will be in good hands going forward. With that, thanks for joining us this morning and now I’ll open it up for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions]. Gregg S. Kantor Looks like people are ready for the weekend I guess. Operator Okay, well this concludes our question-and-answer session, I would like to turn the conference back over to Gregg Kantor, Chief Executive Officer for any closing remarks. Gregg S. Kantor Well thank you everyone. Thank you again for your interest in our company and for taking the time out this morning to listen in and have a great weekend. Operator The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Chesapeake Utilities’ (CPK) CEO Mike McMasters on Q4 2015 Results – Earnings Call Transcript

Operator Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2015 Earnings 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. Beth Cooper, Senior Vice President and Chief Financial Officer, you may begin your conference. Beth Cooper Thank you, Nicole, and good morning, everyone. We appreciate you joining us today to review our fourth quarter and 2015 annual results. Joining me on the call today is Mike McMasters, President and CEO. In addition to Mike, we also have several members of our management team here with us to answer questions. The presentation to accompany our discussion can be accessed on our website under the Investor section and Events and Webcasts subsection or via our IR app. Moving to Slide 2, before we begin, let me remind you that matters discussed in this conference call may include forward-looking statements that involve risks and uncertainties. These forward-looking statements and projections could differ materially from our actual results. The safe harbor for forward-looking statements section of the company’s 2015 Annual Report on Form 10-K will provide further information on the factors that could cause of such statements to differ from our actual results. I would like to begin today’s presentation by highlighting the company’s record performance. As shown on Slide 3, the year 2015 culminated in the ninth consecutive year of record earnings generated by the company, both in terms of net income and earnings per share. In addition, as the slide highlights, Chesapeake has generated very strong returns on equity ranging from 11% to 12.2% over this nine-year period. These results have been driven by our successful capital investments in organic growth opportunities and acquisitions like FPU, Sandpiper Energy, and Aspire Energy of Ohio. The returns that we have generated on these investments have resulted in a compound annual growth rate of 9.8% in earnings-per-share over the nine-year period. Moving to Slide 4, yesterday, we reported results for both the year and the fourth quarter ended December 31, 2015. Net income for the year was $41.1 million, or $2.72 per share, which represents an increase of $5 million, or $0.25 per share, compared to 2014. Year-over-year earnings per share grew by 10.1%. For the fourth quarter of 2015, the company reported net income of $8.6 million, or $0.56 per share. This represents a decrease of $1.5 million, or $0.13 per share, compared to the same quarter in 2014. The decline in the quarter-over-quarter results was caused by lower energy consumption due to warmer temperatures that reduced earnings by $2.5 million, or $0.17 per share. The fourth quarter of 2015 was the warmest fourth quarter in the past 30 years in our operating territories. As you know, gas consumption is impacted by the variability in heating degree days in the winter months. I will now highlight the accomplishments and results for the two business segments for the year. Detailed discussions of our results for the quarter and year ended December 31, 2015 are provided in our press release, which was filed yesterday and will be included in our Annual Report on Form 10-K, which will be filed Monday. Turning to Slide 5, Chesapeake’s regulated energy businesses, which include our natural gas distribution and transmission and electric distribution operations generated operating income of $61 million in 2015, compared to $50.5 million for 2014. The increase in regulated energy operating income was generated from strong growth in the regulated energy businesses. The impact of several nonrecurring items also enhanced 2015’s results. Gross margin increased by $13.2 million as a result of service expansions, the Florida Gas Reliability Infrastructure Program, or GRIP, as we refer to it, natural gas customer growth and the Florida electric rate case. The higher gross margin was partially offset by lower margin as a result of warmer weather and an increase in other operating expenses reflecting the incremental cost of service, ultimately resulting in an increase of $2.6 million in 2015 operating income. The nonrecurring items included non-cash pretax impairment charges recorded in 2014 in the aggregate amount of $6.4 million and a gain from a customer billing system settlement of $1.5 million recorded in 2015. The impact of these nonrecurring items resulted in additional operating income of $7.9 million in 2015, compared to 2014. As shown on Slide 6, the unregulated energy segment reported operating income of $16.4 million, compared to $11.7 million for 2014. Operating income excluding a $432,000 nonrecurring charge in 2014 increased by $4.2 million. Higher retail propane margins and margin generated by Aspire Energy were the largest drivers of the $12.4 million increase in gross margin generated by the segment. The increased gross margin was partially offset by the warmer weather, lower results for Xeron, operating expenses from the addition of Aspire Energy and additional expenses as a result of the year’s strong performance. The key variances in terms of net income and earnings per share contribution between 2015 and 2014 are highlighted on Slide 7. This table is a summarized version of what is included in our filings and provided in the appendix. For 2015, as mentioned previously, earnings per share increased $0.25, or 10.1%, to $2.72 per share. Gross margin increased $0.95 per share, higher operating expenses largely to support growth offset the gross margin increase by $0.48 per share. Unusual items resulted in a $0.13 decrease in earnings per share for 2015, the largest component of which was the warmer weather in 2015, compared to 2014. While approximating normal weather, 2015 was significantly warmer than 2014, which impacted results year-over-year by $0.18 per share. In our regulated energy segment, an increase in gross margin of $0.65 per share was generated from natural gas customer growth, service expansions in the natural gas transmission businesses, continued investment in the Florida GRIP to enhance infrastructure reliability and safety and the full-year impact of the 2014 electric rate case. In the unregulated energy segment, gross margin increased $0.30 per share largely due to higher retail propane margins, which added $0.37 per share partially offset by lower contribution from propane wholesale marketing and sales. The inclusion of nine months for Aspire Energy lowered Chesapeake’s earnings per share by $0.06, including the impact of issuing approximately 593,000 shares for the acquisition. Finally, interest and other changes reduced year-to-date net earnings per share by $0.03. Slide 8 shows our history of capital expenditures as a percentage of total capitalization. For 2015, we invested 28.3% of total capitalization, 20.7% of which came from organic growth capital investments and 7.6%, which related to the purchase of Aspire Energy. Since 2011, we have made capital investments of $545 million, including acquisitions, which equates to an average 21% of capital expenditures to total capitalization annually. In terms of the dollars invested during 2015, we invested $142.7 million in our existing businesses, including $98 million in our regulated energy segment. Adding in the Gatherco acquisition that was completed in 2015 for $52.5 million, this increases our total capital expenditures for the year to a record of $195.2 million. The execution of our strategic plan continues to generate significant opportunities for profitable capital investment. The current capital budget for 2016 projects investments of $179 million to support and grow our existing businesses. We are pursuing several other projects, which could further increase our level of capital spending. Of the total capital budget for 2016, approximately $30 million represents capital expenditures that are in early project development stage. We are excited about these investments, but recognize that the review and approval process by the regulatory bodies may take longer then we experienced in our previous applications. Slide 10 highlights the company’s commitment to maintaining a strong balance sheet, which should facilitate access to competitively priced capital to fund our growth initiatives. Our equity to permanent capitalization and equity to total capitalization, including short-term borrowings, was 70.6%, and 51.9%, respectively, as of December 31, 2015. We target to maintain a ratio of equity to total capitalization, including short-term borrowings of 50% to 60%. As of December 31, 2015, our short-term debt, including the current portion of long-term debt, was $183 million, which also includes $35 million borrowed under our $150 million revolving credit agreement. Available for five years, we can utilize this facility to bridge financing to long-term debt. Given the level of capital expenditures in 2015 along with the 2016 capital budget, we anticipate securing longer-term permanent capital to maintain our targeted equity to total capitalization ratio and will seek to align such financing with the earnings generated from the larger projects. In this regard, on Slide 10, we have highlighted one possible means of securing new long-term debt capital, a Shelf Facility with executed with Prudential Investment Management in late 2015 also for $150 million. In May of 2015, the Board of Directors increased our annualized dividend by $0.07, or 6.5%, to result in an annualized dividend of $1.15 per share as shown on slide 11. We are firmly committed to dividend growth supported by earnings growth. Chesapeake Utilities has paid a dividend continuously for 55 years. Our Board of Directors will be revisiting the dividend level again in May 2016. Given broad market uncertainty and investors current expectations for income and security, we understand the desire for reliable dividends. We expect a significant growth potential in our businesses to continue to provide potential for superior dividend growth in the future, just as it has in the past. Before I dig into the details regarding the gross margin growth we achieved in 2015 as well as our estimates for future margin growth, I would like to spend just a few moments highlighting the overall key financial accomplishments for the year. We have highlighted many of these accomplishments on Slide 12. First, as we mentioned earlier, we increased earnings per share by 10.1%, achieving record earnings for the ninth consecutive year. Our capital expenditures, including the Gatherco acquisition, were $195.2 million, the largest level of annual capital expenditures in our history. This level of investment fostered growth in our overall asset base, which surpassed $1 billion for the first time in 2015. Achieving record earnings enabled us to generate a solid return on equity of 12.1%. We are proud of the growth in our businesses and the returns we have generated for shareholders, which Mike will elaborate on later including a 16.7% total shareholder return for 2015 that included a 6.5% dividend increase. Finally, at year-end, our market capitalization had grown to approximately $867 million. As recently as yesterday, this had escalated further as we closed at a market capitalization of approximately $975 million. Slide 13 shows a snapshot of the consolidated gross margin impact of major projects and initiatives completed since 2014, as well as major projects and initiatives announced and underway. As you can see, these projects and initiatives add a gross margin of $18.2 million in 2015 and are expected to add incremental gross margins of $19.1 million in 2016 and $10.3 million in 2017. We have included a slide in the appendix that provides the detail for the completed projects and their margin contribution for 2014, to 2017. We have a number of other projects and initiatives in place to expand margins in 2017 and beyond and as their timing related to in service is solidify, we will update our projections accordingly. Slide 14 provides detail on projects and initiatives underway as referenced on the previous slide. These investments will be completed over the next year and are expected to produce gross margin of approximately $7.2 million, in 2016 and $18.2 million, in 2017. As our results over the past nine years demonstrate, our team is relentless in identifying and pursuing opportunities to enhance our growth and further increase our gross margin. As always, thank you for your support and interest in our growing company. These continue to be very exciting times for Chesapeake Utilities, as exemplified through our strong financial results. Now I will turn the call over to Mike, who will expand on our strategic growth initiatives, long-term performance results and commitment to continued growth for shareholders. Mike McMasters Thanks, Beth. Good morning everyone. Slide 15 illustrates how we approach achieving sustainable growth. Chesapeake Utilities’ success story starts with engaged, dedicated, and capable employees who are committed to expanding our infrastructure, to meet the energy needs of our customers and communities. Our employees continually seek opportunities to further engagement with the local communities. They construct and operate safe, reliable energy delivery systems whether they are pipelines, wires or trucks. Our employees do a remarkable job of identifying, developing, and transforming opportunities into profitable earnings growth. Finally, we employ a disciplined capital allocation process to produce superior returns to shareholders. Turning to Slide 16, our success in delivering returns is due to the hard work of our employees, our strategic planning process, and discipline in executing our strategic plan. Strategic planning is a continuous process for our company. We update our strategic plan every year and we ask our business unit leaders and our strategic business develop team, to take a new look at market conditions and the new opportunities are evolving in the market. Then we challenge our teams to identify ways to grow at rates faster than they could if they simply continue doing what they are doing today. This keeps our thinking fresh and our focus on generating sustainable long-term growth. Turning to Slide 17, the performance quadrant is one of the ways that we monitor the results of our strategic plan and its execution. We believe that one of the keys to our success is our ability to deploy significant amounts of capital with attractive returns on investment. Chesapeake continues to rank in the upper quartile of gas distribution, electric, and combination utility companies in terms of capital invested and return on capital over the past three years. Our ability to achieve higher than industry average returns, while investing higher levels of capital relative to our size is result of our ability to identify and develop profitable growth opportunities, maintain our disciplined capital investment decision-making process, execute on our growth opportunities and achieve our targeted financial results. Turning to Slide 18, the environmental and economic advantages of natural gas and propane provide opportunities for expanded use in our service territories and across the United States. Natural gas is abundant, clean, efficient, domestic and affordable. The abundance of clean natural gas in the United States continues to provide security of supply, energy reliability, and stable prices to Americans every day. As shown on Slide 18, natural gas and propane continue to have price stability, compared to oil and are expected to maintain this advantage for the foreseeable future. This price stability creates opportunities to satisfy new customer demand at affordable prices. And has helped to create opportunities that our team has developed to drive growth in margins, earnings, and ultimately dividends. Turning to Slide 19, one such opportunity is the White Oak expansion project to increase mainline capacity to serve Calpine’s new power plant in Dover, Delaware. Eastern Shore plans to invest between $32 million and $35 million, which could be used to build 7.2 miles of pipeline looping an additional compression facilities to provide natural gas to the power plant. The estimated annual gross margin resulting from this project, under the 20 year service agreement will be approximately $5.8 million. In 2016, we expect to generate approximately $5 million of incremental margin. As part of our ongoing commitment and efforts to provide reliable service to our customers, Eastern Shore has proposed a $32 million reliability project that is highlighted on Slide 20. The project includes the installation of one compressor and 10.1 miles of 16-inch pipeline looping. These facilities are necessary to provide optimal system reliability and design. FERC issued a scheduling notice to establish a deadline of April, 2016 for the environmental assessment and July 2016 for all other federal agency decisions. The project will be included in the Eastern Shore’s upcoming 2017 rate chase filing. Once the cost is included in our rates, the estimated annual margin associated with this project will be approximately $4.5 million. As a company, we are committed to offering our customers supply, diversification opportunities and access to the lowest cost of natural gas. One such example is highlighted on Slide 21. Eastern Shore is moving forward with making certain modifications to its interconnect with Texas Eastern transmission, TETCO, that will increase the availability of natural gas at the interconnect point by 53,000 dekatherms a day. FERC’s approval to move forward with these modifications was granted in December 2015. These modifications, which are scheduled to be completed and in service during March 2016, will allow customers to have access to additional TETCO supply and the opportunity to secure lower cost natural gas. This 53,000 dekatherms equates to $2.8 million, in incremental annual margin for Eastern Shore. Turning to Slide 22, safety is a top priority for our company. Our Florida GRIP pipeline replacement program is an example of one of our initiatives designed to increase service reliability and operation safety for the communities we serve. The GRIP program enables the company to accelerate the replacement of cast-iron and bare steel mains, and service lines. GRIP also authorizes a company to accelerate the recovery of pipeline replacement investments including a return on those investments, as well as the recovery of certain program related costs. Our GRIP investments totaled $32.8 million, in 2015, and are approaching $80 million, since the program’s inception. To date, we have replaced 162 miles of pipeline and over 4,300 service lines. The gross margin generated from these investments was $7.5 million at 2015 and is projected to be $11.4 million, in 2016. Turning to Slide 23, our Eight Flags Energy subsidiary is constructing a combined heat and power plant located in our electric and natural gas distribution territory on Amelia Island, Florida. The plant will produce approximately 20 megawatts of base load power to be sold to our electric distribution system on the island. Steam from the plant will be sold to Rayonier’s Advanced Materials paper mill. The combined heat and power plant and the related facilities will cost approximately $40 million to construct. Site construction is moving forward on schedule. In terms of timing, the project is expected to be online in the third quarter of 2016. In addition to generating approximately $7.3 million in incremental annual gross margin, the electric output from the plant is excited to generate savings for our electric customers of approximately $3 million to $4 million annually. As shown on slide 24, the Eight Flags project is an example of the diverse capabilities that we have to provide value-added service to our customers and the communities we serve. In this case, our financial pipeline company transports the natural gas to FPU’s natural gas distribution system. FPU in turn delivers that gas to the Eight Flags CHP plant. Eight Flags then generates the power for delivery to FPU’s electric distribution system and the steam for delivery to Rayonier Advanced Materials plans. When all of this is said and done, we save Rayonier Advanced Materials money, save our electric customers on the island money and returns on capital for investors. Slide 25 illustrates the aspired energy of Ohio business model, which operates over 2500 miles of pipelines pipeline in the areas in and around the Utica Shale, and Eastern and Central Ohio. We operate 16 gathering systems for conventional producers in the area. Over 80% of Aspire’s margin is derived from the sale of natural gas, to two local distribution companies that are connected to our gathering system and serve more than 20,000 end use customers. The addition of new producers to our system presents an opportunity for increased reliability for our local distribution customers and increased margins for the company. Finally, we also own rights-of-way that we expect will present additional opportunities for growth over the long-term. Over the last 10 months, since April 1, there has been a significant progress and success with integrating Aspire Energy into the Chesapeake family of companies. Our management team lead with focus and drive to strategically develop, Aspire Energy organization and align the business with the vision, strategies and cultural of our parent company. The team has maintained the momentum of operating the existing business and customer needs, while also focusing on the future growth of the business. Our Aspire Energy employees are actively engaged in developing a strategic growth plan and have already begun to successfully identify and develop new growth opportunities. As a result of our team’s efforts, Aspire energy generated $6.3 million in gross margins since April 1 and is expected to generate approximately $13 million in gross margin in 2016. We continue to be excited about the opportunities presented by the latest addition to the Chesapeake family and continue to expect the Aspire Energy to be accretive to earnings in the first full year of operations. Turning to Slide 26, in 2014, we found a rate increase for our electric operations in Florida which increased rates by approximately $3.7 million annually. As the rate case was approved last year, 2015’s results include a full-year impact of the new rates. On December 1, 2015, we found a rate increase application for $1 million, to increase our Sandpiper subsidiaries operating – returns in Worcester County, Maryland. The following was required as part of the Maryland PSC’s approval of the Sandpiper acquisition and regulatory plan. A decision on the application is expected during the second quarter of this year. We found a $4.7 million rate case in Delaware in December 21, 2015 included in our application, our new service offerings to promote growth and a revenue decoupling mechanism for residential and small commercial customers. The decision on the application is expected during the third quarter of 2016. Pending the decision, the Delaware division implemented an interim rate increase of $2.5 million, on February 19, 2016. Our last rate case in Delaware dates back to 2007. Finally, our Eastern Shore natural gas subsidiary will follow a rate case with the FERC new rates effective February 1, 2017. The filing is required as part of a settlement of our last rate case. Our application will be submitted by the end of 2016. As the chart on Slide 27 shows, Chesapeake provide a total shareholder return of 17%, for 2015. For each of the five periods shown, Chesapeake shareholders have earned more than 14% returns on a compound annual basis. In addition, before the five periods shown, the Chesapeake’s performance exceeded the 75th percentile of the peer group. Slide 28 shows our financial performance of the past one, three, and five years. I am proud to say that our employees have delivered top quartile performance in 18 of the 20 categories. Further, our 10 and 20 year compound annual total shareholder returns of 14.4% and 14% respectively, ranked first amongst our peers. In fact, when you compare our the shareholder returns to the broader market, you could evaluate our performance relative to this larger group. As Slide 29 shows, when you compare us to more than 2,200 companies listed on the New York Stock Exchange, our performance exceeds 84th percentile. Similarly, as shown on Slide 30, when we compare performance to the company’s comprising S&P 500, for all periods shown, our returns range from the 703rd, to the 81st percentile. We are very pleased with our strong performance after the broad market as measured by either of these two larger groups. In closing, our employees’ determination for excellence and consistently high performance, enables us to deliver clean, liable, low-cost energy solutions to our customers while achieving strong growth and earnings and return to shareholders equity, and therefore delivering superior shareholder value. We will now be happy to take questions. Question-and-Answer Session Operator Mike McMasters Well I just want to thank everyone for joining us on our call today and for your interest in Chesapeake Utilities. We’re 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. Operator This concludes today’s conference. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Finding That Elusive 90-Cent Dollar

Photo credit: photosteve101 If I offered to pay you a crisp $1 bill for the 90 cents you have jingling in your pocket… well, you’d probably think I was either crazy or a scamster. Or maybe both. But if, after inspecting the dollar bill, you determined the deal to be legit, you’d jump on it in a heartbeat. In fact, you might even run to the bank and take out your entire life savings in dimes in the hopes that I’d give you a dollar for every 90 cents you could throw together. Why wouldn’t you? It’s free money. I’m not going to give you a dollar for 90 cents… so, sorry if I got your hopes up there. But I will point out several pockets of the market today where these kinds of deals (or better) are on offer. But first, we need a little background. “Book value” or “net asset value (NAV)” is the value of a company’s assets once all debts are settled. Think of it as the liquidation value of the company. Now, for most companies, book value is a pretty meaningless number. If you’re a service or information company like a Microsoft (NASDAQ: MSFT ) or Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), the value of your business is in intellectual capital and in the collective brainpower of your workforce. And that’s something that is a little hard to put on a balance sheet. Likewise, the accounting book values of old industrial companies with a lot of property, plant and equipment – think General Motors (NYSE: GM ) or Ford (NYSE: F ) – are also pretty useless as the numbers on the books reflect historical costs rather than current market or replacement value. And this is further distorted by accounting depreciation. But while NAV is more or less worthless for most mainstream companies, it’s extremely useful in a few pockets of the market, such as mortgage REITs and closed-end funds. In each of these cases, the book value of the companies is based on the real market value of the securities they own, minus any debt used to finance them. What you see really is what you get. And this is where it gets fun. At current prices, many mortgage REITs are worth more dead than alive. Mortgage REITs have an interesting business model: They borrow a ton of money at cheap, short-term rates and invest it in mortgage securities offering a higher yield. When the spread between short-term rates and long-term rates is wide, mortgage REITs leverage up aggressively and make a ton of money. When the spread narrows, they tend to reduce leverage and bide their time. Mortgage REITs usually trade at healthy premiums to book value, which makes sense. The whole is worth more than the sum of the parts, and you’re paying for management expertise, instant diversification and the REIT’s access to cheap and abundant credit – three things you’re going to have a hard time getting on your own. Well, today, it’s not uncommon to see these trading for just 80%-90% of book value, implying that you could hypothetically buy up the entire company, sell it off for spare parts, and walk away with 10%-20% in capital gains… all while collecting dividends. Closed-end bond funds are another quirky corner of the market where it’s easy to find some nice bargains these days. Closed-end funds are very different from what you’d think of as a “normal” mutual fund. In a regular, open-ended mutual fund, the size of the fund changes as new investors buy shares and old investors leave. Shares are priced every afternoon based on the closing prices of the stocks or bonds in the portfolio. So, you can never have a situation where the price of the fund deviates from its net asset value. Closed-end funds are a different animal. They have IPOs like stocks and have a fixed number of shares that trade on the New York Stock Exchange. And these shares are priced throughout the day, just like any stock. So, you can get quirky situations where a dollar’s worth of quality bonds are selling for $1.05, $0.90 or whatever price the fickle Mr. Market wants to assign that day. And right now, we’re seeing discounts as high as 10%-20% in some funds. Today, as an asset class, closed-end bond funds are trading at the deepest discounts since the pits of the 2008 crisis and aftermath. In an otherwise expensive market, we have the opportunity to profit in three ways: Earning a very solid current yield of anywhere from 6% to 9%. Enjoying capital gains as the values of the bonds in the portfolio appreciate. Enjoying additional capital gains as the current deep discounts to NAV start to shrink to something more reasonable. Given how expensive the broad market is right now, these closed-end funds really present us with a nice alternative. This article first appeared on Sizemore Insights as Finding that Elusive 90-Cent Dollar Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post