Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Chief Financial Officer, Beth Cooper. You may begin your conference.

Good morning everyone. I am glad to thank you for joining our third quarter earnings conference call. We’re hosting today’s call from Salisbury University. This is the third time that we’ve actually been here at Salisbury University. We appreciate Dr. Weer, the other members of the faculty, the students that are here. It’s a great honor for us to be back here. This is actually Mike and my – our alma mater, so it’s very important to us to be here. Also joining us in the room today, we have several members of our management team as well as one of our board members, Dr. Forsythe. Before we begin the call, I’d just like to also thank the many veterans that are out there on this special day, coming up here. And so we want to say thanks for all the service that you’ve given to our country. Right now, we’re going to begin to look over our results for the third quarter. Before we do that, what I’d like to do is, first, just remind everybody that our presentation today may include some forward-looking information. And I would refer everybody back to our Form 10-K, where we talk about those factors that may cause our actual results to differ from the forward-looking information. Now, I am going to turn the call over to our President and CEO, Mike McMasters, who is going to begin with a discussion of the quarterly results. Mike?

Thanks, Beth. Good morning everybody. I guess as you, I guess, have seen in our earnings release yesterday, we’ve had a very strong quarter. We feel very good about that. Earnings per share of $0.42 for the third quarter, up from $0.29 last year, a 45% increase. We’ve broken out the earnings per share – or the earnings per share impact of all of these changes. What you’ll notice right at the top, lower operating and maintenance expenses of $0.07 of share, pretty substantial move for us. You’ll also notice at the bottom, you’ll see some higher payroll benefits cost. So what we have, really, as a result of our growth last year and also our work on our cost control. We’ve been able to save the $0.07, but in addition to that, we’re offsetting that. As a result, again, of the growth, we have incurred $0.03. When you look at the next line down, higher retail and wholesale propane volumes at improved margins, $0.06 a share, pretty solid contribution for the third quarter, natural gas transmission and distribution, $0.04 a share. Once again, for the third quarter, a pretty strong number. Implementation of the new rates for Eastern Shore Natural Gas as a part of the rate increase that we filed back in August – or excuse me, for the rates in effect in August. Moving on down. Aspire Energy margins and volumes, $0.02 a share. It’s an unregulated company in Ohio. Higher depreciation and taxes resulting from our growth as well, $0.07 a share, to the negative. So overall, $0.13 per share growth. When you look at the key third quarter accomplishments, interim rates I just mentioned on August 1 for the Eastern Shore rate case. FERC approved the 2017 Eastern Shore Natural Gas expansion. As you may…

Moving to Slide 7. What this table summarizes, and many of you have seen this in our press releases, is our expected future margins associated with the large projects that we’re undertaking. And you’ll see, as we look out over 2016, 2017 and 2018, these larger projects are adding about $27 million in total. What’s interesting to note, and Mike just talked about them, if you look at those three key expansions that he talked about, those, along next year, are going to add an estimated $14.8 million in margins, so very significant. But also, what we also want to communicate here is that we’re also seeking to identify those opportunities that are going to further add margin in 2018 and 2019 and then beyond. Moving to Slide 8. I’m going to come back and talk just for a few minutes a little more detail about the quarter and what happened for the quarter. Overall, Mike mentioned that our earnings per share was up $0.13. That’s a 45% increase for the quarter. That’s the result of our net income, which was also up 55% for the quarter. And that was a result of, really, our gross margin, which was up by about $4.6 million for the quarter, which basically, a good part of that, $4.1 million of that made its way to the operating income line and represented about a 40% increase for the quarter. So our gross margin growth continued to be strong. It was strong, as Mike talked briefly about, in both of our segments, both on the regulated side as well as on the unregulated side. What’s interesting is the operating income growth, when you look at Slide 9, is pretty equivalent. It’s about $10.1 million in both segments. However, on the regulated side, that was a…

Thanks Beth. I guess going through to Slide 14, you’ll see the quadrant graph that we pretty much present on everything we do. As you can see, one of our long-term objectives here, if you will, is to basically keep both our investments and our returns on capital at above-median levels. As you can see, we’re still sitting at top right-hand quadrant. Significantly higher level of CapEx are being spent than most of the peers, with only two that are close to us. And then on the ROE side, we’re still maintaining a very strong ROE. And so again, that’s one of our primary objectives. I think this is a key indicator for us. If we can maintain that, and we are committed to maintaining that, we will continue to have earnings per share growth that will be if not top quartile, very close to it. Next slide. I guess there’s been – just to get everyone a sense of how these – how we’ve been performing and what we’re doing over time. You can see that in 2013, again, the same graph, actually, you can see where we were in terms of CapEx and also ROE. We moved up in 2014 with a higher ROE, slightly more capital expenditures. 2015, still higher and also more capital expenditures. Then you can see 2016 falling down very slightly, still maintaining top quartile, probably top third of that total peer group. And then 2017, something very similar. So again, very strong returns on capital and also very strong growth in terms of spending capital, I guess, effectively. Looking at the next slide, Slide 16. We’re measuring ourselves also against both the NYSE and also our peer group. And so when you look at the NYSE comparisons, you can see one-year, three-year, five-year,…

[Operator Instructions] Your first question comes from the line of Insoo Kim, RBC Capital Markets. Your line is open.

Good morning everyone.

Good morning.

Good morning Insoo.

Good morning, everyone. On the regulated side, I know you guys had a pretty good – did a good job lowering O&M for the quarter on a year-over-year basis. As we look towards the next couple of months, finishing off the year, how do we think about O&M expenses on a year-over-year basis for that? And was the 3Q expenses more of a timing thing to offset the year-to-date impact from weather?

No, there really wasn’t a weather impact there. Actually, if you go back and look at our cost structure, you’ll see that we started – as a result of the growth in reference, and we started to ramp up probably most of the measures in the third and primarily the fourth quarter. And so what we’ve been doing is looking at those costs hard trying to – addressing those costs in addition to, in some cases, moving things out of a consultant or a contractor into an employee. And all of those things have been helping us get our cost down. And so yes, I wouldn’t see this as a seasonal thing or anything along those lines. I think it’s – it is a position that we’re in. There’s always going to be adjustments up and down in every quarter, but I think you should – if you look at the fourth quarter of last year, you’ll see there was a pretty big ramp-up in that quarter, and I think – so I wouldn’t expect that to recur.

Understood. And switching to the increase – the healthy increase in wholesale and retail propane volumes. Could you just explain the factors driving that, whether that was more just increased customer base or more demand per customer?

You have both – and so you had two things happen. I mean, you have the additional customers that were added on the wholesale side. And then where we did see a significant increase for the quarter was – it will be timing-related, and that was in Florida given the hurricane. And so of the total increase that we saw in terms of the consumption, a big part of that, about two-thirds of that is going to be a movement in what would have been in the fourth quarter in terms of consumption, providing gallons to those customers in the third quarter. Unless you’re going to use that, there could be somewhere the propane was used, we could end up having higher consumption. But we believe a good part of that is timing-related.

Yes, it may not be obvious, but what I believe happened there is the gas on generators, basically, everybody wanted to get filled up. I can’t say everybody, but a lot of customers wanted to get their generators filled up in the event of power outages.

Got it. That makes a lot of sense. And then finally for me, the ongoing tax reform package is in the House and now the Senate. We don’t really know exactly what will come out of it. But just as it stands, perhaps, with the House bill, have you guys tried to quantify what that could mean for your company on a consolidated basis?

Insoo, we’ve done some preliminary calculations. And I would say, out of the gate, our initial response is really what it was earlier in the year, that we don’t see – certainly, we don’t see it being, from an EPS standpoint, detrimental. But we are still fine-tuning those calculations. But our initial calculations show not an exposure on the interest expense deductibility side for us. And so far, everything else that we’ve looked at, the other components, it seems like it will be either neutral or slightly will be above that. So I don’t see a downside at this point, but we need a little more time to refine our calculations.

When you think about the regulated business, so we cut the tax rates, all those deferred taxes. They will not roll into earnings on the regulated side of the business unless something changes on the regulatory front. So that potential, I guess, windfall will not occur on the regulated side. So I think that’s probably important to recognize.

Understood. Thank you very much.

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

Thank you taking my question. I had a question on your Eight Flags operations, $297,000 of additional gross margin. I mean, is there more growth from that? Or is that – or are you really at the run rate of income that you’ll generate from Eight Flags?

Without some more construction, we are about at the run rate we’re going to be. Maybe…

And what would – pardon me, what would cause fluctuations in where you – in what you earned from Eight Flags in the most recent quarter?

We had several days last year where the plant didn’t operate, Tate. So having a full quarter – or having more days of operation in the third quarter as compared to last year was the incremental difference.

That’s – service last year. I think it was June last year. Is that right?

Very end of June.

Yes, very end of June. So you had some fine-tuning going on in the system last year in the third quarter.

Okay. Thank you. And then maybe I missed this. I think I heard a comment about some tight contracting for pipelines. Or was it related to the compression unit that you purchased? Or did I misunderstand that?

It was – the comment was on pipelines. On the compressors, I would imagine there’s probably some pressure there as well, but I don’t know if we saw that as much.

And has it increased costs for you? Or is it more timing issues?

It’s a capitalized cost, so it’s a onetime thing. We incurred these costs to capitalize the 2017 project. And then the market, hopefully, will go to normal and not stay at the level it’s at. So it’s kind of a little abnormal just from the magnitude of the projects getting approved now that have been on hold while we waited for a quorum. And there were some other things, but anyway – so you would expect that, hopefully, we’ll go back to normal.

Okay. Thank you very much. Have a good rest of the day.

Thank you, Tate.

[Operator Instructions] Next question comes from Spencer Joyce, Hilliard Lyons. Your line is open.

Good morning, congrats and thanks for the great quarter here.

Thanks, Spencer.

Just a couple of quick ones for me. We’ve discussed the hurricane impact a little bit. I’m just wondering if maybe we can bring that to a point. Beth, perhaps, is – as we look ahead at the Q3 2018 comparison period, is it fair to say that, kind of on a net basis, there really wasn’t much discernible EPS impact from the hurricanes there in Florida? And when we net out kind of the positive propane volumes with, perhaps, some negative items on the electric side, I mean, is that kind of a non-issue as we model into 2018?

Yes, that would be the case. I mean, the propane to the extent, in a sense, that we really need to look at the fourth quarter. That’s the only thing – how much of that propane moving forward and the customer is getting an earlier delivery. As we see that in the fourth quarter, we’ll be able to get some additional guidance at the end of the year. But that – from a contractor standpoint, we have a storm reserve. To the extent we utilize those contractors, those costs are against the storm reserve. So there’s really no other impact beyond this acceleration of propane in terms of the delivery.

Okay. That’s very helpful. Only other question from me, as we look at the Northwest Florida Project and the New Smyrna piece of that coming online next year, what is kind of the approximate margin cadence across the quarters? Will that be relatively evenly split? Or will we see pretty good seasonality there in the winter months?

What we’ll do, Spencer, we’ll lay that out – right off the top of my head, I don’t recall if it’s completely even. I know Jeff Householder is joining us on the line. Jeff, I don’t know if you want – would like to comment further on that. He must not be in.

Yes, he may not be able to get in.

Well, Spencer, we’ll get back to you. But my recollection is there’s not a huge significant change quarter-over-quarter. But we’ll do – within our fourth quarter report, we’ll try to provide a little bit more clarity about how that’s going to lay out next year.

Okay, that’s good. Yes, if you’re going to follow up, that would be great. But I mean, safe to say it would be closer to even across quarters versus the barbell that we see with the standard residential margins?

That’s going to be a function of rate design, correct? It’s going to be – the number is going to be right. That’s function was going to employ volumetrically or through capacity charge.

Okay, understood. That’s all I had. Thanks.

There are no further questions. I will turn the call back to Mike McMasters for closing remarks.

Thank you. I guess, first of all, I’ll just thank everybody for their interest in the company. It’s a big deal to us. We know that we’re getting access to other people’s capital, and we take that seriously. And we want to be good custodians of that capital and use that to drive earnings growth. I just want to make sure to remind everybody, we are committed to safety, reliability of service and also the great service to our customers and our communities that we’re serving. And our employees remain engaged and genuinely enjoy what they’re doing. And again, our commitment to shareholders is unwavering. So thank you very much for your time, and have a good weekend.

This concludes today’s conference call. You may now disconnect. Thank you.