Good morning. My name is Nicola, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Chesapeake Utilities Corporation 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, you may begin your call.

Good morning, everyone. And once again, as Nicola mentioned, we’d like to welcome you to the first quarter earnings conference call. We appreciate you joining us today. On the call with me today will be Mike McMasters, President and CEO. We also have other members of our team joining us in the room today. And today’s call is being hosted from Dover, Delaware, live from the company’s corporate office. Turning to Slide 2, before we begin, I would like to remind everyone on the call that today’s call will include a discussion of some forward-looking information. Please refer to our 2017 Annual Report on Form 10-K for discussion of risk factors that could cause our results to actually differ from this forward-looking information. You will note in the presentation today that our discussion includes certain non-GAAP measures including, but not limited to, gross margin and adjusted EPS. We have described on Slide 2 why these and other non-GAAP items are meaningful from our perspective as we review and discuss our performance. Now I would like to turn the call over to Mike McMasters, President and CEO, and he’ll briefly talk about the first quarter highlights.

Thanks, Beth. This first quarter highlights our adjusted GAAP earnings per share of $1.64 for the first quarter of 2018, compared to $1.17 for the first quarter of 2017. It’s a 40% increase in the first quarter earnings, the most profitable quarter in the company’s history. We achieved growth across the business units led by Propane, Eastern Shore Natural Gas, Natural Gas and Electric Distribution, and Aspire Energy. The Board of Directors declared a 13.8% dividend increase, reflecting strong growth and lower income tax rate. Regulated business units served $3.2 million in estimated, excuse me, reserved, $3.2 million in estimated refunds for customers due to lower tax rates. Eastern Shore and Florida expansion major projects are under construction. Regulated Distribution and Transmission growth and Eastern Shore rate settlement generated $0.15 and $0.13, $0.15 for growth and $0.13 for the settled rates. In Propane and Aspire Energy, growth of $0.07, net impact of lower rates of $0.10, generated $0.17 increase in earnings per share. Colder weather, although still warmer than normal by $1.7 million, or $0.07 a share, generated $0.17. Lower contribution from PESCO, negative $0.10 and higher depreciation operating expenses and interest to support growth, negative $0.09. I’ll turn it back to Beth.

On Slide 4, you will see that, it wasn’t growth in one particular area, but across both of our segments both in the regulated and the unregulated energy segments were very strong. Overall, from the company’s standpoint, gross margin growth was $10.3 million or 12.2% growth and operating income growth was $5.3 million or 15.1% growth. Looking at it in terms of each segment. In the Regulated Energy segment, before any impact from federal tax reform and the reserves for estimated customer refunds, our gross margin there grew 12%. The estimated amount for refunds have a dollar-for-dollar offset in our income tax line, as reflected in lower tax expense. As our expense growth was low during the quarter, operating income for this segment grew 14.2%. For the Unregulated Energy segment, our results were also very strong. Gross margin growth was $3.5 million, or 13% and our operating income growth was $2.1 million, or 18.2%. Moving to Slide 5. This slide shows the EPS or earnings per share reconciliation from the first quarter of 2017 to the first quarter of 2018. There are a couple of points that I’d like to make regarding this slide. First, regarding the weather, colder weather generated $3.9 million of additional margin or $0.17 per share. As Mike mentioned, if weather had been normal, we would have generated another $1.7 million in terms of additional margin or $0.07 from an incremental EPS standpoint. Beyond the weather, the Regulated Energy segment generated additional gross margin of $6.1 million or $0.28 and the Unregulated segment generated additional gross margin of $1.7 million or $0.07 per share. Finally, federal income tax reform reduced our income tax expense by $0.28 per share, and this is broken up into really two big pieces: $0.10 is generated from our Unregulated Energy segment;…

Thanks Beth. Turning to Slide 11, I’ll talk about Eastern Shore Natural Gas, as you know we’ve been working on system expansion project for quite some time. We expect this to go in service some time during this next year. It’s $117 million project, 60,000 dekatherms per day. The project is approximately displays our total investment excuse me, in Eastern Shore about five times what it was back in 1998, some 20 years ago. It’s got 23 miles of pipeline looping, 17 miles of mainline extension, 3750 horsepower of new compression and 25% more capacity. Estimated annual gross margin is $15,800,000. Turning to Slide 12, in Florida the Northwest Pipeline Expansion is now in service, it’s a $36 million capital investment, $6 million of estimated annual gross margin. New Smyrna project, one slide below that or one layer below that, $9.1 million capital investment, $1.4 million of estimated annual gross margin, fully in service in September of 2018, 14 miles of transmitted pipeline. Belvedere Pipeline Expansion is $3.8 million of capital expenditures, $1.1 million if estimated annual gross margin, expected to be in service end of the third quarter of 2018 and has 2 miles of pipeline. Moving to Slide 13, to talk about our propane operations a little bit. Our propane delivery operations additional customer consumption related to weather increased gross margin by $1,956,000. The increased margin driven by growth and other factors $1,392,000; and the margin, propane margin and sales $379,000, all of this is based on the warmer weather as I mentioned earlier. We continue to execute our multi-pronged growth strategy in the propane operations. Organic growth, expanded growth in new territories, acquisition opportunities, targeted marketing to commercial and industrial customers to convert to propane, we’re targeting new community gas systems with high growth areas, the expansion…

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

Hey, good morning, everyone.

Good morning.

Good morning.

Maybe just starting with the PESCO business. Understood – I understand, there were various moving parts, including significant weather that impacted the quarter on a year-over-year basis. But I know – I saw that you did have a negative impact from a supply contract that was not renewed. Is this just part of the normal volatility of the business as contracts roll off and you sign huge contracts or is there something else that we should be aware of?

No, it’s a normal part of the business. So we had a one-year contract and when we got – when we rebuild this year, we drew a line on the sand where we want to go and decided not to go any further than that, and so that was – that’s what’s happening there just basically having the discipline to walk away from the contract, it wasn’t the right price.

Understood. And then just looking at your CapEx, obviously, you guys mentioned how CapEx has been very robust, especially the past few years. How much visibility do you see in the pipeline of projects in the next few years or so to give you any sense of whether that level should continue or if this has been more not an anomaly per se, but just a period of higher growth versus what you should – what we should see on a normal basis?

Yes, I would say, Insoo, there – there’s multiple project opportunities that we’re looking at the present time. We haven’t formalized that number for 2019. But our goal was, hopefully, for it to be at a level that approximates that. But at this time, we – those projects are still coming to fruition. I think, the important thing that we – that hopefully, we got across also is that, when you look at our margin table even for this first quarter, when you think about us as a company, there’s organic growth, there’s growth in the unregulated businesses, and there are lots of pieces that are seeding that gross margin growth that the company is achieving. But certainly, a lot of projects in the pipeline, a lot of projects that we’re pursuing and hopefully, we’ll be providing some more information as those projects gets finalized.

Yes, this isn’t a really unusual for us. Every year, just about every quarter, just about – when you look at it, you will see a little fall off on the second year. And so it’s not unusual, it’s something we have to work on all the time.

Right, right. Yes, I understand. And then perhaps, lastly, I guess, in hindsight, it definitely makes sense, impressive dividend growth that you guys just announced at maybe close to 14% given the various items driving robust year-over-year growth in 2018, as expected. Are you – but I guess, given this is kind of a jump in EPS unlike some of the other years we’ve seen, are you still sticking to – I believe it was the low 40s in terms of a payout ratio longer term, or are you thinking that maybe that could trend higher?

Yes.

Well, I guess, we’re thinking somewhere between 45% and 50% payout. We typically have been growing at a rate higher than we expected, and so it’s been diluted down to the 40%. But we’re trying to get to the – we’re trying to be around the 45 to 50. The key there is that at below 50% that we’re basically getting higher EPS growth than we’re in dividend growth. And so, as long as we can maintain that dividend, that EPS growth at rates that are that high, then we’ll be able to keep dividends fairly high. But again, it’s just something we look at every year. We assess and spend a lot of time actually just going through this and studying whether we’ve got the right numbers and we feel good about where we are.

Got it. Thank you. That was it. Congratulations on a great quarter.

Thank you.

Thank you, Insoo.

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

Hi, thank you, thanks for taking my question. Beth, can we talk about the unregulated energy operating income result of $13.7 million in the first quarter. But then I think, it was – the previous quarter you backed out the mark-to-market change from that number…

Yes.

…in terms of PESCO. Is that available, or did I miss that?

No, you’re correct. In the fourth quarter, we actually – when we looked at adjusted earnings per share, we made an adjustment to look at our results and that’s where I spoke about the $2.89. That includes – basically, that include or excludes both the tax reform impact of last year as well as the unrealized loss. And so then this year, what we did in – when we came out of the first quarter was we felt from a purpose – we needed to also remove that from the first quarter results, because it’s really just a timing issue between the fourth quarter and the first quarter.

Okay. Do you have an -- adjusted for that mark-to-market, do you have an adjusted operating income margin for your Unregulated segment though? I think it was 10.5% in the first quarter?

We have not looked at it like that, because when you think about that business as we talked about earlier. When Mike went through the results of that particular business, there are factors each year contracts that are and maybe not being renewed new ones that are being added. But overall from this business standpoint, Tate, one of the things that Mike mentioned in his comments is that, when it comes to our unregulated businesses, our goal is to earn returns that are going to be above those that we can generate on the regulated side. And that continues to be the case across the portfolio of unregulated businesses.

Okay. Yes, I’ll have to take a better look at how I forecast the operating income margin for the unregulated energy piece. I’m just trying to get back out the mark-to-market and sort of see what is sustainable basis. Okay, thank you very much.

Thank you.

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

Well, thank you very much, everyone. Thank you for your continued interest and support in our company. Our engaged employees are committed to providing safe realizable service and our continued growth. Thank you, again, and have a great weekend.

Thank you. Bye-bye.

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