South Jersey Industries, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the First Quarter 2018 South Jersey Industries’ Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Marissa Travaline, Vice President of Communications. Please proceed.

[Marissa Travaline:]

Thank you. Good morning and welcome to South Jersey Industries’ first quarter 2018 conference and webcast. I am joined today by Mike Renna, our President and Chief Executive Officer; Steve Clark, our Executive Vice President and Chief Financial Officer; as well several additional members of our senior management team. Our earnings release and the slide intended to accompany our call today were issued yesterday after the close of the market and were posted on our website at www.sjindustries.com. The release and the associated 10-Q provided an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of economic earnings. Reconciliations of economic earnings to the comparable GAAP measures appear in both documents. Let me note that throughout today's call, we will be making references to future expectations, plans and opportunities for SJI. Actual results may differ materially from those indicated by these statements as a result of various important factors including those discussed in the Company's Forms 10-K and 10-Q on file with the SEC. With that said, I’ll now turn the call over to our CEO, Mike Renna, to discuss our current performance and future initiatives in the context of our strategic plan.

[Michael Renna:]

Thanks Marissa. Good morning, and thanks for being with us. I am pleased to report that we are off to a strong start in 2018; improved performance from both our regulated and non-regulated businesses drove economic earnings of a $1.26 per share in the first quarter, up significantly compared with $0.72 last year. In fact, our first quarter results were higher than our total reported results for 2017. On the regulated side, improvement in our gas utility business, South Jersey Gas reflects positive impacts of the recent base rate case, solid customer growth, and continued infrastructure investment intended to enhance and improve service and reliability to our customers. On the non-regulated side, our wholesale marketing and fuel management businesses, posted strong gains as well, capitalizing on favorable weather, tax reform, and an additional fuel management contract. Before I turn it over to Steve to discuss our first quarter earnings performance and guidance, I want to share with you an update on our business transformation efforts and the key priorities we are focused on for the remainder of the year. As you recall back in 2015, we began a planned shift into our future operating strategy toward a more regulated business mix. Our plan was driven by a desire to increase the quality of our earnings by increasing investment in utility and FERC-regulated assets that provide highly-visible cash flows and earnings while at the same time reducing our earnings volatility and optimizing the value of our non-core, non-regulated businesses. As our first quarter results show, we have made significant progress toward implementing our plan since that time. In 2016, we announced a cessation of new investment in solar projects, reduced our portfolio of on-site energy production businesses, and significantly strengthened our balance sheet through a successful equity offering. In 2017, we announced plans to acquire Elizabethtown Gas and Elkton Gas from solar company, assets ideally tailored to our strategy which I will discuss in a moment. And in 2018, we already completed a successful equity raise to finance these acquisitions and announced a strategic review of our remaining non-core, non-regulated businesses. As you know, a big piece of our transition is our planned acquisitions of Elizabethtown and Elkton. The transaction involve assets we know well, improves our business risk profile, leverages our strong regulatory relationships in New Jersey, enhances our path to long-term, high-quality growth and earnings accretion and provides an opportunity for enhanced utility investment through the replacement of aging infrastructure. The acquisition is progressing well, settlement discussions have commenced in New Jersey and Maryland and the transaction remains on track to close in mid-2018. Our recently completed equity financing marks an important milestone in the acquisition process through a highly successful offering of equity unit and common stock in April; we raised net proceeds of $447 million with an additional $200 million of potential equity from our forward sale. The use of a forward-sale agreement enables us to match our capital needs with actual stock issuance and it would be adjusted to reflect any potential non-core asset sales. As previously disclosed, we are currently exploring strategic opportunities regarding our remaining non-regulated businesses that are non-core to our strategic plan. We expect to communicate additional progress on this process in the coming months. With that, I will turn the call over to Steve to detail our first quarter results and guidance.

[Stephen Clark:]

Thanks Mike, and good morning, everyone. As Marissa noted earlier, both the earnings release and the slide deck we made available provide you with detailed information regarding GAAP earnings and I would encourage you to review that information as well. For the purposes of this call, as we normally do, we will focus our discussion on our non-GAAP measure of economic earnings as management believes that this measure provides valuable insights into the performance of our business. SJI's first quarter economic earnings totaled of $100.4 million with economic EPS of a $1.26 as compared with economic earnings of $57.6 million and economic EPS of $0.72 in 2017. Sizable quarterly improvement reflects higher earnings at South Jersey Gas and Energy Group partially offset by lower earnings at Midstream and Energy Services. To give you some added color, I will now briefly review the performance to average each of these business segments. South Jersey Gas contributed earnings of roughly $67 million for the quarter compared with roughly $47 million last year. The improvement in earnings reflects the impact of our base rate case settlement, the roll-in of investments for infrastructure, replacement and improvement and customer growth. Important to note that earnings growth was achieved slight higher operating costs, including higher O&M driven by investments aimed at improving efficiency and productivity for the benefit of our customers at higher depreciation driven by the additions that plan. Customer growth remain robust with more than 8,800 customers added during the 12 months ended March 31, roughly three quarters of the additions came from customers converting from alternate fuels and the remainder were from new construction, reflecting a continued strengthening in our region's housing market. On a net basis, customer growth was 1.6% over the last 12 months well above the national average. It is also on our Midstream business which surprised of our 20% interest in the PennEast pipeline were $300,000 compared with $2 million last year. The comparison is skewed to the Q1 2017 results, reflecting a catch up of AFUDC related to prior periods that had not been deemed appropriate to record until receipt of the environmental impact statements FERC in the April of last year. In January 2018, PennEast received its Certificate of Public Convenience and Necessity from FERC. With this approval, we are moving to the next phase to obtain survey access and submit completed applications for water permits in New Jersey and with the Delaware River Basin Commission. Construction is expected to begin upon receipt of approvals from these entities, with in-service expected in late 2019. Energy Group which includes our wholesale and retail marketing and fuel management businesses contributed exceptionally strong results with economic earnings of $36 million with quarter as compared with roughly $10 million of the same period last year. Higher earnings reflect strong results from our wholesale business are roughly $33 million compared to roughly $8 million last year. This improvement was driven by portfolio optimization during cold weather in January compared with extremely warm weather into Q1 2017 and the impact of federal tax reform. Fuel management activities contributed $2.8 million compared with $1.4 million last year driven by our sixth contracts going operational. We expect that an additional three fuel supply management contracts will come on-line in 2018, through by mid-year of one close to the Q4, providing low-risk segment growth. Our retail gas and electric marketing business generated a strength loss compared with slight gain last year, reflecting a continuation of increased competition and tighter margins in this business. Energy Services which includes our solar, CHP and landfill generation assets and our accounts service businesses was that a loss of $2.7 billion in the first quarter compared with a loss of $2.4 million last year. Earnings from our account services businesses, South Jersey Energy Service Plus and Millennium Account Services, were actually up $400,000 compared with the prior year. The gain, however, was more than offset by $700,000 decline from CHP, solar and landfill activities reflecting increased costs, higher allocated interest expense and 1% decline in solar production. Consistent with our strategic plan, I would simply highlight that there were no investment tax credits related to renewable project development in first quarter 2018 results or the year-ago period. Tuning now to our balance sheet and cash flow we remain committed to a strong capital structure with ample liquidity and a solid investment grade rating. At March 31, 2018, equity-to-total capitalization was 46.3% compared with 43.7% at December 31, 2017. For the first quarter, net cash from operating activities was roughly $95 million compared to roughly $80 million last year, reflecting strong operating performance at Energy Group. Net cash used in investing activities roughly $62 million compared with roughly $73 million last year, reflecting timing of utility infrastructure upgrades and investment to support customer growth. We remain on track to invest roughly $270 million in 2018 and anticipate providing an update to our longer-term spending target following completion of our pending acquisitions Elizabethtown and Elkton later this year. Net cash used in financing activities was roughly $50 million compared to roughly $20 million last year reflecting a larger repayment of short-term borrowings in 2018. Turning now to guidance. First quarter 2018 economic earnings of $100 million were exceptionally strong in both magnitude and quality. In prior years, investment tax credits contributed approximately 30% of economic earnings. However, first quarter 2018 results were instead bolstered by solid performance at South Jersey Gas and Energy Group, which successfully leveraged opportunities in our marketing and fuel management businesses. It is important to note that in less than three years, we have replaced nearly the entire impact of ITCs growth in our core businesses. Today, we are reaffirming our previous 2018 economic earnings guidance of $1.57 to $1.65 per share with our regulated businesses generating between 65% to 72% of economic earnings in 2018. I do want to point out that this range includes approximately $0.10 per share relates to performance of our wholesale marketing business due to the extremely cold weather experienced in early January. This business has a demonstrated ability to outperform in periods of high demand for natural gas. We are also reaffirming SJI standalone economic earnings guidance of $160 million by 2020. As a reminder, we increased our 2020 economic earnings target to $160 million or $150 million in February reflect the impact of federal tax reform. And finally, we are reaffirming our expectations for EPS accretion from the acquisitions of Elizabethtown and Elkton beginning in 2020. We expect to update our longer term guidance to include these acquisitions, upon receipt of final regulatory approvals and closing of the transactions. That concludes my remarks. Now let me turn the call back over to Mike for his closing comments.

[Michael Renna:]

Thanks Steve. As you can see, we are making great strides in advancing our shift to a more regulated business mix. We are excited by our ongoing business transformation and remained confident in our ability to achieve our 2020 standalone economic earnings target of $160 million and post acquisition EPS accretion beginning in 2020. As we look out at the remainder of 2018, we are focused on successfully completing the acquisitions, including the review of our non-core non-regulated businesses, gaining New Jersey regulatory approval for a multi-year extension of our storm hardening infrastructure investment program and moving forward with our BL England and PennEast Pipeline projects. We look forward to updating you again in the coming months as we execute on these priorities. Finally, I want to thank our more than 700 dedicated employees for their outstanding work. They are as always the driving force behind our results. That concludes my prepared remarks. Operator, we are now ready to open the line to questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Tate Sullivan with Sidoti. Please proceed.

[Tate Sullivan:]

Hi. Thank you. Good morning, everyone.

[Michael Renna:]

Good morning, Tate.

[Tate Sullivan:]

Can we just start with gas utility operations, I mean the last two quarters, the annual growth has been very impressive. I mean this quarter it felt a little more than 40%. I mean what causes that to slowdown for the rest of the year? Is that based on timing of AIRP investments or some other conservative rate case? Can you provide more detail there?

[David Robbins:]

This is Dave Robbins. Big driver for the utility is obviously [indiscernible] significant rate case with new rates [indiscernible] November 1. So that coupled with continued strong customer growth and the return on our infrastructure investment is really added up to the significant growth numbers at utility.

[Tate Sullivan:]

Okay. Yes, it’s been very impressive. And then I understand your – and it’s been I can imagine so busy on all the strategic fronts for you, I mean maybe you're limited in what you can talk about, what you're looking for sale to sell in on non-regulated side, but are there examples of sales of some of your non-regulated businesses recently that you can point to or is it too early to talk about?

[Michael Renna:]

Tate what we've been doing is, we've been really focused on the businesses that are core to our strategy and that is obviously our utility business which will ultimately include Elizabethtown and Elkton as well as South Jersey Gas. Our wholesale and fuel management business in our midstream business, so those are the businesses that we consider core to our strategy, and as far as the other businesses go, right now it's still very early in the process and we are just exploring strategic alternatives for all of those businesses that we do not consider core to our longer term strategy.

[Tate Sullivan:]

Okay. Thank you. Can you talk and you can't talk, have you given provided any pro forma capitalization ratios post the deal or will you just prefer to wait for the pricing for the final timing of the deal to provide more detail on that?

[Stephen Clark:]

Yes, we will wait. I think the massaging we try to deliver is that we’ll look to maintain a solid investment grade rating. Obviously the financing is still little bit fluid. We’ve raised the equity that we intended to raise, but what we hold a bit the combination of debt and equity is still look like we’ll have to wait unit it rolled out.

[Tate Sullivan:]

Okay, I understand that. My last one in terms of the current 2018 guidance $1.57 to $1.65, does that include the straight equity consideration you already raised that probably not the forward sale of equity, is that correct?

[Stephen Clark:]

So we didn’t go within for – with the equity. It was based upon where we were previously at the 80 million share range. So we will be making adjustments as we go forward. And we’ve said previously that we won’t do the combined number until once we’ve completed the acquisitions.

[Tate Sullivan:]

Okay. Thank you for clearing that up. I’ll jump back in line.

[Operator:]

And our next question comes from the line of Christopher Turnure with JPMorgan. Please proceed.

[Christopher Turnure:]

Good morning, guys. I was hoping you could give us a little bit of color on when the next point of reassessing the PennEast timeline and budget might come given the fact that you're still waiting for two permits there. In other words, what's the point in time of which you guys not having received those permits would require you to reassess?

[Michael Renna:]

Well, that's really a decision that's made by the PennEast Board and they’ll take into consideration all of the events that are happening now. So certainly if there are unexpected delays throughout this year in acquiring the necessary permits that could affect ultimately the in-service date, but given how fluid the situation is right now and the progress that we are making on a lot of fronts. We still are – we're looking at a late 2019 in-service date, but obviously as things progress through the permitting process that could change.

[Christopher Turnure:]

Yes, is it fair to say that given the delay in the process so far on the backend you've been making arrangements for construction to partially begin or tree felling to begin and basically have built yourselves and more flexibility maybe then you had originally envisioned on the timeline of the budget?

[Michael Renna:]

Yes. I mean the leadership of PennEast along with obviously all of their consultants and engineering partners have certainly evaluated and make sure that our schedule has get the amount of flexibility in it.

[Christopher Turnure:]

Okay. And then can you – if possible give us a sense of the contribution by segment of weather versus normal for this quarter?

[Michael Renna:]

The only segment that would have been significantly impacted would have been wholesale. Obviously, the utility is – it’s neutral – the impact of weather is neutralized to our various causes. It would not be significant on our energy production side simply because these are – again these part of our portfolio there are solar and these are generally low production months just because of there's not a lot of daylight in the first quarter. So any variance wouldn’t have a meaningful impact on the bottom line. So the biggest piece would have been in wholesale and I think we've assessed that at $0.10.

[Christopher Turnure:]

Okay. The $0.10 of EPS at wholesale and then when we’re modeling the first quarter of next year for all the other businesses we should basically assume pretty much in line all of [indiscernible].

[Michael Renna:]

Yes, absolutely.

[Christopher Turnure:]

Okay. And then sorry one-third question briefly. Can you give us a sense as to kind of the thoughts about PennEast in your mind right now has been part of your core portfolio numbers as being something that might be considered for sale?

[Michael Renna:]

No. Our investment in PennEast, we viewed to be critical to the region to our customer in the utility and we remain very bullish on PennEast and the opportunities that will move forward as I said the region in particular in New Jersey. So PennEast is part of our core business. Our Midstream is part of our core strategy. So there is no intention on monetizing PennEast to our investment PennEast.

[Christopher Turnure:]

Got it, appreciate the color, Mike.

[Michael Renna:]

Okay. Chris thanks.

[Operator:]

Our next question is a follow-up from Tate Sullivan with Sidoti. Please proceed.

[Tate Sullivan:]

Hi, thanks for taking my call.

[Michael Renna:]

Lots of asking one call.

[Tate Sullivan:]

Yes, I mean just on for modeling purposes, $0.10 for the wholesale, $0.10 per share for the weather contribution from wholesale, but I mean in the energy group, you had about $36 million of income. So does the rest – I mean $0.10 about $9 million of net income shows the rest more/“recurring income” in wholesale? Is that fair? Am I looking with at that from?

[Michael Renna:]

Yes, I think what you're seeing is higher performance as a baseline in wholesale largely because a lot of the contracts that were either marginally profitable or even quite frankly at a loss that trace back to the earlier part of the decade have run their course. So it's allowing us to extract the full value of our assets. So we mentioned we always we call them legacy contracts and there's been inspire again that that led to a natural uptick in our baseline wholesale business.

[Stephen Clark:]

I'll just add to that is as you kind of look back in frontline Q1 of 2017 was extremely warm, so actually performance there was down significantly in 2017 maybe not quite as much as it was up this year, but down from kind of what you’ve expected from normal weather conditions.

[Tate Sullivan:]

Right. Okay. Thank you. And then Mike, can you talk about your fuel management business, is that core similar to what you commented on PennEast or can you talk about getting opportunities there in terms of future contracts as well?

[Michael Renna:]

Yes, absolutely fuel management and wholesale are part of our core strategy. It's a business that we've had – we've enjoyed it, again, I think there is nice amount of success and it’s a niche business that as served as well. I believe at this point we have 11 facilities under contract, six of which are on line right now, three will come on line throughout the course of the year and the other two in 2019. There continues to be opportunities as new gas-fired merchant generation facilities are get built. We think that there is – the remains, again, just given our strong performance in the reputation that we've built in this marketplace there remains an opportunity for us to add additional fuel management contracts in the coming years. It's hard right now to put a number on how many that could be, but we've enjoyed a lot of success and I remain confident that that success will continue into the future.

[Tate Sullivan:]

Okay. Thank you very much for taking my follow-ups. And that's all great detail. Have a good rest of the day.

[Michael Renna:]

Thank you. End of Q&A

[Operator:]

And now at this time, I’d like to turn the call back over to Marissa Travaline for closing remarks.

[Marissa Travaline:]

Great. Thank you, everyone for joining us. As a reminder, recording of the call will be available on our website, and as always you can follow-up after the call or at any time with Eric Jacobson, our Manager of Investor Relations for any questions, or you can follow with me for any media inquiries. Eric could be reached at 609-561-9000, extension 4363 or by email at [e-mail] and I could be reached at 609-561-9000, extension 4227 or via email at [e-mail]. Again thanks for joining us today and for your continued interest and investment in SJI.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Wish you all have a great day.