South Jersey Industries, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the Second Quarter 2018 South Jersey Industries' Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Dan Fidell, Vice President of Investor Relations. You may begin.

[Dan Fidell:]

Thank you. Good morning and welcome to SJI second quarter 2018 earnings conference call and webcast. I am joined here 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 presentation slides intended to accompany the call today were issued yesterday after the close of the market and are also available on our website at www.sjindustries.com. The release and the associated 10-Q provide an in-depth review of earnings on both the 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'll 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'm pleased to introduce our CEO, Mike Renna, who will discuss our current earnings performance and ongoing business transformation efforts. Our CFO, Steve Clark, will then review our financials and outlook. After some closing remarks, we'll then be happy to take your questions. So with that introduction, let me now turn it over to Mike.

[Michael Renna:]

Thanks, Dan, and thank you all for joining us this morning. I'm pleased to report solid second quarter and year-to-date results for our Company. Second quarter saw an improvement in earnings per share driven largely by stronger results from Energy Services and Midstream. Improved performance from both our regulated and non-regulated businesses drove economic earnings of $1.29 per share, up significantly as compared with $0.78 per share last year. In fact, to the first six months of 2018, earnings have exceeded full-year results for 2017. On the regulated side, year-to-date improvement in our gas utility business, South Jersey Gas, reflects the positive impacts of our 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 Steve, to discuss our second quarter and year-to-date earnings performance in more detail, I want to share with you an update on our business transformation efforts. Back in 2015, we began a planned shift toward a more regulated business mix. And over the past three plus years, we have done much to advance that strategy. In particular, our second quarter was marked by several historic milestones, including the financing and closing of the Elizabethtown Gas and Elkton Gas acquisitions, as well as the announcement of the sale of our portfolio of solar assets. Both of these events serve to reinforce our commitment to high-quality regulated earnings growth. We're excited to welcome ETG and Elkton into the SJI family, and we're especially excited to be able to mark this new chapter for our Company, by ringing the bell at the New York Stock Exchange in July. With the closing of our acquisitions and the sale of our solar assets, we look forward to providing you with a detailed review of our newly combined Company and its growth outlook at our upcoming Investor Conference. Details surrounding this event will follow in just a few weeks. It's an exciting time for our Company, and we look forward to sharing with you our vision and confidence in SJI's future. With that, I'll turn the call over to Steve, to detail our second quarter and year-to-date results.

[Steve Clark:]

Thanks Michael. Good morning, everyone. As Dan noted earlier, both the earnings release and the Slide deck we made available will provide you with detailed information regarding GAAP earnings. I would encourage you to review that information as well. For the purposes of this call as we normally do, we'll focus our discussion on our non-GAAP measure of economic earnings, as Management believes that this measure provides valuable insight into the performance of our business. SJI's second quarter economic earnings totaled $5.5 million, with economic EPS of $0.07 as compared with economic earnings of $4.5 million and economic EPS of $0.06 in 2017. The quarterly improvement reflects stronger results from Energy Services and Midstream during a historically - quarter that's historically slow. SJI's six months year-to-date economic earnings totaled $105.9 million, with economic EPS of $1.29 per share as compared with economic earnings of $62 million and economic EPS of $0.78 in 2017. As Mike discussed, the year-to-date improvement reflects a combination of record results of SJG and stronger results for Energy Group and Energy Services. Now I'll briefly review the performance drivers of each of our business segments for the second quarter and year-to-date periods. For South Jersey Gas, second quarter earnings of almost $2 million were essentially flat with last year with slightly higher operating costs offsetting modest improvement in utility margin during this seasonally slow quarter. For the year-to-date, South Jersey Gas, contributed earnings of roughly $68 million compared with roughly $49 million in 2017. The improvement in earnings reflects the impact of our base rate case settlement, the roll-in of investments for infrastructure replacements and improvements and customer growth. It's important to note the year-to-date earnings growth was achieved despite higher operating costs, including higher O&M, driven by investments aimed at improving efficiency and productivity for the benefit of our customers, and higher depreciation, driven by additions in that plan. Customer growth remained robust, with more than 8,700 customers added during the 12 months ended June 30. Roughly three quarters of the additions came from customers converting from alternate fuels, such as oil and propane, 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. Our Midstream segment, which is comprised of our 20% interest in the PennEast pipeline, contributed second quarter earnings of $900,000 compared with $400,000 last year, reflecting AFUDC related to our investment in the project. For the year-to-date, Midstream contributed earnings of $1.2 million compared with $2.4 million last year. The comparison for the year-to-date period is skewed due to Q1, 2017 results, reflecting a catch up of AFUDC related to prior periods that has not been deemed appropriate to record until original receipt of the Federal Energy Regulatory Commission approval. Recall, in January, PennEast received its certificate of public convenience and necessity from FERC. With this approval, we're moving to the next phase to obtain survey access, submit completed applications for water permits in New Jersey and with the Delaware River Basin Commission. Timing of construction is dependent upon receipt of approvals from these entities, and we're currently expecting to start by late 2019. Energy Group, which includes our wholesale, retail, marketing, and fuel management businesses, contribute second quarter earnings of $200,000 compared with $600,000 last year. Quarterly results reflects continuation of weakness from retail marketing given an extremely competitive market. Prior overheads partially offset improved results from our wholesale marketing and fuel management business, which was driven by the addition of our six contracts earlier this year. Fuel management performance was hindered slightly by planned outages at facilities we served during the quarter. For the year-to-date, Energy Group contributed earnings of $36.2 million compared with $10.4 million last year. The significant increase in earnings, reflect strong results from our wholesale business of $32.6 million compared with $6.6 million last June. This improvement was driven by portfolio optimization during cold weather in January compared with extremely warm weather in Q1, 2017, and the impact of federal tax reform. For the year-to-date, fuel management activities contributed $4.2 million compared with $2.7 million last year, driven by the addition of our six contracts. With Lackawanna facility coming online in late June, we are now managing the fuel supply activities for seven facilities, with two more expected to begin operations in the third quarter. Our retail gas and electric marketing business generated slight loss for both the second quarter and year-to-date period compared with slight gains last year, reflecting a continuation of increased competition and tighter margins in this business. Our Energy Services segment, which includes our solar CHP and landfill generation assets and our account services business, contributed second quarter earnings of $2.8 million compared with $1.1 million last year. The improvement largely reflects better performance from our CHP and solar businesses, offset in part by increased cost and higher earnings expense. For the year-to-date, Energy Services contributed roughly breakeven results compared with a loss of $1.3 million in 2017, largely driven by positive results from CHP and our account services businesses, South Jersey Energy Service Plus and Millennium Account Services earlier this year. In June 2018, as Mike mentioned, we announced the sale of our solar assets to an entity managed by Goldman Sachs Asset Management for approximately $350 million in cash. SJI received $62 million of the purchase price in early July, with the balance to be received over the next several months, as individual projects in the portfolio satisfy closing conditions. We expect nearly all projects in the portfolio will satisfy the closing conditions prior to December 31, 2018. Turning now to our balance sheet and cash flow at June 30, 2018, equity-to-total capitalization was 29.5% compared with 43.8% December 31, 2017, our current capitalization reflects the timing of acquisition-related financing activity injunction with the timing of our efforts to optimize the values within our non-core businesses. We are committed to a strong capital structure, ample liquidity, and a solid investment grade rating. Accordingly, we are evaluating optimal deployment of the anticipated proceeds from the sale of our solar portfolio. Among many options, we are considering potential repayment of debt, a potential reduced share issuance under our existing forward equity agreement. Our forward equity agreement was structured to allow flexibility for us to either receive up to $200 million and our option up to 12 months in the future. In July, S&P lowered SJI's and SJG's ratings one notch to BBB with a stable outlook driven by increased leverage tied to the acquisition debt. Post-closing, S&P expects a strengthening over time of financial metrics driven by our focus on regulated operations, ongoing regulatory recovery of infrastructure replacement costs at Elizabethtown Gas and expected divestment of a portion of our non-regulated operations. We expect the same. For the six months ended June 30, 2018 net cash from operating activities was $152.8 million compared with $123.7 million in the prior year period, largely reflecting strong operating performance in Energy Group earlier in the year. Net cash used in investing activities was $131.5 million compared with $162.9 million in the prior year, reflecting timing of utility, infrastructure upgrades, and investment to support customer growth. Net cash used in financing activities was $1.71 billion compared to $19.3 million in the prior year period, obviously reflects of the acquisition-related debt and equity financing. Turning now to guidance. Today we're reaffirming our previous 2018 economic earnings guidance of $1.57 to $1.65 for fully diluted share for SJI, excluding acquisitions and divestitures. This range reflects our strong performance in the first half of 2018, including improved results from both our gas utility and non-regulated wholesale marketing and fuel management operations earlier this year. I want to point out that this range includes approximately $0.10 per share that relates to performance of our wholesale marketing business due to the extremely cold weather experienced in early January. As you know this business has a demonstrated ability to outperform in periods of high demands for natural gas. We previously provided 2020 economic earnings guide of $160 million. With the closing of our acquisitions and the sale of our solar assets, we plan to provide a detailed review of our combined Company growth outlook by business segment and provide updated economic earnings guidance at our upcoming Investor Conference. Conference details including agenda for the day and reservation instructions will be provided in the coming weeks. That concludes my prepared remarks. Now let me turn the call back over to Mike, for his concluding remarks.

[Michael Renna:]

Thanks Steve. As you can see, we are making great strides in advancing our shift to a more regulated business mix. In the first half of 2018, we successfully achieved our objectives, including closing our acquisitions, the optimization of certain non-core non-regulated assets, namely solar, and security regulatory approval for a multiyear extension of our SHARP infrastructure enhancement program. As we look at the remainder of 2018, we are focused on successfully integrating the acquisitions, including the sale of our solar assets and thoughtfully deploying the anticipated proceeds, completing review of our remaining non-core non-regulated businesses, and moving forward with our PennEast and B.L. England pipeline projects. As I conclude my remarks, as always, I want to thank our dedicated employees for their outstanding work day-in and day-out, it remains a driving force behind our results and have been at hard at work for many months, laying the foundation for a successful transition and integration of the acquisitions, which I'm proud to say has been seamless. I feel fortunate to work side-by-side with some of the most exceptional professionals in our industry. That concludes my prepared remarks. Operator, we're now ready to open the line to questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Bruce Ellinghaus (sic) [Christopher Ellinghaus] from Williams Capital. Your line is open.

[Christopher Ellinghaus:]

Mike, you talked a lot about non-core review. Can you give us some color on what you're up to and sort of timelines and that sort of things?

[Michael Renna:]

Sure, it's - our assessment and evaluation of our non-core assets remains consistent with what we've put out there for the last, I really should say guess in April. We're focused on our regulated businesses, those are our utilities and certainly our PennEast investment, as well as our wholesale and fuel market business on the non-regulated side. The other businesses we view as non-core to our strategy going forward, and we have the case of solar, we've obviously entered into a deal, and on the other assets and businesses we continue to progress through the process. We expected that we would have announcements in the third quarter, and I still am confident that that's a very strong likelihood to happen.

[Christopher Ellinghaus:]

As far as PennEast goes, have you done any updates on your thinking about the time for construction?

[Michael Renna:]

In terms of the initiation of construction or how long it will take actually once we start the construction?

[Christopher Ellinghaus:]

The actual construction - you told us about the, when you're expecting to start, but have you got any changes to your thought process on the construction time?

[Michael Renna:]

No. It's still, it could be about seven months project from the time we start construction.

[Christopher Ellinghaus:]

And one thing about the guidance, the customer credit for Elizabethtown, are you including or excluding that from your guidance for the year?

[Steve Clark:]

Chris, we're excluding that. The number that we provided out there now and we'll obviously update that in the coming months but the number we have out there now is excluding anything from related acquisition or divestiture.

[Operator:]

[Operator Instructions] And our next question comes from the line of Dennis Coleman from Bank of America Merrill Lynch. Your line is open.

[Derek Walker:]

Hi, this is Derek Walker on for Dennis. Just a quick one on Energy Group, seems like you have two more supply contracts coming on in 3Q, what are the size of those contracts?

[Michael Renna:]

I don't know the exact megawatts, I do know that there is a three that were coming online this year with the three larges that we have in our portfolio. So, Lackawanna - I forget the other two, off the top of my head, but Lackawanna came online in the second quarter. I believe it was either Lordstown or - one of them came online just in the past week. So that one will be, it's now fully operational and the third one I believe comes on a little bit later this quarter. But they are three of the larger ones in our portfolio.

[Derek Walker:]

You mentioned the optionality sort of around funding with the asset sales, but maybe there's a little bit more color there as far as - are you looking to do a certain amount of asset sales before you would consider that as a sort of replacement for the equity units or is it sort of a separate option altogether? Any color there would be great.

[Michael Renna:]

I guess what I'd say is that the - as we look to optimize some of the businesses, it's going to depend upon what the proceeds are and what timing of those proceeds are. I think that's very important. We do have - we've enhanced the solar sale but proceeds are going to be coming in during the course of the second half of the year, and timing of that also plays a role. But also I think in the initial transaction, the initial financing's that we did, we also set it up in a such a way where the - we had some expectation that we would be seeing second half closings on some of these divestiture activities. So, we purposely set up some of our financings, our debt financing, so that - the expectation is that they'll be out. The debt financings themselves will be out for the remainder of this year and really at the very beginning of next year, the very end of this year we're in a position that our - basically we repay those without incurring any penalties or any early prepayment fees associated with those. So, from a timing standpoint, I think you're probably looking anything we do on equity would be towards the very end of the year, but the dollar amounts that we're talking about for some of these things are really going to be what drives the ultimate amount of equity. I think the conversation I would have with anybody is at least at this point in time is, we have - we can issue as much as $200 million for modeling purposes, we're just thinking about it. Just assume that mid-point of that range right now and we'll obviously address that as we go forward.

[Operator:]

And I'm showing the next question from the line of Stephen D'Ambrisi from Castleton Investment. Your line is open.

[Stephen D'Ambrisi:]

What type of either capitalization, like consolidated capitalization ratio or credit metrics to the FFO debt are you guys targeting another year in a more regulated and you've gotten rid of solar and right-sized the portfolio?

[Michael Renna:]

One that remains - one that keeps us solidly investment-grade.

[Stephen D'Ambrisi:]

Would you like to expand on that anymore?

[Michael Renna:]

Got it.

[Ann Anthony:]

Hi Steve, it's Ann. So, if you look back at the research that S&P has laid out there, when they downgraded us to BBB with the same outlook. We've laid out their expectations and again, we concur with their expectations around where the FFO to debt credit metrics will be. We anticipate that we will be solidly in the middle of the BBB stable range. As we move through, the transformation of our business, meaning, the divestiture of these non-core non-regulated businesses, as well as when with the count earnings start to come in, when some of the other things that we've brought in our plan also starts to come in. They've also laid out clear guidelines for when they would expect a downgrade as well as an upgrade. So, I'll point you back to their research, again, we - as Mike said, solid investment grade rating is the goal here. And I think our goal is - it's fair to say, to get back to BBB plus for the stable outlook in short order.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Dan Fidell, for any closing remarks.

[Dan Fidell:]

Thank you everyone for joining us this morning. As a reminder, a recording of this call will be available on our website. As always, please feel free to contact either myself, Dan Fidell, or Eric Jacobson for investor questions. Dan can be reached at 609-561-9000 extension 7027 or by e-mail at [e-mail]. Eric can be reached at extension 4363 or by email at [e-mail]. And for media inquiries, Marissa Travaline, our Vice President of Communications, can be reached at extension 4227 or by email at [e-mail]. Again, thanks for joining us today and for your continued interest and investment in SJI. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a nice day.