South Jersey Industries, Inc.
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4, 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 and instructions how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Fidell, Vice President of Investor Relations. Sir, you may begin.

[Dan Fidell:]

Thank you. Good morning, everyone and welcome to SJI's fourth quarter and 2018 and full earnings conference call and webcast. I am joined here today by Mike Renna, our President and Chief Executive Officer; as well as several additional members of our senior management team. Our earnings release and the presentation slides that accompany the call 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-K 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 outlook. SJI's Principal Financial Officer, Cielo Hernandez, will then review the performance of our individual segments and balance sheet. And Mike will then review our financial guidance. After that, 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. Good morning, everyone. Before we start, I want to take a moment at the outset to address two senior level management changes at SJI. Our Executive Vice President, Steve Clarke is retiring from the company effective today, Steve has distinguished himself in countless ways over a very long and successful career and shown effective leadership at every level across the company. As you know, Steve was our CFO for over five years and then more recently brought that same leadership and steady hand to our non-regulated operations. Like many of you in the investment community, we will miss Steve's intellect wise counsel, and good humor very much. On behalf of the SJI family, Steve, we wish you and Liz all the best as you begin this exciting chapter and we thank you for a job well done. I'd also like to welcome and introduce you all to our new Senior Vice President and CFO, Cielo Hernandez. We are thrilled to have a proven leader like Cielo join our team. She brings not only strong technical expertise but also an impressive track record of partnering with business units to drive operational excellence and profitability, exactly the leadership and principled approach that is integral to our business transformation efforts. Many of you will have an opportunity to meet Ceilo as we make the route at several meetings and conferences in coming months. And you'll hear some remarks from Cielo shortly about our operational performance. But first, I want to give you an update on our business transformation activities. In addition to record earnings, 2018 certainly witnessed some of the most significant change in our company's history. I'm very pleased with our progress and excited by our future. With regard to our Elizabethtown and Elkton acquisitions, the process was seamless with financing regulatory approval and closing in less than 9 months. Full integration is on track to be completed in Q1, 2020. On the regulatory front, we achieved multi-year extensions of our SHARP infrastructure and energy efficiency programs at SJG and filed an infrastructure replacement proposal for ETG with the BPU in October. With respect to our core non-regulated operations, we achieved record wholesale marketing results, driven by cold weather and three additional fuel management contracts that became operational. Regarding business transformation, we successfully executed the sale of our non-core solar and retail gas marketing assets using cash proceeds to pay down debt and strengthen our balance sheet. We also launched a series of initiatives designed to better align internal resource with our strategy and opportunities, leveraging people, process and technology we were able to cost effectively absorb, ETG and Elkton, while simultaneously driving down costs all across our businesses. These business transformation efforts, which included a very successful early retirement incentive program will help support our growth plans into 2020 and beyond. Again, we did all this while achieving record economic earnings of $116.2 million in 2018. I could not be proud of our employees and their commitment to excellence. In the first few months of the year, we have further strengthen our balance sheet using the proceeds from our non-core assets, sales and the issuance of our equity forward in January for repayment of debt. As we look toward the remainder of 2019,Ww are focused on completing our review of the remaining non-core non-regulated businesses effectively integrating our ETG and Elkton acquisitions, including winding down our transition services agreement with Southern; achieving significant cost savings from the business transformation initiatives mentioned earlier, and effectively executing our regulatory strategy. All of which provides a foundation for top tier financial growth, including expected long term 8% to 10% rate base growth and 6% to 8% economic earnings per share growth. I've never been more optimistic of our future and I look forward to reviewing our progress with you as the year goes on. With that, I'll now turn it over to Cielo to review our operational performance.

[Cielo Hernandez:]

Thank you, Mike, for that warm welcome. I'm very positive about our future too. I'm excited to join SJI and I look forward to meeting with many of you in the investment community in the months ahead. As Dan noted earlier, both the earnings release and the slide deck we have made available will provide you with a detailed information regarding GAAP earnings, and I will encourage you to review the information as well. For the purpose of this call as we normally do, we will focus our discussion on our non-GAAP measures of economic earnings, as management believe that these measures provide value insight into the performance of our business. SJI 2018 economic earnings were at $1.38 per share, as compared with $1.23 per share in 2017. The improvement reflects a combination of on a strong results at South Jersey Gas and Energy Group. That was partially offset by the impact of acquisitions and divestitures. SJI fourth quarter economic earnings were $0.39 per share compared with $0.60 per share in 2017. The quarterly guidance reflects the additional Elizabethtown Gas and Elkton Gas and improved results at midstream in NHS Services, offset by interest cost and share dilution related to acquisition financing and lower results at Energy Group due to March warmer weather. I will now briefly review the 2018 full year performance drivers of each of the business segment. Our gas utilities' consolidated revenues of a $1.05 per share compared with $0.91 per share in 2017. The $0.14 per share improvement were evenly split between SJG and ETG. The EZG improvement reflects the impact of base rate case, the rolling of investments for infrastructure replacement and improvement in consumer growth. On a net basis SJG customer growth was 1.9% over the last 12 months well above the national average, with three quarters of revisions from conversions. ETG contributions reflect a partial year ownership of the asset with profitability driven by our 2017 base rate case and customer growth. Elizabethtown added more than 2,000 net customers over the last 12 months which represent to a 0.8% growth rate. In the future years we expect an increase rate grade driving by enhanced focus on commercial opportunities. Midstream contributed earnings per share of $0.04 compared with $0.06 per share last year. The annual guidance is skewed with 2017 results reflecting a catch up of our AFUDC related to prior period that has now our prepared record [ph] until the original receipt of the FERC approval. Turning to our non-related operations, Energy Group consolidated economic earnings per share of $0.60 compared to $0.27 per share last year. The $0.23 per share increase largely reflects a strong result from our wholesale business driven by our portfolio optimization including the cold weather that was hot in Q1 2018 compared with an extremely warm weather in the prior year Q1 2017 and the impact of the federal tax reforms. Fuel management earnings improved by $0.03 per share driven by a larger portfolio of the contracts. Now Energy Services contributed roughly breakeven results and a slight improvement versus last year. In June 2018 we announced the sale of our solar assets to an entity managed by Goldman Sachs Asset Management. So turning now to our balance sheet review, SJI remains committed to a capital structure that supports our capital spending plan. While we maintain our guidance equity to total capitalization, ample liquidity and solid investments grade credit ratings. At December 31, 2018 our equity total the total capitalization was about 28.9% compared to 43.7% at December 2017, reflecting acquisitions financing as previously communicated our growth plans in this conversion of mandatory convertible equity units in 2021. Including this conversion our adjusted equity to total capitalization ratio a non-GAAP measure was 35.3% at December 31, 2018. As Mike mentioned our balance sheet strengthen activities remain our core focus and have continued into 2019. In January we settled our equity forward sale agreement receiving net cash proceeds of approximately $189 million. We deployed a majority of those proceeds for debt repayment in late January. In 2018 we have also deployed a majority of our more than $300 million in cash proceeds from the sale of our solar and retail gas marketing assets for debt repayment. Lastly, I wanted to remind you that in November the SJI Board of Directors voted to increase the company regular quarterly dividend to an annualized rate of $1.15 per share. With this latest raise SJI has now increased the dividend each of the last 20 years. That concludes my review of operational performance. I will now turn it to Mike, to review our guidance.

[Michael Renna:]

Thank you, Cielo for that great review of our operations as well as our balance sheet strengthening activity. Turning to our guidance, in 2019 we expect economic earnings to be in the range of $97 to $107 million or $1.05 to $1.15 per diluted share. Consistent with our strategy, regulated operations are expected to contribute 80% to 85% of economic earnings, excluding acquisition-related interest costs. I think it is important to point out that our 2019 guidance reflects the costs associated with the transition services agreement we have with Southern, which we intend to exit by early 2020. Financing and operational requirements associated with our ETG and health and acquisitions and divestitures of our non-core non-regulated businesses and timing associated with the execution and implementation of our regulatory strategy. For additional clarity 2019 guidance reflects the cost of several transition year items that I just spoke of, including $0.24 per share an additional interest expense related to the acquisition financing and the $0.08 per share in transition services costs. In addition, 2018 performance included $0.09 per share related to very cold weather experience in January of that year, which was not considered repeatable. It is important to note that it is the growth in our utility businesses and reduced O&M resulting from our BT initiative that are partially offsetting these transition year items, along with our more conservative expectations from wholesale. Capital expenditures are expected to be approximately $525 million in 2019, with more than 97% supporting regulated operations and projects and following our equity forward draw in February, we do not anticipate any additional equity issuances in 2019. Looking to 2020 however, we expect earnings to rebound significantly above both 2018 results and our stated 6% to 8% long term growth rate. 2020 earnings are expected to benefit from our exit of the transition services agreement; accelerated utility customer growth and infrastructure replacement at both SJG and ETG; execution of our regulatory strategy including recovery of base utility investment; reshaping of our wholesale portfolio including the expiration of legacy marketing contracts and significantly lower operating costs driven by 2019 business transformation activities. Capital expenditures are expected to be approximately $540 million in 2020, again, with more than 97% supporting regulated operations and projects. As previously communicated, we anticipate an equity issuance of a $125 million to support our planned utility redundancy projects. As we further execute our business transformation and regulatory initiatives over the coming months, we look forward to providing you with additional guidance in conjunction with our Q1 2019 earnings release on May 8. And before we open it up to questions I want to provide an update on our PennEast project at BL England. With respect to PennEast, we've made great strides in completing remaining land surveys and anticipate filing a completed application with NJDEP in the coming months. The current project timeline assumes as construction started late 2019. There is always however, the potential for delays and I want to assure you that our guidance reflects those impacts. We remain very encouraged by recent actions and are confident this critical project will soon bring clean affordable natural gas to the region. With regard to BL England, we are very disappointed by the decision by Rockland Capital to exit this important project. But I want to assure you however, of two important takeaways. First, this announcement is bad for the region as repowering BL England with natural gas was a cost effective and environmentally prudent solution to a known PJM constraint point. Second, and more importantly, this is not expected to impact our growth plan, as we've already begun to explore alternatives that will allow for a secondary supply of natural gas needed to create reliability and resiliency for the 142,000 customers in Atlantic and Cape May County who count on us to heat their homes, provide hot meals and hot water for their families. We expect to share additional details as these alternatives clarify, most likely in our first quarter with our guidance is at the end of the first quarter. As I conclude my remarks, as always I want to thank our 1,100 dedicated employees for their outstanding work day in and day out. They remain the driving force behind our results. And have been working diligently for many months now laying the foundation for us to execute on our plan. I am humbled by these efforts and feel fortunate to work side by side with these exceptional professionals every day.

[Dan Fidell:]

Thank you Mike. Operator, that concludes our prepared remarks we're now ready to open the line for questions.

[Operator:]

Understand. [Operator Instructions] Our first question comes from Chris Ellinghaus with Williams Capital. Your line is now open.

[Chris Ellinghaus:]

Hey everybody. Good morning.

[Michael Renna:]

Hi Chris.

[Dan Fidell:]

Good morning Chris.

[Chris Ellinghaus:]

Welcome Cielo and Steve, I'm going to miss you buddy. Can you elaborate in the sort of corporate segment, the year-over-yearchange, how much of that was related to the Elizabethtown interest expense?

[Michael Renna:]

For 2017 to '18 or '18 to '19?

[Chris Ellinghaus:]

The 2017 delta in the other category, that $20 million-ish change year-over-year. How much of that's interest expense?

[Michael Renna:]

Standby, Chris, we're getting it for you.

[Chris Ellinghaus:]

And also in the 2019 guidance, can you elaborate on to your expected effective income tax rate?

[Michael Renna:]

Income tax rate for 2019?

[Dan Fidell:]

Yeah the effective tax rate for 2019, is that what you're asking about, Chris?

[Chris Ellinghaus:]

Yeah.

[Dan Fidell:]

Yeah, I mean, it'll be right around the 25%, 26%.

[Chris Ellinghaus:]

Okay, great. When did you guys find out about the BL England cancellation?

[Michael Renna:]

We started to hear rumblings about it probably within the last seven to 10 days and confirmed it within the last four.

[Chris Ellinghaus:]

And are you still - I know you talked about, completing the transition services agreement by early 2020, are you still hoping to complete that sooner?

[Michael Renna:]

We'll have completed the majority of it by year end. What's going to stretch into early 2020, and really very early 2020 is just kind of the final cut over of the systems.

[Chris Ellinghaus:]

The final verification and testing type phase?

[Michael Renna:]

Yeah, that's exactly right. We'll do that in January of 2020.

[Chris Ellinghaus:]

Okay. And lastly, the equity in the guidance for 2020, can you elaborate how much of that is anticipated to go into your LNG project specifically?

[Ann Anthony:]

Chris. it's Ann. I think based on what we see today, the bulk of it would be going towards that LNG product project, as well as, again, supporting other capital investments down at the utilities.

[Chris Ellinghaus:]

Sure. Okay. Thank you very much.

[Cielo Hernandez:]

Hey Chris. I have - going back to your first question, it's about $60 million of cost.

[Chris Ellinghaus:]

That's after tax?

[Michael Renna:]

Yeah, correct.

[Cielo Hernandez:]

Yeah, that is correct.

[Chris Ellinghaus:]

Okay. That's excellent. Okay, thank you very much.

[Michael Renna:]

Thanks Chris.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Dennis Coleman with Bank of America. Your line is now open.

[Dennis Coleman:]

Yes. Good morning, everyone. And let me add my welcome to Cielo and also good luck in your retirement, Steve. If I could just circle back to BL England situation, can you talk a little bit about what the alternatives might be, or are they the same scale in terms of investment?

[Michael Renna:]

We're still refining the plans but yeah, they'll be significant. I don't know that they'll be exactly the same scale. But they will be - they are going to require significant investment for us to be able to provide redundancy to that region. And again, I mean, you're talking about, I guess 35% to 40% of our of our customers right now are being served off of a single line that we deem to be one of the most important things that we do is providing adequate redundancy to that line. So Dave Robbins team right now is working on a on a final plan for us to be able to provide that redundancy. It will be alternative path for BL England, but it will be a significant capital investment and to Ann's point we'll consider that as similar to what we're doing on the LNG side as part of the entire redundancy package and $125 million of equity will probably support that redundancy package.

[Dennis Coleman:]

Okay. So it's, it's something like a line, maybe smaller diameter or something like that, I guess is an alternative.

[Michael Renna:]

Yeah, you're testing my engineering skills right now. Yeah, I mean what it would really involve would be looping of some existing feeds into that area. But no, it would not be - it's not planned to be a 24 inch line. It's going to be smaller scale in terms of like pipe diameter. But it will be - it will address the redundancy issue. And make sure that all 142,000 customers are protected.

[Dennis Coleman:]

Okay, and then any color on the ETG rate case filing. I think there's - when that will happen, and 2019 I guess is -

[Steven Cocchi:]

Yeah. Dennis this is Steve Cocchi. So I think you're probably aware of the regulatory requirements that we have for rate cases at both ETG and South Jersey Gas in terms of timing required by 2020. At this point, we're anticipating making filing significantly earlier than that for Elizabethtown. At this point, we're looking at something in Q2. So the exact date will be determined when we're ready for that filing. We've got to obviously have conversations with our regulators around that as well. So stay tuned but you should see something. At this point we're thinking in Q2.

[Dennis Coleman:]

Great. We'll look forward to that. And then maybe one more just a little bit more detailed on the 2020 information you gave us, we will look forward to the full guidance, I guess in a few months. But the capital budget, the 540 up a little bit from the spend this year. How much of that is for Penn East, if you can break that out just so we sort of know where that delta might be given your comments about delays potential.

[Michael Renna:]

Yeah. So Penn East is a relatively - Dennis if you can hear me Penn East is a relatively smaller number. I'm trying to think off the top my head what that was. It wasn't a big number in 2019. I'd say the majority of it is going to fall into 2020. And it wouldn't have changed.

[Dennis Coleman:]

But if it was delayed, would impact 2020, the 540?

[Michael Renna:]

Yeah, obviously the delay beyond 2020, sure. But for '19 purposes, I think we have $22 million in our plan right now for '19,

[Dennis Coleman:]

Okay. That's it for me. We'll see you all next week.

[Michael Renna:]

All right..

[Operator:]

Thank you. And our next question comes with Scott Walker with MFS Investment Management. Your line is now open.

[Scott Walker:]

Hi, thanks for taking the question. I'm wondering if you could clarify and maybe not with specificity but directionally, kind of embedded returns at each utility that are baked into the 2019 guidance.

[Steven Cocchi:]

Scott, this is Steve Cocchi again. Look, there's obviously a regulatory lag issue that we have to deal with. We've got significant capital expenditures at both South Jersey Gas and Elizabethtown. At this point, as we just discussed, we're looking at a rate case filing at Elizabethtown. And I think more to come on the timing of a South Jersey Gas rate case. But there's clearly going to be some regulatory lag issues in 2019, until we can get in with rate cases for both companies and start to recover on all this significant capital investments that we've made. And I think what we've always said is that we expect coming out of base rate cases to earn on our authorized return on equity, which right now is 9.6% and that's really the standard number across the utility world in New Jersey right now.

[Scott Walker:]

Right what I'm trying to get at is, I think the market clearly today is saying that people are uncomfortable with 2020, the rebound and so I'm trying to get some way to size if you were to earn and at mid-nines on some pro forma capital number in that year to kind of underscore market confidence in your plan?

[Steven Cocchi:]

I think if you take a look at some of the pages that we've included in our deck with regard to the timing of our planned regulatory activities and the capital expenditures that we expect to include in the base rate cases you can probably kind of calculate what type of returns we would expect to see coming out of base rate cases. And on top of those we've got our infrastructure programs at South Jersey gas that have annual roll into rate base as well as proposed infrastructure a little bit down that we would expect to be in place and hopefully earning return on those investments in 2020. So you have got a combination of things that if you look at the capital expenditures similar return, similar to what you've seen in our prior cases and others across New Jersey you can kind of figure out where we would be.

[Scott Walker:]

Okay, and if - I'm sorry there's lot going on today I think I missed it, but did you clarify that the Southern transition agreement was about $0.08 of headwind in 2019?

[Michael Renna:]

It is, yes.

[Scott Walker:]

And that will go away but offset by some addition of cost or how should we think about that for '20?

[Michael Renna:]

It will go away. There will be some, yes but albeit smaller there'll be some addition of cost but that then is further offset as the BT initiatives take root and we drive down overheads and cost throughout the organization. So in total we're expecting a significant reduction in overall cost.

[Scott Walker:]

Yeah. Thank you.

[Operator:]

Thank you [Operator Instructions] And I'm showing no further questions in the queue at this time. I'd 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 is going to be available on our website. As always please feel free to contact either myself, Dan Fidell or Eric Jacobson for analyst and investor questions, or Marissa Travaline for media inquiries. Our contact information may be found on our earnings release and earnings presentation materials. Again thanks for joining us today and for your continued interest and investment in SJI. This concludes our call. Have a good day.

[Operator:]

Ladies and gentlemen thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.