South Jersey Industries, Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Q2 2017 South Jersey Industries Earnings Conference Call. My name is Jasmine and I'll your operator for today. At this time, all participants are in listen-only mode. Later we'll conduct a question-and-answer session. [Operator instructions] I'd now like to turn the presentation over to your host for today Marissa Travaline. Please proceed.

[Marissa Travaline:]

Thank you. Good morning and thanks for joining us as we review South Jersey Industries' second quarter results for fiscal year 2017 provide an update on our business. Joining me to present on the call today are Mike Renna, President and CEO of SJI; and Steve Clark, our CFO. We also have several members of our Senior Management team available to help address questions following our prepared comments. Our earnings release and the slides intended to accompany the call were issued to the media yesterday after closed and posted this morning online. They're available on our website at www.sjindustries.com. The release and the associated 10-Q provide 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'd now turn the call over to our CEO, Mike Renna, to discuss both current performance and future initiatives in the context of our strategic plan.

[Mike Renna:]

Thanks Marissa. Good morning, everyone. As we take a look at year-to-date and second quarter performance, I think it's important to weigh not only actual results, but also the progress of our performance against our strategic plan. We've accomplished a lot. Our balance sheet is strong. We've achieved strong growth in our core businesses. We've made significant progress toward our goal of $150 million of economic earnings through 2020. We knew there would be near-term challenges, but that the long-term benefit of a strategic shift one that's focused on regulated investments, contracted assets, and customer growth will position us on a more sustainable growth trajectory as we move forward. Central to our strategy is a renewed focus on regulated investments. From 2013 to 2016, we've invested over $141 million in the first phase of our accelerated infrastructure replacement program, replacing- 362 miles of main and 18,000 services across 117 municipalities we serve. In collaboration with the New Jersey Board of Public Utilities, we've extended this program, committing to - $300 million of new investment over the next five years. When these investments are complete, we will have one of the most modern distribution systems not just in the state but in the entire country. We don't intend to stop there. We believe that critical investments are also needed to both in-state and interstate transmission, investments - designed to minimize service disruptions to our customers, and to ensure that they have access to the most cost-effective supply. Through investments like our Cape Atlantic- pipeline, we'll help repower the BL England generating station, so we could provide a growing Southern New Jersey with a clean, economical, and reliable electric supply and we've committed to the PennEast partnership. It's a critically important project that will bring over 1 Bcf of Marcellus supply to the residents of our region. This means inexpensive supply, not just today on a warm August day, but on record cold days like we saw in February 2014 when supply can be in such demand and capacity can be so constrained that prices can reach $100 a decatherm - in just a few days. Our business we can’t- focus on short-term solutions or investments. We have 381,000 utility customers to whom we are accountable each and every day. So within our regulated businesses, we will remain focused on optimizing the investments in our AIRP - and uncovering innovative ways to supply the unserved and underserved customers in our territory reinforcing the more portable areas of our system through a second phase of our Storm Hardening and Reliability Plan on ensuring a safe, reliable, affordable supply of natural gas for all of our customers and on investing in the people, processes, and technology that will allow us to provide the best service possible to our customers. Within our non-utility businesses, we have maintained our commitment to achieving earnings from repeatable and reliable income streams. This commitment is reflected in the contracted assets like those within our fuel supply management’s portfolio-. With our sixth contracts having come online in May and 11th contracts just executed this week, this niche business is positioned to remain a long-term driver of earnings well into the future. We've already exceeded the assumed growth that was built into our 2020 plan and continue to build an attractive pipeline of new business opportunities. Our existing solar assets also continued to perform well with year-to-date production up 7% as compared with same period last year. When coupled with a strong renewable energy credit, SREC - prices in our primary markets, we remain confident this piece of business will continue to be a positive contributor for the foreseeable future. The CHP assets that round out our nonutility earnings contribution are also expected to remain strong performers. While the current period reflection nonrecurring impacts in this area, the margins in this business remain strong, and our flagship property at Borgata continues to operate with great success. I remain confident that the actions we've taken to strengthen our business have already and will continue to reduce risk and volatility in our results and have us well positioned to achieve our 2017 economic earnings-per-share targeted range of $1.14 to $1.20. With that, I'll turn the call over to Steve to detail our year-to-date and second quarter results.

[Steve Clark:]

Thanks Mike and good morning, everyone. SJI's year-to-date economic earnings were $62 million as compared with earnings of $65.7 million for the first half of 2016. Economic EPS for the first six months of 2016 were $0.78 as compared with economic EPS of $0.89 for the same period in 2016. For the second quarter of 2017, economic earnings were $4.5 million with economic EPS of $0.06 as compared with $8.7 million- and $0.12 respectively for the second quarter of 2016-. You'll recall that secondary equity offering we executed in May 2016 resulted in issuance of just over 8 million additional shares. Since per share performance is calculated based upon average shares outstanding for the period, net share issuance impacted the year-to-date economic EPS comparison by $0.06 per share. Now we'll take a closer look at the items driving performance within our individual businesses. Beginning with - our utility, South Jersey Gas contributed net income of $48.7 million in the first half of 2016 as compared with $49.5 million in the same period last year-. For the second quarter, utility provided $2.3 million of economic earnings as compared with $5 million in the prior year. The year-over-year variance in both periods is largely attributable to substantial investments in our utility infrastructure, driving depreciation and interest expense higher, an increase in the reserve taken for uncollectible accounts, and the actions of the nonrecurring $1 million tax credit received in 2016. We would expect that the first three items will be addressed in our pending rate case. The quarter was further impacted by the reduced benefit from AFUDC recorded from our infrastructure investments in 2017 as compared with the second quarter of 2016. As noted on our Q1 call, where we earned under our accelerated infrastructure Replacement- program has changed, with investments made through this program rolling into base rates in October of each year and AFUDC being recognized in a different manner than the previous program. These changes make AIRP consistent with our System Hardening and Reliability Program or SHARP. We've invested $60.7 million year-to-date towards improving our gas distribution system under these programs producing an incremental net income contribution of $3.5 million in 2017. Another key component of utility earnings for the year and quarter is customer additions. For the 12 months ended June 30, 2017, our customer base grew by 1.5% bringing our total number of customers served to almost 381,000. Conversion activity continues to be the main driver of customer additions throughout our service territory. Customer additions from new construction is also picking up as rates improve relative to the prior year. Within our other regulated businesses SJI Midstream, our investment in the PennEast projects reflecting an earnings contribution from AFUDC totaling $2.4 million for the first half of the year, with $400,000 added in the second quarter, and obviously we’re excited about the fact that the nominees to the FERC have been approved and confirmed and there is forum now in place. We’re expecting that project to continue to moving forward as expected. Turning to our non-utility businesses, they contributed total of $9.1 million in economic earning for first six months of 2017 as compared with $16.3 million for the same period in 2016. For the second quarter, our non-utility business provided economic earning of $1.7 million in 2017, compared to $3.8 million in the second quarter of 2016. I’ll address the significant factors that drove these businesses as I discuss our two primary non-utility business lines. Our wholesale and retail commodity businesses, housed within South Jersey Energy Group attributed $10.4 million for the first six months of 2017, as compared with $11.8 million for the same period in 2016. Performance for the quarter reflected economic earnings of $600,000 versus a loss of $300,000 in the second quarter of 2016. Year-to-date economic earnings at South Jersey Energy Group were impacted by the extremely warm weather our region experienced this winter, which limited the ability to optimize capacity and significantly reduce spreads available to our business. However, a major driver of Energy Group results continues to be our fuel supply management contracts with our year-to-date contributions to earnings up 50% relative to prior year. In May of 2017 our six contracts came online at the Panda Stonewall facility. As a result, we expect increasing contribution from this activity to the balance of the year. As Mike noted, we have executed our 11th fuel supply management contract and expect to announce specifics shortly. Further, we continue to seek actively additional opportunities in the fuel supply management. I’ll also note here, the GAAP results for our wholesale business were impacted for the quarter and year-to-date by two disputes with the counter parties. In addition to the jury’s verdict that went against us in the first quarter and which we intend to appear, we accrued a $6 million charge in the second quarter in anticipation of a settlement over contracted expired last year. We have excluded these items from economic earnings, both of these items are detailed in the 10-Q being filed later today. Turning to our energy production business, South Jersey Energy Services produced a loss of $1.3 million for the first half of 2017, as compared with $4.5 million of economic earning for the same period in 2016. For the quarter Energy Services produced economic earnings of $1.1 million in 2017, versus $4.1 million in the prior-year. Results for Energy Services were heavily impacted by two significant factors. Our current year-to-date results reflect the strategic elimination of investment tax credits from earning, which added $2.8 million in the first half of 2016, and non-operational charges within CHP business totaling $1.9 million, which included cost associated with refinancing EDA bonds that retired earlier in the earning and an asset write off associated with the moving CHP equipment from existing facility. Economic earnings from solar in Q2 2017 totaled $2.2 million as compared $1.7 million in Q2 2016. Although additional solar development is not occurring, production from our existing assets has been strong, that strong production help to offset the impact of gas prices at the Maryland market. Year-to-date numbers are lower in 2017 at a $100,000 of economic earnings versus $300,000 in the same period in 2016 through the write-down of a portfolio of available-for-sale Maryland SRECs in the first quarter, based upon lower marked prices. With that, that concludes our prepared remarks today and will be happy to answer any questions you may have. I turn it back over the operator.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the Spencer Joyce with Hilliard Lyons. Please proceed.

[Spencer Joyce:]

Good morning, guys. Thanks for taking the call.

[Mike Renna:]

Good morning, Spencer.

[Spencer Joyce:]

Just a couple of quick ones for me. I know the FERC quorum - news is still really fresh and you all touched on it a little bit. But do we know when we might see some progress on PennEast. I mean is it too early to know, kind of what their procedural schedule there might be?

[Greg Nuzzo:]

Hey Spencer, it’s Greg Nuzzo. It is a little bit early, obviously, but our expectation is that PennEast is the queue of the several pipelines that are waiting for the review from FERC. But I would expect, we’re optimistic there is a lot of things happening behind the scenes even though the commission is not staffed-. So, we can get a quick start on the review. But I would expect probably in the next that 60 days we would have an expectation of FERC looking at PennEast and issuing a certificate. So, that would be my expectation. But yes, it is obviously early to know, but again the good thing is there's - the staff has been working behind the scenes reviewing - PennEast.

[Spencer Joyce:]

Okay. Great, that’s helpful Greg. Steve, maybe back to you for a second, just parsing through some of the energy services stuff, really nice quarter for the in-place solar force in Q2. Is that a fair normalized run rate or was weather perhaps a bit of a boost, that got us to that $2.2 million in economic earnings?

[Steve Clark:]

We had some help from the fact that, remember that we completed some projects at the end of last year, so we did have some work online this year. But weather was not bad, let’s put it that way. It was -- I don’t remember it was exceptional in any way, it wasn’t there.

[Spencer Joyce:]

And then finally jumping down just a line to the - landfills. Can you update us maybe on the progress there? I know that the expectations for the year weren’t necessarily robust for them in the first place, but still seeing the losses widen a little bit. So just any kind of general update on those landfills?

[Mike Renna:]

Spenser, it’s Mike. A lot of that is really tied to some delays in the improvements that we have scheduled for one of our sites, one of our four remaining sites. Greg, correct me if I am wrong. But I think we expect those improvements to be online in August.

[GregNuzzo:]

I mean one of the engines is July, they came along and then we’d have -- in August, we would expect all the engines to be in service and producing what we expect, so we should be seeing improvement in the third quarter relative to that business.

[Spencer Joyce:]

Okay. That’s helpful. So, I guess a little bit of a delay there with progress kind of already in the bag for Q3 and then perhaps Q4, we’ll be able to get a bit of a read there?

[GregNuzzo:]

That’s fair.

[Spencer Joyce:]

That’s all I had. Thanks for taking the call guys.

[Mike Renna:]

Thank you.

[Operator:]

And our next question comes from the line of [Kevin]. Please proceed.

[Unidentified Analyst:]

Just a follow-on the PennEast question from before. In the old presentation from last quarter, you guys had a second half 2018 in-service date, and now it just has targeted construction on 2018 with quorum being restored at FERC, could you just clarify when you're expecting the pipeline to be in service?

[Greg Nuzzo:]

This is Greg. Yes, I mean, with the uncertainty with FERC not having a quorum, we didn’t want to - we have an expectation, construction is going to start in ‘18 and we would reevaluate once the FERC got a full staff, have a better sense of the timing. So, now we have a quorum since last night, but we’re going to take a look at that. Again, constructions in ’18 and still - not really changed - much change in our expectation, but wanted to kind of be conservative since FERC is still out in terms of the quorum.

[Unidentified Analyst:]

That’s very fair. And could you just describe what the state process is required to go forward there?

[Greg Nuzzo:]

Yeah. I mean we still need some permits from the state levels like any other pipeline. Pennsylvania, we’ve already received our work - water permit. New Jersey has a different process that we have to follow, so we still need to get certain permits in New Jersey. But step one is getting our FERC certificate that will allow us to meet some of the requirements in New Jersey. so that’s kind of the process.

[Unidentified Analyst:]

Okay. But the issues that in New Jersey, that they don’t really change your overall view correct, in terms of timing?

[Mike Renna:]

No, there is no -- in terms of the issues in New Jersey no, in reality there is no issues.

[Unidentified Analyst:]

It seems there was an outgrowth of the lack of a quorum basically if I understood it correctly.

[Mike Renna:]

Right.

[Unidentified Analyst:]

And then on the incremental, the 11th fuel management contract, should we assume the guidance that you've given in the past of roughly like $1 million per contract, is that the right assumption going forward for that?

[Greg Nuzzo:]

Yeah, I would say, this is Greg and that's consistent, it's in line to our prior economics of the 10 before that -. So, I think that's a safe assumption.

[Mike Renna:]

Yeah, I think we previously said it will be a little bit more like – closer to $1.5 million, yeah, that's what we're using on average.

[Unidentified Analyst:]

Closer to $1.5 million?

[Mike Renna:]

Yeah.

[Unidentified Analyst:]

Thank you. And then -- I am sorry, didn't hear you.

[Mike Renna:]

I am sorry, on average.

[Unidentified Analyst:]

On average. Okay. And then on the CHP results for the first half of the year, you guys were highlighting the bond financing costs in the write-off of an asset, was there any of that in the second quarter of '17 risotto in first quarter of '17 or is that all in first quarter of '17?

[Mike Renna:]

The write off in the abandonment of the asset was second quarter.

[Unidentified Analyst:]

Okay. Okay. So, if I add back the $1.9 million to the negative $0.3 million that gets you up a little bit quarter-over-quarter relative to last year. Is that the right way to think about it that those two things are nonrecurring?

[Mike Renna:]

Yeah, that's right.

[Unidentified Analyst:]

Okay. And then just the last thing on the, could you give an update on where you stand in rate case right now and the potential for a settlement?

[Steve Cocchi:]

Good morning. This is Steve Cocchi. We've begun settlement discussions. That said, we still have some work to do, but we do we still maintain our expectation that it will be resolved in 2017.

[Unidentified Analyst:]

Okay. Terrific. Thank you very much.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator instructions] And there are no further questions at this time. I would now like to turn the call over to Mr. Mike Renna for closing remarks.

[Mike Renna:]

Thank you. Before we wrap up, as always please feel free to contact Marissa Travaline, our Director of Investor Relations or Ann Anthony our Treasurer if any follows up question arise. Marissa can be reached at 609-561-9000, extension 4227 or via email at [e-mail]. Ann can be reached at extension 4143 or by email [e-mail]. Again, thank you for joining us today and for your continued interest and investment in SJI.

[Operator:]

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