South Jersey Industries, Inc.
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good day, ladies and gentlemen. And welcome to the Q3 2016 South Jersey Industries Earnings Conference Call. My name is Maurine and I will be your operator for today. At this time, all participants are in listen only mode. [Operator Instructions] I would now like to turn the call over to Marissa Travaline, Director, Investor Relations. Please proceed.

[Marissa Travaline:]

Thank you, Maurine. Good morning, everyone and thank you for joining us to review SJI' third quarter results for fiscal year 2016 results provide an update on our business. Joining me to present on our call today are Mike Renna, President and CEO of SJI; and Steve Clark, our CFO. We also have several members of our key management team available to help address questions following our prepared comments. Our release was issued to the media yesterday evening. It is 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. Additionally, we made slide available in conjunction with our webcast and posted these slides on the Investor section of our website. The slides are intended to support the discussion on today's call, providing you with key takeaways regarding the current state of our business and future opportunity. With that in mind, 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, 10-Q filed with the SEC. Now I'll turn the call over to our CEO, Mike Renna.

[Mike Renna:]

Thanks Marissa. Good morning. And thank you for joining us on this call. I want to begin my reiterating my confidence in the strategic vision that our Board and management first laid out year and half ago. Strategy committed to high quality earnings growth, operational excellence, and innovation and minimizing risk across our business. Further, the success of our equity offering in May strengthened our balance sheet, providing us the flexibility to pursue the opportunities critical to achieving our near and longer term growth targets. With these goals in mind, plan we've laid out to achieve $150 million of economic earnings by 2020 is one that prioritizes earnings from our core businesses. It's a plan focused on regulated investments with over $1.5 billion of regulated capital expenditures planned over the next five years. When that is committed to sales and marketing innovations necessary to ensure utility customer additions remain a major driver of growth. It is a plan focused on expanding niche market like our fuel management business. We've achieved early success and it is a plan that I am confident we can achieve. With three quarters of the year complete, I think our performance clearly reflects our progress towards each of the key tenets of strategic plan. Equally important, this performance continues driving us towards our full year economic EPS target $1.29 to $1.35. Before turning to the call over to Steve, I'd like to share a few highlights of our progress with you. On October 31, BPU approved a five year extension of Accelerated Infrastructure Replacement Program or AIRP, which will allow us to invest $60.5 million per year to complete the replacement of bare steel and cast iron main in our system. Similar to our SHARP program, this extension will now allow AIRP investments to roll into base rates annual. In early October, world arguments on the appeal of the B. L. England pipeline approval were completed. As we continue to navigate the delays associated with this vitally important gas supply line, we remain committed to seeing it constructed. We expect the decision to be rendered on appeal process before year end, allowing us to initiate construction along the most cost effective and efficient timeline we can, while ensuring maximum protection of the environment. Another bright spot in the quarter was the performance achieved within our solar portfolio. As record production further benefited by a strong SREC market. Repositioning our energy production business at the end of 2015 is scaling back further solar development has enabled us to focus on maximizing the performance of our existing energy production assets. We've also start to see the benefits of our incremental fuel management contracts with our fourth and fifth contracts at the Moxie Liberty and Moxie Patriot plants respectively commencing just prior to the start of the third quarter. Other highlights include our newly constructed liquefaction facility and when it is service at the beginning of this month. This facility will provide South Jersey gas with greater system reliability and price stability to encourage of high demand. And of course with respect to PennEast progress continues on this vital project as it proceeds through the FERC review. With the final environmental impacts statement expected in December. Each of these items is represent progress made executing on a strategy I laid out in my opening comments. At this time, I'll ask our CFO, Steve Clark to detail our year-to-date and third quarter results.

[Steve Clark:]

Thanks Mike, and good morning, everyone. First I want to draw your attention to both the earnings release and the slides accompanying this call, where you will find detail information regarding our GAAP results. I'd encourage you to review that information in your convenience. The purpose of this call however we will focus our discussion on economic earnings as management believes that this measure provides valuable insight into the performance of our business. SJI's year-to-date economic earnings were $69.6 million as compared with $55.8 million for the same period in 2015. Economic earning per share for the year-to-date period ending September 30, 2016 was $0.92 as compared with $0.83 for the same period in 2015. For the third quarter of 2016, economic earnings were $3.9 million with economic EPS of $0.05 as compared with an economic earnings loss of $5 million and economic EPS loss of $0.07 for the third quarter of 2015. Now we will discuss at a bit more detail what drove performance within our individual business lines. Beginning in our utility, South Jersey Gas contributed $46.1 million of economic earnings year-to-date in 2016, as compared with $44.4 million in the same period last year. In the third quarter, traditionally a weak one for most natural gas utilities, SJI saw loss of $3.3 million as compared with a loss of $3.4 million in the prior year period. Major drivers of the incremental net income for the utility were the investments made under our AIRP and SHARP programs and customer growth. We have invested nearly $58 million year-to-date through our accelerated infrastructure programs to improve the safety and reliability of our gas distribution system. Our infrastructure programs have produced aggregate incremental net income contribution of $4.3 million in 2016. Coupled with improvements and the contributions from customer growth, this incremental contribution has more than offset O&M and depreciation expenses associated with the almost $280 million of system investments we've made since our last base rate case. Also noteworthy regarding the AIRP extension Mike discussed earlier is that that investment that we've made through this program over the last several years will move into base rate effective December 1st as opposed to with the completion of the next rate case as originally scheduled. For the 12 months ending September 30, 2016, our utility added 4,830 customers, achieving a 1.3% growth rate, despite a higher level of customer collection activity we experienced in 2015. We expect our full year customer growth to add incremental net income of approximately $2.6 million. The value of natural gas versus other fuels continues driving its popularity among homeowners. However, low oil prices do make the conversion process less urgent for customers. Consequently as Mike mentioned, we are putting a concerted effort into enhancing our sales and marketing activities. Shifting gears, our non-utility businesses contributed a total of $23.7 million in economic earnings year-to-date, as compared with $11.5 million of economic earnings for the same period in 2015. For the third quarter, economic earnings from these businesses totaled $7.3 million in 2016, as opposed to an economic earnings loss of $1.5 million in the third quarter of 2015. I'll address the significant drivers that impacted these results as I discuss our two primary non-utility business segments. Our wholesale and retail commodity businesses, housed within South Jersey Energy Group, contributed $10.4 million of economic earnings for the nine months of 2016 as compared with $6.1 million for the same period in 2015. Performance for the third quarter reflected a $1.4 million loss in 2016 versus as loss of $2.3 million in the third quarter of 2015. Improvements for both the year-to-date period and the quarter were driven largely by wholesale marketing margins and the incremental net income contributions we are starting to see from our five operating full supply management contracts. We expect to add to the contribution from each of these are of our wholesale business during the fourth quarter with the onset of colder weather. It is also worth noting that 2016 has been a very strong year in our retail electric business due to increased sales across our portfolio. Including several municipal aggregation contracts we began serving this year. And optimization of assets throughout our book. Turning to our energy production business. South Jersey Energy Services contributed economic earnings of $13.3 million for the first nine months of 2016, as compared with $5.4 million in 2015. For the quarter, this business produced economic earnings of $8.7 million in 2016 versus $800,000 in 2015. Comparative results for Energy Services over the last two years have been impacted by some non-recurring events and a reduction in the amount of investment tax credits we are recording in 2016. It's worth spending a minute to detail those items in order to illustrate the positive shift in operating performance for this area that we are experiencing in 2016. I do want to note that we lay out and I think in pretty concise fashion in the earnings release exactly how these items I am about to talk about layout so you don't have to scurry writing these down. In the first nine months of 2015, after tax charges related to the write-down of our assets for Revel facility reduced Energy Services' economic earnings by $12.5 million. This period also included ITC totaling $18.6 million which helped to offset the Revel loss. In the first nine months of 2016, Energy Services received Revel related settlements that produced in after tax gain of $3.8 million. This period also benefited from $4.6 million of ITC which was $14 million less than in the prior year period. If we were to adjust for these items, operating performance in our energy production business would have accounted for $5.6 million of improvement in the first nine months of 2016. Comparing the quarters with ITC of $1.3 million in 2015 and $1.8 million in 2016, and adjusting for the impacts of the previously noted non-recurring events in the period which included a $1 million of loss in 2015 and $2.9 million gain in 2016, operating performance drove $3.5 million in our energy production business in the third quarter of 2016. This performance is reflective of our strategic focus on optimizing current assets while reducing further investments in solar and landfill assets. The incremental improvement in both year-to-date and quarterly results is largely attributable to extremely strong solar REC production and the higher prices at which we are selling those SREC. Our year-to-date SREC production grew from 112,000 in the first half of 2015 to nearly 184,000 in the first half of 2016. Our remaining energy production assets the only item worth noting is the landfill losses for the quarter and year-to-date have been halved as compared to last year. This performance occurred despite much weaker location and marginal pricing for electric experienced this year that impacts a portion of our production. We expect the improving trends we've seen year-to-date continues moving forward. That concludes our prepared remarks. And at this time we would be happy to answer any questions you may have regarding the information we shared today.

[Operator:]

[Operator Instructions] Your first question comes from the line of Chris Ellinghaus. Please proceed.

[Chris Ellinghaus:]

Good morning, ladies and gentlemen. How are you? Good, no complaint so far. Vis-à-vis I get the sort of backing out to get the $4 million versus $500,000 on energy services. But can you sort of give us a little more color on the production versus the SREC improvement there? Can you give us a little mix on how that worked out?

[Dave Robbins:]

Well, a lot of -- Chris this is Steve Clark. A lot of the production is coming from the new projects that we brought online during the year. And certainly the SREC market particularly New Jersey has improved and we've been pretty aggressive in hedging in some attractive prices. So it is really driving the uplift solar performance.

[Chris Ellinghaus:]

Okay. Can you give us a little comparison year-over-year sort of realized the SREC prices?

[Dave Robbins:]

I think if you want to get slightly average prices that we sold in to?

[Chris Ellinghaus:]

Yes basically.

[Dave Robbins:]

We are just [Multiple Speakers] finding the number. I think Chris I am going to have to get back to you on that. We don't have that broken down in that manner. I certainly get you the weighted average price that we sold into during 2015 versus 2016. I think that might give you what you want.

[Chris Ellinghaus:]

Okay. Steve --

[Mike Renna:]

I was just going to say really quick that in addition to bringing on new facilities this past year which obviously added to our incremental production, our site by site production has been up as well as we continue to achieve some of our -- or seeing our operating targets.

[Chris Ellinghaus:]

Okay. Steve, as far as the improvements that you are seeing at energy services, obviously pricing on SREC can be somewhat volatile but do you feel good about the sort of durability of the improvement in the site production?

[Steve Clark:]

Yes. I would say that, a, that there is always going to some fluctuation depending upon weather, really if you have a long rainy summer that will have an impact but we now have a very pretty significant fleet of these and I think we get better and better and make sure that they remain operational and we can maximize, so yes I am feeling pretty good about what we have out there.

[Chris Ellinghaus:]

Okay. And one last question about the change in the presentation in the economic earnings reconciliation, can you just talk about breaking out the taxes and what not and how that works now?

[Steve Clark:]

Well, actually the only reason for the change, Chris, is that was in essence the SEC was kind of looking for us to do it that way. So effectively what we are doing we are getting down to economic earnings in the same way. We are just pulling it out of the individual locations up above it which is basically the way that all of us have been mandated to deal with those non-GAAP earning type things.

[Chris Ellinghaus:]

Right. I just want to make sure that I'm reading this right now. Now that -- let's say the mark-to-market adjustment in a given period is pretax?

[Steve Clark:]

Yes. That's correct.

[Operator:]

Your next question comes from the line of Tate Sullivan. Please proceed

[Tate Sullivan:]

Hi, thank you. Good morning. I thought you had a chance to exceed your EPS from last year in this quarter and then you meaningfully did but then my question related to that is I mean you kept your 2016 to full year guidance unchanged and that implies that year-over-year drop in the fourth quarter. Can you go over your thinking on changed EPS please?

[Greg Nuzzo:]

Well, I think some of it is clearly seasonal, certainly we had over performance in our solar fleet that contributed to a better third quarter than we would have originally expected. And largely I think the really in the fourth quarter there is a number of things that can affect final year earnings particularly in the wholesale business. I don't -- I am very confident in our ability to deliver on our guidance. But I am not really seeing anything particular in the fourth quarter that is a cause of concern. I think it is mostly timing.

[Steve Clark:]

Yes. And I just add to that to Mike's point about the wholesale business. Clearly the most wholesale businesses do most of their performance in that first and fourth quarter. So we have significant numbers we have to making in that fourth quarter with regard to wholesale or at least in December.

[Greg Nuzzo:]

And the other thing it's hard to compare to past two because the bulk of our ITC came in fourth quarter as well. So that has significant impact.

[Tate Sullivan:]

Okay. That's a great point. And what's -- what will be variables and wholesale margins in the fourth quarter in general?

[Steve Clark:]

It is largely going to be driven by weather. I mean what the opportunities are and how the curve move based upon expectations.

[Tate Sullivan:]

Do you have handy and maybe it is all follow up on it from last year's [66] that result if I am having that right in 4Q. I mean how much of that was your 62 with ITC related?

[Steve Clark:]

Fourth quarter?

[Tate Sullivan:]

Of 2015? I will follow up with it later.

[Steve Clark:]

Do you have any idea?

[Tate Sullivan:]

I will follow up with it later.

[Steve Clark:]

If you give me a second I got it here, I look at it as --

[Operator:]

Your next question comes from the line of Spencer Joyce. Please proceed.

[Spencer Joyce:]

Hey, good morning, guys. Nice quarter. Just a quick follow up. I'd interested in the year-over-year realized SREC pricing too when you all pull that but Steve, wanted to ask about the SJES the gain from this year and the loss from last year. The $2.9 million this year and the $1 million loss year, are those pretax or post tax numbers?

[Steve Clark:]

After tax

[Spencer Joyce:]

Pretax?

[Steve Clark:]

No, after tax.

[Spencer Joyce:]

Okay. Perfect. And similarly on the tax side should we be expecting about $1 million in ITC here in Q4, I guess that's kind of plus or minus what we've seen across the year?

[Greg Nuzzo:]

We've got a number out that target of $30 million or less so I would expect us to continue to track toward that target. So there will be more significant impact in the fourth quarter than there has been in the prior quarters.

[Steve Clark:]

Yes. And to that point though and I guess from Pete's question before, we did probably just about $20 million of ITC in the fourth quarter of last year.

[Spencer Joyce:]

Yes. I think $19.7 million here in --

[Steve Clark:]

From last year. So I guess we will see a meaningful step down from the $19.7 million last year but obviously more than we've seen kind of through the quarter thus far.

[Greg Nuzzo:]

Our full year will be a meaningful step down from the fourth quarter of last year.

[Spencer Joyce:]

Fair point. I guess shifting a little bit, it sounds like we are finally seeing a little bit of positive progress on B L England. And I know while you mentioned somewhat of soft timeline with some items later this year but is it too early to give us maybe another completion date maybe late next year or perhaps Q1, 2018?

[Jeff DuBois:]

Hi, Spencer. This is Jeff DuBois. Yes, we are starting to see some movement. We are hearing we might get some word out of court next week. What we are really just trying to work in coordination with the owners of B L England to determine what the construction timeline will be. We are still hopeful there will be something in 2018. I don’t know that it will be first quarter though.

[Spencer Joyce:]

Okay. And then Steve remind us how we should be thinking about the AFUDC once we start to see the wheels turn a little bit on that construction.

[Steve Clark:]

With regard to B L England specifically we just start accruing that until the project goes into service. So it depends upon how long that process takes. The dollars, it will recognize AFUDC from the point we starts spending to the point where again effectively our spent is done and it goes into service. If that is before a base rate case, at that point in time AFUDC stop accruing and you starting current depreciation expenses and interest expenses like you would expect like one any other normal project that we think you picked up in when it rolls into rates as part of base rate case. Timing with regard to how that plays out and whether you have a GAAP there is --

[Spencer Joyce:]

Okay, perfect. Thanks for that. Last one for me, want to jump back to the utility segment. I know we increased collections was an issue we worked through a little bit last year and even mentioned it a bit on this call. And my question is, is it too early to say that maybe we have a soft comparison there for this year? It seems like a bit of unique issue for you all moving past or through the heating season of 2015-2016. Are you seeing your customers firm up a little bit or maybe absent weather is there the potential for this to be an issue again or perhaps on wind?

[Steve Clark:]

I guess exclusive on this. From an economic standpoint our market place does have some issues. I don't see it is something that is getting more significant at this point in time. We are not seeing that. When we are making reference the collection issues that we are looking at, the reference we are making there is a little bit more on the amount of -- I guess turn off activity is probably little greater than what it would have been last year. So that's really what it was -- the reference was there with regard to what our next customer number were. That was the primary focus there but with regard to uncollectible accounts, we are not seeing a heavier push on that this year.

[Operator:]

Your next question comes from the line of Michael Gaugler. Please proceed.

[Michael Gaugler:]

Hi, good morning, everyone. My questions are quick. On the solar SREC generation insurance you have back in the appendix, I am looking at 2016's total and wondering if we are getting to close to what's potentially a peak for you in terms of that generation? And then second part of the question is you had mention you were hedging and I am just wondering how far out you are hedging out on that timeline?

[Steve Clark:]

Yes. I'll answer both. Yes, we are approaching a peak and certainly that's going to be -- we will achieve a peak I would assume next year when we essentially -- no curtain any kind of new construction or new investment in solar. So as the 2016 projects come online there will be a little bit of incremental bump up in production. But as we move to 2017 and those begin to achieve full production then there will be a leveling off and that will be really where our peak is established. Second question, remind me again.

[Michael Gaugler:]

Hedging timeline.

[Steve Clark:]

Oh the hedging, the market is liquid about three years because it is largely determined by the BJS process, BJSS process in the state. So as it relates to New Jersey RECs we typically go out there and look to start to hedge as far as there is liquidity in the market in terms of hedging. And normally that's our approach to go out there and try to have start eat into a three year hedge.

[Operator:]

Your next question comes from the line of Tate Sullivan. Please proceed.

[Tate Sullivan:]

Thank you for taking my follow up. And you gave great detail on deal England when I asked you this before but and the regulators are already going through the approval process on your spending associated with that project. What is the risk of the operator of the B L England plant just walking away from that plan and it is too expensive to convert using natural gas.

[Greg Nuzzo:]

I think it is difficult for us to answer that question on behalf of the honor of B L England. I mean I am not trying to pun I mean certainly that risk is in any kind of the construction project or investment of this type. There is nothing that would leave me to be concerned at this point in time but trying to put some type of quantification around that risk would be me speaking out of turn.

[Tate Sullivan:]

Or could the state step in for instance and say well we need this capacity and I mean take over those variables that could take place and cause I mean could cut in the total spending you are planning on the B L England expansion project.

[Mike Renna:]

Well, I mean certainly it is in state's best interest particularly it is in the region's best interest to have this plant because it is heavily constrained area. This is one of the only base -- existing solutions to create baseload electricity in region. So again I am certainly not in the business of guessing what the state would do particularly New Jersey but I would think that the state would have vested interest in trying to get this project done simply because of the demand for electricity in the region.

[Steve Clark:]

Tate, they were extremely supporting of it right from the very beginning. So I guess just to follow on Mike's remarks this has been much longer and much for arduous process than everybody anticipated but everybody's continued moving through it so that may speak something to your original question.

[Tate Sullivan:]

Okay, thanks. And then I mean of the plan spending associated with B L England, let say the plant gets delayed in terms of switching from coal, converting from coal to natural gas. Is there a still a portion that you would be able to spend associated with expanding your infrastructure to serve your current customers or is it depended on that plant converting?

[Mike Renna:]

I mean there is certainly need for us to reinforce our system and create redundant feed to that area of service territory.

[Tate Sullivan:]

Okay. And then if I may on I assume since you took my follow up maybe there -- maybe I'll just keep going, is fuel management contracts, if you take the total income that you quoted for fuel management divided by the five contracts I get $1.04 million annualized per contract. It looks little low compared to what I have tried to figure out before in terms of per contract contribution and net income. Is that because one of the five contracts is a lower baseload contract?

[Greg Nuzzo:]

This is Greg. Actually I think if you are doing that math I think two of them just came online a couple of month ago. So is that will get them to full production, yes, the two Moxie plant, Patriot and Liberty just came commercial in June. So they don't have as much contribution to this year. Since they are only probably two or three months of contribution. So I don't know that's where the math might not be making sense.

[Steve Clark:]

[Multiple Speakers] smaller, that is correct, it was add on to an existing contract. So we talk about that as -- we are looking at as we look at all of our contracts as kind of an average number. So we are building up.

[Tate Sullivan:]

Okay. Are two those marketing plan still ramping up to full production or did they achieve that in 3Q?

[Greg Nuzzo:]

Yes. They achieved their full output in June. They went for commercial and utilizing almost a 100% of their next contract.

[Tate Sullivan:]

Okay. And then one last one for me. On your press release showing the ITC contributions from Q3, 2015 was $1.3 million to $1.8 million. Did that $1.8 million in 3Q, 2016 reflect the remaining investment that you are doing in solar or is there more to come in 4Q?

[Steve Clark:]

No. It reflected greater profitability in utility for us; utilize those tax credits in a more profitable quarter.

[Operator:]

[Operator Instructions] At this time, I'll like to turn the call over to Mike Renna.

[Mike Renna:]

Thanks. Before we wrap as always please feel free to contact Marissa Travaline, our Director of Investor Relations or Ann Anthony our Treasurer, if any follow up question arise. Marissa can be reached at 609-561-9000, extension 4227 or via email at [e-mail]. Ann could 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, that concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.