South Jersey Industries, Inc.
Q4 2012 Earnings Call Transcript

Published: 28 Feb 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the South Jersey Industries Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to Mr. Steve Clark, SJI's Vice President, Finance and Treasurer. Please proceed.

[Stephen H. Clark:]

Thank you, and good morning. I'd like to welcome you to South Jersey Industries Fourth Quarter 2012 Earnings Conference Call and Webcast. Joining me today on the call are

[David A. Kindlick:]

Thanks, Steve. As usual, we'll be discussing our business in the context of 3 business lines

[Edward J. Graham:]

Thanks, Dave. We are very pleased with the record results achieved during 2012. Performance was clearly rooted in the actions we took starting in 2009. But more importantly, 2012 results laid the groundwork for continued growth in 2013 and beyond. Our incremental infrastructure investment continues to positively benefit the utility's bottom line. Game-changing nature of the Marcellus continues to benefit our nonutility business. The abundant supply and low price of natural gas continues to drive interest in developing energy projects, like thermal and CHP, throughout the country. Our demonstrated expertise in those projects drove the investment decisions over the past few years, and we continue to see many attractive opportunities. Finally, the proximity to the Marcellus and our relationship approach to a wholesale business has reshaped our focus away from the traditional storage and transportation spreads to one of producer marketing and fuel management. We normally provide specific full year guidance when we report our first quarter results typically in early May. Looking ahead though, we believe that we are well positioned as we move into 2013 and beyond to achieve our longer-term goal of average of 6% to 7% growth in Economic Earnings per share. So let's discuss the performance drivers for 2013 and the next few years. Beginning with utility, as Dave mentioned earlier, last week, the BPU approved a 4-year accelerated infrastructure investment program. I'd like to emphasize that these are incremental dollars over and above our historical normal CapEx of approximately $55 million to $60 million per year. Each $35 million investment, we are expected to produce approximately $1.6 million of incremental net income. Given the availability of the Marcellus Shale gas in the Northeast market area, we expect that this historically low natural gas price will continue, providing the headroom needed to make sure these investments will not have a significant effect on our customer bills. Customer growth over the past few years has really been the driver for conversions. This is due to the natural gas' competitive advantage over other fuels. In fact, in recent comparisons, natural gas continues to be 1/4 or 1/2 the cost of other fuels, like fuel oil or propane. We have identified roughly 145,000 households in our service territory that don't currently heat with natural gas. By the ongoing extension of our distribution system that supports our conversion activity, we have estimated approximately 50,000 potential customers that are already on or near our gas mains. Finally, our effort is in sync with the New Jersey Energy Master Plan, which specifically targets as an objective, replacement of fuel oil as an energy source. Our target is to add over 5,500 more conversions in 2013. The cost advantage coupled with the environmental benefit of natural gas are driving discussions around several gas-fired electric generation projects in both the utility service area and surrounding states. State and local governments recognize the price and environmental advantages of supporting these large-scale conversion projects from coal and other fuels to natural gas. South Jersey Gas has recently filed a petition with the Board of Public Utilities to serve the B.L. England facility just outside of Ocean City, New Jersey. This 447 megawatt facility currently uses coal-fired generation to produce electricity but has environmental permits that are set to expire over the next few years. The State of New Jersey has been extremely supportive of converting this facility to natural gas. This would amount to a $90 million capital investment for the utility with the expectation that our pipe will be completed and in service by the end of 2014. This will allow us for testing and ramping up prior to the full commercial operation, which is planned in 2016. Growth in 2013 and beyond for the utility business is clearly defined by 3 things

[Operator:]

[Operator Instructions] Your first question comes from the line of Spencer Joyce with S. Joyce and Hilliard.

[Spencer E. Joyce:]

I wanted to talk first a little bit about the utility side. And congrats, a really good year there for the utility. I guess, quarters 1 through 3 looked pretty solid, and then just looking there at the earnings in Q4, a little bit of an increase over Q4 of '11. But what were maybe a driver or 2 that kept it relatively flat from the prior year?

[Edward J. Graham:]

I guess, we tend to not compare quarter-to-quarter. But I think if I look at our performance, we saw some light treatment on our infrastructure program just by the method it’s installed. And also we, as in anticipation of the future, bolstered at our reserve fund collectible just to put us in a better position going forward as well. So I think we took some actions that really should benefit '13 and beyond. Likewise, we see a lot of activity on the customer growth side in the fourth quarter that will start to reap its benefits for the full year '13 and beyond as well.

[Spencer E. Joyce:]

Okay. Yes. That makes sense there. Also on the utility, the $35.3 million that we just got approved, how does that compare to the annual figures that we've been doing since '09? Is that a little more, a little less, about the same?

[Edward J. Graham:]

It's a little less. I think we see that the state is very, very supportive of the program, but they're also being very conscious of how much they want you to spend incrementally each year. So the way we approach it is that we certainly have our plans to accelerate replacing infrastructure and expanding our system. And so to whatever degree it's slightly less amount in that program, we still look towards a base rate case in the future to recover those costs that we spent above that target.

[Spencer E. Joyce:]

Okay. And I don't know if you guys have disclosed this. But did you all sell any SRECs in the quarter? Or how many do you still hold there sort of in the inventory?

[Edward J. Graham:]

Gee, Spencer, off the top, I know we did sell SRECs during the quarter. And quite frankly, I also know that we were active selling them in the beginning of this year as well. So I don't have an exact figure on the inventory. But all of our books reflect exactly what we did or we've accrued as current value. So as the value goes up, it actually creates an earnings opportunity to grow. We also -- a number of projects had presold SRECs several years ago at some very high prices that we'll likewise recognize this year as the cash close in.

[Spencer E. Joyce:]

Okay. Yes. I was going to ask if there was anything there as far as the hedge book maybe. It sounds like there maybe a little benefit. One kind of minutia item, I noticed an adjustment to Economic Earnings for unrealized loss on PP&E. Can you explain a little bit what that is exactly?

[Edward J. Graham:]

Sure. In some of the testing we do on any of our projects every year, we have a project where our assumptions would cause us to be close to a breakeven or slightly a loss on cash flow from one of our nonregulated projects. So accounting rules require you to immediately discount all those income streams. And so we, for GAAP processes, reduced our earnings, but we recognize it's noncash and unrealized. So for Economic Earnings purposes, we did not change earnings. And that's an item that will adjust each year as assumptions change and as the cash comes in.

[Spencer E. Joyce:]

Okay. I guess, you said it was for a nonregulated project?

[Edward J. Graham:]

Yes.

[Spencer E. Joyce:]

Okay. So I guess, this, as far as I know, is the first quarter we've seen that adjustment. So that will be a somewhat regular adjustment going forward possibly?

[Edward J. Graham:]

No. Probably not, in that really it's only when events change for a particular type of business do you do this impairment test. And unless there's new facts surfaced, it's really done for any project you have. So unless there's something material that changes that would affect any of our go-forward projects, I really don't anticipate new ones. So it really is stemmed by some new event.

[Spencer E. Joyce:]

Okay. That makes sense. So it will be a major sort of regime change as opposed to mark-to-market type thing.

[Edward J. Graham:]

That's correct.

[Spencer E. Joyce:]

Okay. That makes sense there. Of the $26 million in ITCs that we got for this year, I'm assuming most of those were solar. Do you have the piece that may have been the CHP or anything besides the solar investment?

[Edward J. Graham:]

Your assumption is right. In '12, the majority was solar. I think it was $1 million or less that was nonsolar. However, I think as we look at 2013 and '14, we'll see a bit more shift to whatever level we do towards the Montclair CHP or the fuel cell up in the Hartford Steam loop or some of the other projects will be nonsolar-related.

[Spencer E. Joyce:]

Okay. And this may be more towards the guidance that I know you all will come out with here in a couple of months. But I mean, do you have a sort of rough feel of over whether the ITCs will trend upwards or downwards for '13? Just sort of my back of the napkin, if we're going to put in $74 million versus $91 million in solar, it looks like that almost 1/2 to come down at least a little bit?

[Edward J. Graham:]

Yes. Our expectation would be they will be flat to a decline. We are seeing some of our projects that we are starting up this year, a full year of Hartford. Also as I said, some of the ITC were clearly related to Montclair and potentially Hartford. And so we really start to see some of those CHP and thermal projects going a full year in operation this year.

[Spencer E. Joyce:]

Okay. And just what was the full year '12 CapEx number? You don't have that? I know it will be in the K.

[David A. Kindlick:]

About $250 million at the SJI level.

[Operator:]

[Operator Instructions] Your next question comes from the line of Chris Ellinghaus with Williams Capital.

[Christopher R. Ellinghaus:]

Going back to the solar question. You're actually doing more capacity this year but at a lower cost. Has there anything been happening in terms of the cost profile?

[Edward J. Graham:]

Mike, maybe you can touch on what you're saying.

[Michael J. Renna:]

Yes. The per kilowatt cost to construct projects has come down pretty dramatically over the last 12 to 16 months. We're starting to see numbers that are sub-3,000 kW, whereas just 16, 18 months ago, they were well over 8,000. So they've come down considerably. Of course, that improves the overall economics of the project.

[Christopher R. Ellinghaus:]

Okay, great. Ed, you didn't talk too much about Atlantic City. Have you got any color on what's going on in terms of development?

[Edward J. Graham:]

There isn't any new casinos on the market, but we see some potential changes in ownership. But the most significant event that just happened is the governor signed a bill to approve Internet gaming in Atlantic City. The way that would work is the servers have to be housed in Atlantic City, which will -- there's expectations of the governor, I think, has in his budget, couple of hundred million for the next fiscal year of taxes earned off of that incremental. That maybe optimistic, but I think it will add substantially over the next few years to Atlantic City's income stream. In terms of the properties themselves, some have changed hands, that some of the weaker properties. In the case of resorts, now I guess, there's a project underway, with Margaritaville being built, a couple of projects and a new operator in there, I think -- Mike, who is the new operator of the Resorts Casino?

[Michael J. Renna:]

One of the travel [ph], I guess.

[Edward J. Graham:]

One of the casinos out of Connecticut, I think.

[Michael J. Renna:]

I think it's Mohegan.

[Edward J. Graham:]

Mohegan Sun. So we're seeing some change in the properties, some improvements being made. And with specifically, Dave did touch on Revel, where obviously we're sitting in a very strong place. They've likewise had some management changes to try to bolster some of their activities. So we would expect that they would be well positioned for the coming summer to perform better. So overall, I think one of the challenges that the casino market has experienced most recently is the media led most of the country to believe that Atlantic City was devastated by the storm and that it was inoperational. And I think there's been a lot of activity by the city to say, "We feel very badly for the damage that happened north of us, but Atlantic City really did not experience that type of damage, and they're fully open for business." So I think right now, still feeling the competitive challenges, but there's a lot of positive improvements being made.

[Christopher R. Ellinghaus:]

Are you expecting server farm type-sized development in Atlantic City as a result?

[Edward J. Graham:]

It's interesting. I don't yet know how each of the casinos. I would expect fully that each of the casinos would plan to have a server farm of their own. How they house them and where they locate them, I don't think that they necessarily have to be contiguous to the property. They just have to be within the boundaries of Atlantic City.

[Christopher R. Ellinghaus:]

I was just wondering if you're expecting that to be any kind of cooling load growth that might benefit you.

[Edward J. Graham:]

I think there's certainly maybe small applications. I don't know that they're all going to house them in 1 location. But certainly, it's an incremental opportunity for us.

[Christopher R. Ellinghaus:]

And then can you just go over the Hartford fuel cell details again? When do you expect that to be completed?

[Edward J. Graham:]

We, right now, are thinking it's out into 2014. We're still in negotiations, trying to finalize the contract terms. And it's again, instead of purchasing electricity for customers that we already serve off of the loop, we'll be able to generate directly for them. And obviously, that will also qualify for an investment tax credit treatment. We're seeing with the Hartford Steam loop, customers that are now either new potential customers or those that want to expand service with us that really haven't had the opportunity under the previous owners.

[Christopher R. Ellinghaus:]

Okay. So in terms of an investment tax credit, it sounds like this year, it's flat to down a little bit. But next year, you probably would have an uptick with the fuel cell.

[Edward J. Graham:]

Well, we don't really know yet. We haven't provided any guidance as to how much renewable projects and how many other projects we might have. So again, our goal is to actually reduce that over time and replace it with the output of these thermal and CHP plants as well as, for that matter, the growth in utility.

[Operator:]

With no further question in queue, I will turn the call back over to Mr. Ed Graham for closing remarks. Please proceed.

[Edward J. Graham:]

Thank you, all, for your questions and your interest today. And if you have any further questions or for further clarity, please feel free to call Steve Clark, our Treasurer; or Ann Anthony, our Director of Finance and Investor Relations. Steve can be reached at [phone] extension 4260 or by email at [e-mail]. Ann can be reached at extension 4143 or by email at [e-mail]. Again, thank you for joining us on the call today and have a nice day.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.