South Jersey Industries, Inc.
Q1 2013 Earnings Call Transcript

Published: 6 May 2013

[Operator:]

Good morning, and welcome to SJI's First Quarter Earnings Call and Presentation at the AGA Financial Forum. We are webcasting today so we'll stick on script. With me today are several of our senior officers, as well as our key representatives from the Investor Relations area, so ready to answer your questions during the meeting but also at its conclusion. Of course, as you would expect, we have a slide with the Safe Harbor language. Please take a look at it. We always show this prior to any financial reporting. But of note is we will talk about some future events and they're certainly not guarantees of how things are going to turn out but for any information you want to consult us, we just recently filed our 10-Q on Friday, so certainly all details will be there. Now I'd like to start the representation where we always do and talk about our goals. And Slide 3 really highlights that they have not changed over the last 10 years. We continue to target growing our earnings-per-share by at least 67% a year. We continue to have our Board of Directors with a policy to grow its dividend by at least 6% to 7%. We're very, very conscious of risk and as we talk about some of our nonregulated businesses you'll see that reflected in how we approach trying to have our risk levels be similar to utility-type risks. And finally, for those who have an opportunity to see our press release on Friday, we gave guidance for 2013 to grow earnings by 4% to 8%. This, I think is interesting to most people. Slide 4 demonstrates really our board's commitment to growing our dividend. In addition, it highlights the strength of our earnings performance over the last number -- several years really, as compared to our peers that -- which certainly gives us the opportunity to continue to grow our dividend at a nice pace. In fact, if you look at in terms of growth, we've grown our dividend by an average of 10% a year over the last several years. And I think as far as our board is concerned, every November at the November board meeting is when they determine how much to increase the dividend by, given their policy. So we'll expect that to happen again at this year's board meeting in November. This is my self-serving slide of how we performed. Slide 5 highlights -- in terms of our historical earnings growth over the last 10 years, we've averaged 9.6%, which I think stands reasonably tall in our industry. And I think our future hopefully will bode even better. And again, I guess, also for those that may be new to South Jersey Industries, our total shareholder return over the last 10 years, Slide 6 highlights that, and as you can see a combination of growing our dividend by double-digits as well as earnings reflects itself in a nice return on -- for shareholders. Over the last 10 years we've actually averaged the return -- total shareholder return of about 15% a year, and I guess it just shows, and someone that invested in our stock 10 years ago would be almost up 400% compared to our peers, and the index is, I think, it's at least double if not more. But I think what's most important, certainly that's great, but if you're a new shareholder, that won't do a lot for you. So what I think is most important is the next 10 years, and I can tell you we feel -- we're optimistic about what we have in terms of opportunities in front of us than what we have actually experienced over the last 10 years. I think it's important to at least highlight where our earnings came from in 2012, but also give you some indication of where we think the contributions will come in the future. And Slide 7 highlights Economic Earnings contributions in 2012, and as you can see, we have contributions from all areas of our business but most significantly in South Jersey Gas, our utility, contributed 62% of South Jersey Industries' earnings. I think, importantly, as you -- as we discuss some of the future direction of the company, expect the SJI pie to get much bigger, but I also expect that South Jersey Gas become an even larger percentage, probably moving more towards the higher end of the 60s, towards 70%, contribution on what we think will be a much larger pie. Just a touch on performance of the past before we start to speak a little bit about what's coming next. This slide highlights performance between 2012 as compared to 2011. And as you all are well aware of, that or familiar with us, we've actually grew our earnings by 7% over -- year-over-year, and our earnings-per-share by 5%. One of the key differences in that growth is we did issue shares last year. We, in fact, raised $70 million of equity through our dividend reinvestment plan. And this is important, we still are committed to having a strong balance sheet, and as we talk about our opportunities to invest capital, we certainly want to make sure that we don't weaken our balance sheet in the process. I can say that as of this point, we have used the Dividend Reinvestment Plan and it had a 2% discount. I guess, as we saw how much interest we were receiving in our plan, we've actually eliminated the 2% discount right now to slow the pace of equity coming in. We certainly want to keep the plan in place, but we really don't need to raise the equity quite as quickly as it was coming in during the last, really, 1.25 years, I would say. In terms of the first quarter, as I said, our press release went out on Friday and Slide 9 highlights, for the first quarter, our earnings were running slightly behind last year. But we had a couple things that impacted us year-over-year differently that we're very confident will offset themselves in the latter part of this year. And in fact, that's why we have guidance of growing 4% to 8%. Some things are more mechanical than anything, and I'll cite an example, our investment tracker for South Jersey Gas is really designed to add to earnings as we invest in infrastructure but it adds immediately but on a straight-line basis, as we roll that into our rates, that then becomes a biometric earnings. So in this -- in case, year-over-year we would start to, had we rolled it in, in advance of the year, had a much stronger first quarter because of winter season and higher volumes. Instead, we realized that benefit in a much lesser level at -- on a straight-line basis. What -- so what we expect is that as you look at the next couple of quarters, we will actually have higher earnings than we would have expected but end up at the same place that actually is a shift of earnings of $1.5 million almost between the first quarter and the second and third quarters, and then beyond that, what we expect to be on the volumetric basis, going forward. So that's citing an example. A couple other things that affected the comparison is some activities on our nonregulated side in terms of using spot gas to serve the market last year for its storage. And it actually created later in the year, although a big profit beginning later in the year, some partial offset in terms of hedge losses. We don't expect that to repeat this year so, therefore, the first quarter looked better last year. But I think the balance of the year looks much better as we run our business this year. The other thing that did affect the comparison, I alluded to it a little bit earlier, is we did raise $70 million of equity last year. That caused about a $0.07 dilution impact in our earnings, so that's in place and I guess that's part of what caused the differential between years. As in -- and again, we've seen that it's so easy for us to raise equity through that vehicle that we've eliminated the discount just to slow that pace. Slide 10 is designed really to talk about why we think we can grow earnings by 4% to 8% this year. And I -- certainly, it always begins with what the utility has as opportunities. And there's a couple key items on this slide. One is, is that customer growth that's already taken place last year will get a full year's value of it this year, in addition to our growth rate that's actually increasing this year. We continue to have conversions ahead of our last year's level and far in advance of previous years. So that alone we expect year-over-year to add incrementally $1.8 million to $2 million of net income. The other big driver is that investment recovery mechanism I talked about in utility. If you recall, we go -- we are able to replace cast iron and bare steel in our system and earn on that investment immediately. The annualized benefit for 2013 versus 2012 equates to about a $2.5 million incremental net income, so -- largely, which we have not realized in the first quarter. So combined, the utility, alone, we expect from these 2 mechanisms to have improvements over last year by $4.5 million of net income. And likewise, as I referred to the non-utility side, we expect a number of other activities in the nonutility to produce growth in the second part of the year. So overall, we feel extremely confident about our growth target of 4% to 8%. If I can, in Slide 11, I'd like to shift the discussion and start to talk about what do we think the next decade has in store for South Jersey Industries, and as you might guess from the slide, we're pretty optimistic. And what we've done is looked at starting with the next few years, we've really put up a solid plan in place that we think helps growth, particularly in the next few years but and beyond. And highlighted, that is something that's not normal in our space. We expect to be able to grow South Jersey Gas or Utility by 8% to 12%. In a minute I'll discuss where we feel that optimism, what's driving it. Likewise, on the nonregulated side, some of the project businesses that we're putting in place, adding this year and have in the queue, really make us confident that we think we can grow the nonregulated side of our business from 4% to 8%. So the combination of those 2 things give us a lot of support for the expectation that we can continue to hit our target, on average, of growing earnings-per-share by at least 6% to 7%. I intend, I guess, at this point, to start to give you a little bit of detail behind why we think we can achieve those growth rates. So I'll start with South Jersey Gas, and this first slide highlights what we see are the 3 main drivers for South Jersey Gas. Certainly, customer growth and it highlights we think we can grow the margin, on average, from $2 million to $3.5 million a year, so accumulatively, by 2015, that will be a higher earnings level of $6 million to $8 million. Secondarily, the infrastructure tracker that's already in place and continuing through the period really contributes in the ballpark of $1.5 million to $2 million. So again, we see that is something -- it's just a matter of operations and adding $4.5 million to $6 million. And finally, something that we've touched on in the past, and it's starting to get closer to a time where it really impact our finances, is a rate case. And we have an expectation that a rate case could contribute somewhere between $8 million and $11.5 million as it's implemented. So as you look at that detail, we feel incredibly confident in our ability to grow at a much higher pace, and what's important about the rate case is it's really based upon the growth in rate base, and I'll talk about that in a minute. First, let me start to provide a little bit more support for why can we continue growing customers at a pace that, to the best of our knowledge, is at least doubling the national average. And in a period of time where we had a rough economy, with housing has been slow for several years in terms of new construction, we've been fortunate enough to see conversions more than offset what we were losing from the new construction side. And if you just start to look on this slide, under 2012, we converted 5,200 or almost 5,300 customers. We also did realize some new construction growth of close to 2,200. The results from that produced about a net customer add of about 6,000 customers, and with everyone there are some lost customers in terms of houses being torn down or changes in ownership that there's always some level of loss. So based on a net 6,000 new customers, we produced $1.8 million of incremental margin. As we look forward from '13 to '15, we're already actively working on conversions and we're seeing really quite a bit of interest and certainly the economics are supporting that, so growing at a pace of 5,500 to 6,500, we feel incredibly confident in. That gets largely driven, quite frankly, by the queue of opportunity we have. Within South Jersey, this is about 150,000 households that heat with something other than natural gas. And of that 150,000, 50,000 actually lie on or near our mains, which are much easier to convert and easily inexpensive and easy to connect. We also are fortunate with what happened in terms of technology in adding natural gas and its pricing. We enjoyed probably a savings versus, certainly, propane oil and even more so electricity, of at least 70%. So it's the payback in installing natural gas equipment in your house has never been better. We're finding people actually, quite frankly, as we run our main to reach new areas of our -- of South Jersey, we have mayors coming to us asking, "Would you come speak to our -- at a town hall meeting? Would you come start to provide service to our town? We've never had natural gas." And certainly, that's true in parts of Cape May County, as an example. The other added thing that's helped us in terms of reaching customers is the improvements we've made to our system through the programs that we've been -- that actually have been in place since 2009 to either enhance our system or replace aging infrastructure. And an ironic twist is that about 5 years ago, we had less than 40,000 perspective conversion customers on our main. It's actually 50,000 and increasing because the reach of our system continues to grow. So a very good place to be, very confident, in fact, I think that we need to challenge our salespeople in the gas company a little harder to grow that even a little bit more. I think, in terms of new construction, I think we're being conservative, we're stepping off of 2012, we're not, right now, expecting an enormous growth in new construction but we're seeing signs with requests for gas service that developers are starting to develop projects a little bit more. So you can see the range we expect to grow, somewhere between 2,000 and 3,500, in terms of new construction. So the result really gives us a great deal of confidence to support adding to our net income in the range of 2 million to 3.5 million a year over the 3-year period. Shifting over to a slide that at least explains in -- for those that haven't seen it before. We love acronyms in our industry and this is yet another one, AIRP is our infrastructure program where we get to earn on it immediately. This just highlights how profitable the program in place is today. And in fact, in February of this year, the Board of Public Utilities approved an extension for 4 years, where we can spend $35.3 million annually, or a total of $141 million plus, and earn on that immediately, and you can see the annual benefit of doing that. And that's a basic formula of how the program's in place. I think, also pretty reasonable to expect continuation of that program beyond the 4 years. In fact, we have 1,081 miles of cast iron or bare steel remaining in our system to be replaced. So I expect, well beyond this period, we'll continue to ratably move through that inventory, so that's just -- it's functioning as an annuity for us in effect. The next slide really highlights how do we expect the rate case to have the potential I highlighted. And quite frankly, on Slide 16, it shows the range of investments we expect to add to rate base since our last case, through the ending of what we project to be a completion of a future case. And we've been very diligent in enhancing our infrastructure outside of the normal -- or inclusive of the normal process, but we've also focused on our technology. Certainly, at this point we've implemented a significant system in terms of dispatching work but also tracking our infrastructure and keeping a great inventory of all history of our systems. Obviously, that's come under great scrutiny with some of the unfortunate events around the country. We also are enhancing our Customer Information System as well. So the timing of these IT projects fit well in a test year for rate case. But over and above that, some investment that makes this even more attractive is if you have heard recently, I guess we announced it last Monday, that our contract to serve B.L. England, a generating plant that had been predominantly coal- and oil-fired that is now going to convert to natural gas. I believe it's about 450 megawatts, and we've now completed the contract there, executed the contract with B.L. England and the Board of Public Utilities has approved that contract. How that relates to the rate case? Or a potential rate case? Of that -- it will actually be a $90-million investment. I guess it's about 15 miles of 24-inch pipe substantial project. Of that $90 million, $35 million will be dedicated specifically to B.L. England to serve it and $55 million will actually loop our system, reinforce it, but also enable us to reach B.L. England. The $55 million part of that investment would fit right in the test year for a rate case. Now we have not offered any specific data when we're going to file a case, but what we have repeatedly said is the latter part of the year would be an ideal time, would enable us if we can complete a case, our last case was 9 months. If we complete a case within 9 to 12 months, it could yield some benefit for 2014 and 2015 but it also can include the completion of the project for B.L. England. So I think that's a real attractive timing, but as I said, we still are studying it and haven't put out something formally that we've done. And we thought it might be a good idea to present that to the regulators first before we actually announce what we're doing. In terms of electric generation opportunities, and this is servicing them. This is a slide that highlights the contract I just referred to at B.L. England. And our expectation is, as I said, that, that should go probably into 2015, as far as completing our work, but we would expect them to start using test gas in 2015 and actually go commercial in 2016, so we think that's a great project. Also to note is that there are other opportunities in South Jersey to convert plants like that as well. This slide, I think, I want to highlight the top item, which is really something that's developing and it's relatively new, is the hardening of assets. Unfortunately, New Jersey experienced the brunt of Sandy in the fall. We were incredibly fortunate in the southern part because the eye of the storm went directly over us, but what -- it did raise attention to, and the governor's office is very focused on this, is what can we do to harden critical facilities in New Jersey? Whether they be hospitals, state facilities or other essential facilities, so that if they lose power, they continue to operate. And the proposal that is being worked on by the BPU and a potential regulation would be to encourage CHP development at these facilities on site, and actually have the gas utilities do a combination of things

[Unknown Analyst:]

[indiscernible] about the economy, reserves area, and specifically, the Atlantic City [indiscernible]?

[Edward J. Graham:]

Question is, what's the economy looking like in Southern New Jersey and how is Atlantic City performing? I think the economy struggled just like elsewhere in the region, we do see some signs of improvement. In terms of Atlantic City, specifically, Atlantic City struggled from competition as well as from the economy. We're starting to see that level off a little bit. We've had some properties at Atlantic City that haven't performed as well as they could have. I -- we see some changes in the management teams. What's important for us to highlight is that we're an essential service for the facilities we own a plant for, so we earn our profit as long as they don't go dark and the probability of any of the new properties not continuing to operate is highly unlikely. So we want them to succeed but I don't want to say we're indifferent to it from bottom line, but to some degree we are.

[Unknown Analyst:]

Is there an issue with you financing your CHP project, including [indiscernible]

[Edward J. Graham:]

The question, I'll repeat it not because I couldn't hear clearly, but I want to make sure the people on the webcast hear your question. But really the issue is, is there a problem with the utility financing one of the CHP facilities under the hardening regulations, if our nonregulated business actually builds it? And certainly that has to be looked at, but I think what will solve that issue is a competitive bid. We have to go out and win it in a competitive process and so I would expect them all to be competitively bid, then I think they're going to drive towards the best operator with the least cost. Yes?

[Unknown Analyst:]

Are you all from under the MBE project? Can you give us the final tab there? And also is there any exposure on Revel construction?

[Edward J. Graham:]

The MBE project...

[Unknown Analyst:]

LVE.

[Edward J. Graham:]

Oh, LVE, I'm sorry. Question is talk about the LVE project. We had it -- been working on a project in Las Vegas to build a plant. That facility partially built has been sold. We've been paid our money, we received $58 million, I guess, in March, it was about at our book value. So we're out of that project and using the cash for, I think, some more valuable investments. In terms of Revel, the casino in Atlantic City question is how we fared there. Revel, newest casino filed bankruptcy actually, they're going to come out of that, we think maybe this month. In terms of our investment, we own the energy plant that serves Revel. We've been made -- we're made whole, we get paid on time, we're an essential service. Our contract has been guaranteed by the bankruptcy court. So in fact, right now, if they even pay us late, there's impacts on them financially, but we are in great shape. We think Revel will be successful. It's a beautiful property, it could have been managed in a more effective way and we expect when they come out of bankruptcy they will. Any other questions? Well I understand lunch is in front of you. So thank you for joining us today.