South Jersey Industries, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 South Jersey Industries Earnings Call. My name is Crystal, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to the host for today, Mr. Steve Clark, Vice President of Finance. Please proceed.

[Stephen H. Clark:]

Thank you, Crystal, and good afternoon, everyone. As Crystal mentioned, I'm Steve Clark, Vice President of Finance for South Jersey Industries, and I'd like to welcome you to South Jersey Industries' Second Quarter 2013 Earnings Conference Call and Webcast. Joining me today on the call are Ed Graham, our Chief Executive Officer; Dave Kindlick, our CFO; Mike Renna, President of our Nonregulated Businesses; Jeffrey DuBois, President of the Utility; Ann Anthony, our Director of Finance and Investor Relations; and also joining us today is Marissa Travaline, our new General Manager of Investor Relations. Before we get started today, I'd like to remind you that during the course of this call, we may make various remarks about future expectations, plans and opportunities for South Jersey Industries. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. 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 Form 10-Q on file with the SEC. Further, we assume no duty to update these statements, should actual events differ from expectations. As always, we'll be discussing our business in the context of 3 business lines

[David A. Kindlick:]

Thanks, Steve. The second quarter income from continuing operations on an Economic Earnings basis was $9.9 million or $0.31 per share as compared with $8.6 million or $0.28 per share for the same period last year. In the first half of 2013, SJI posted income from continuing operations on an Economic Earnings basis of $58.3 million or $1.83 per share as compared with $58.7 million or $1.93 per share for the first half of 2012. In our Q1 presentation, we anticipated that a key driver of second quarter results would be higher net income benefit from utilities, infrastructure investment programs. That impact is actually being realized as we recognize a greater share of the recovery of these investments during the second quarter. On the nonutility side, performance factors most significantly impacting the quarter included

[Edward J. Graham:]

Thanks, Dave. I'm very pleased with our performance during the first 6 months of 2013 as a whole, and in particular, the progress we've made in the second quarter. Utility is benefiting from our incremental infrastructure investment programs, as well as our strong and continuing interest in conversions in natural gas. On the nonregulated side of our business, we see tremendous opportunity for Retail Energy projects, as well as for fuel management and producer marketing services in our Wholesale business. Also, we expect to capitalize on opportunities for unlimited restructuring of business lines and assets that will only improve earnings. Longer term, we remain confident that the development of the Marcellus Shale and our geographic proximity to it will positively impact our long-term business plans through marketing relationships and our passive royalty interest. Considering the strong foundation SJI has in place, layered with an abundance of both long- and short-term energy project opportunities, we are reaffirming our 2013 guidance of 4% to 8% growth in Economic Earnings per share. So let's take a look at the key initiatives driving this growth. Beginning with the utility, in the wake of Super Storm Sandy, robust discussion has focused on the concept of hardening assets. In addition to the direct damage to structures from the storm, resulted loss of utility service for days, weeks, and in some cases, months at a time, to many of our state residents, underscored the need for hardened assets. During this time, a number of facilities with CHP systems were highlighted their ability to continue providing needed services at a critical time. As a result, I called a target critical assets by expanding CHP at both public and private entities, has been fast-tracked, and we anticipate that this will be an important opportunity for South Jersey Gas to assist with providing a solution. The first program to harden critical facilities that could operate 24/7 in shelters, for health and safety purposes, could be formalized as early as this fall. On-store [ph] applications include educational facilities, hospitals, prisons and waste treatment facilities. The opportunities for the utility is not only in the potential to provide natural gas to these CHP systems, but within our territory, we also have the opportunity to perhaps finance in the form of loans to these entities, on which the utility would earn a return as a regulatory asset. Similarly, as many of you know from our presentation in the first quarter, we received approval for $141.2 million of 4-year accelerated infrastructure replacement program that runs through 2016. Given the availability of plentiful low-cost Marcellus gas to the Northeast market area, we expect that this historically low natural gas price will continue, providing the headroom needed to make these investments without unduly burdening our customers. As a result, we are hopeful that our regulators will continue to support regulatory treatment that takes a proactive approach to infrastructure investments going forward. Customer interest in conversions to clean burning natural gas remains very strong. We continue actively extending our distribution system to areas not served by natural gas based on identified demand. The up to 70% price advantage that natural gas currently has over alternative fuels clearly supports our marketing effort to the universe of approximately 150,000 households in our service territory not currently heating with natural gas. We anticipate adding 5,500 conversion customers in 2013 and are working on programs to exceed that level in 2014 and beyond. We also look forward to any upward movement in the new housing market. We are currently adding customers from new housing development at about 1/4 of the levels that we added back in the mid-2000s. An increase to even half of that old level would significantly add to our bottom line. Between our incremental infrastructure spending programs, customer growth and substantial general capital investment, all of which are significant factors in consideration of a rate case filing, we should be well-positioned for continued earnings growth at the utility, both in the near term and longer terms. Now let's move to a discussion of our nonregulated businesses. We remain confident that we are well situated for significant economic benefit from energy project opportunities that are beginning to present themselves in New Jersey and beyond. Our activities related to Marcellus Shale gas continues to bear fruit in the form of long-standing relationships we have, which enable partnerships that present valuable energy project opportunities. The emphasis on asset hardening has brought to the forefront a vigorous discussion of the benefits of combined heat and power capabilities. From this discussion, there has arisen parallel regulatory and legislative tracks for proposals incentivizing the development of these projects. As part of the discussion and as one of the foremost developers in this type of project in the region, we are well-positioned to support the state's effort to improve the reliability and resilience of its energy infrastructure through the development of CHP projects. These projects feature a long-term annuity-like income streams that flow to moderate risk profiles. Our goal continues to be to add 1 to 2 CHP or thermal projects a year and to selectively fill in the portfolio with solar projects. A promising addition to our energy project portfolio is Energenic's public-private construction project with Montclair State University, which is developing a new combined heating, cooling and power system for their Montclair campus. A $91 million project is enabling the university to replace its current heating and cooling system without construction or funding from either the University or the State of New Jersey. The new state-of-the-art facility and its related infrastructure improvements will replace the campus' existing energy plant and is expected to be in service in the fourth quarter. Additionally, we're at various stages of planning and negotiation on 10 prospective CHP projects and a significant queue of project inquiries and new opportunities are rising daily. On the solar front, we continue to generate significant numbers of SRECs, all of which should benefit from the legislation signed by Governor Christie in 2012 which accelerates the renewable portfolio standard for solar energy. The start of the energy year 2014 brings the potential for solar market dynamics to continue shifting and more evenly spread the demand for solar projects, supporting their financial viability and protecting the value of current and future SRECs. To that end, we have been very encouraged by the gradual recovery of SREC prices. Fuel cells we are adding at Energenic's Hartford steam plant, which is shared by a major hospital customer, is exactly the type of add-on opportunity we had hoped to realize when we acquired the plant. As you may recall, the downtown system at the plant provides chilled and heated water plus electric generation for 44 buildings. The south-end system provides electric generation and chilled and heated water to 2 tenants

[Operator:]

[Operator Instructions] Our first question comes from the line of Dan Fidell.

[Daniel M. Fidell:]

Just a few questions on my side. First, maybe you can give us a little bit more color in terms of where we are in the process on the asset-hardening plan. You mentioned legislative and regulatory discussions ongoing parallel. Can you talk a little bit about just timing for approval and the potential opportunity you see kind of boiling it down? I know you mentioned 1 to 2 CHP projects a year, 10 in queue. What is this -- what would approval mean for you? Could it significantly expand your opportunity there? And just maybe if you could just quantify it for us a little bit.

[Edward J. Graham:]

Sure, Dan. The first comment is, there is legislative action for ways to incentivized CHP. But probably what seems to be moving more quickly is the efforts of the BPU to put something in place. What we see, I guess, is there's 3 components to supporting CHP, or for that matter, emergency generation sales, the combination of things to harden a facility. The first phase would be federal moneys. They're expecting any time now, in New Jersey, an allocation of HUD money from the federal government to support either enhancing transportation assets, as well as energy assets. So once that amount is notified or received, it will determine how much is applicable to energy and specifically, these types of projects. Secondarily, the state is exploring to what degree through EDA or other vehicles lower interest and no interest loan. And then the final is the straw proposal of the BPU, which we would expect to see something in September, which speaks to how natural gas utilities can provide grants and also 0 interest loans to support economics of these projects being built and, of course, utility would earn on those assets just like a rate-based investment. So given that, I think the scope continues to widen what constitutes a critical facility. So as we get more insight as to what that looks like, we would think our opportunities expand significantly. Hard to quantify how much, but there's probably certainly a couple of hundred megawatts immediately that could fall into category for CHP. But the other part of this endeavor to harden would be a facility having a baseload project like an equipment of CHP, but also additional, either emergency generation or something like it on top that cover a peak load. What they're looking at is being able, in total, what's called -- be able to island the facility if the grid goes down so it could operate 100% without an interconnect to the grid. Secondarily, they're looking at Black Start capability that it could immediately start up again if the facilities went down. So this is really even beyond CHP. This is really gas-fired equipment for all those purposes. And so it's going beyond what we originally scoped. It's just adding CHP projects. But at this point, it's hard to quantify, but the opportunity is growing as it gets defined daily.

[Daniel M. Fidell:]

That's great. Would it be your intention whether your direct-builder CHP are making loans to developers to get the CHP built, that those would have trackers attached to them?

[Edward J. Graham:]

Yes. In our case, we would expect that the utility of South Jersey Gas would provide the financing to whoever built the projects in the service area and would earn on those -- with trackers or mechanisms similar to our energy efficiency program and our infrastructure programs. And our expectation is that there'll probably be some third party that could decide the priority of what's most critical to do first and how to award projects based on a developer's capability, experience, as well as cost.

[Daniel M. Fidell:]

Okay, very helpful. Just switching topics quickly on the gas conversion side. You mentioned in your talking points about 5,500 conversions expected for 2013, and that kind of discussions about moving that number higher in the future years. So how should we think about kind of the upward mobility in that number? Is it 10%, is it 20%? How sizable do you think you can ramp up those conversions in the next few years

[Edward J. Graham:]

Well, I guess, one of the things that we're starting to get is more intelligence about those that are on our facilities or near our infrastructure that are not current customers. And that number, as we've enhanced our system, is growing. So we're somewhere in the 50,000 customer range as far as customers right on -- or potential customers, right on our infrastructure that require little expenditure to support. So hard to quantify. I would be disappointed if we weren't improving that number by 10% to 20% in the future.

[Operator:]

Our next question comes from the line of Spencer Joyce with Hilliard Lyons.

[Spencer E. Joyce:]

As we think about the 4% to 8% guidance range moving through the back half of the year, what are some external things that we can look towards that may there push it towards the top or bottom into that range?

[Edward J. Graham:]

I think, certainly, things that help us to move upward is some of the continued conversion activity, maybe exceeding our targets, but also some of the activities on utility side in terms of contracts of larger customers that would enhance revenue sooner than later. Also, the hardening activities, whether or not any of those could start to benefit us this year. On the nonregulated side, I think the customer growth has been a key. We certainly, at this point, have plenty of opportunity on the project side to support our growth, and as some of the restructuring activities we're undertaking on businesses and some of our assets to make them operate better, as we get them in place sooner than later, I think they'll provide some benefit to this year. What could go wrong to push us towards the downside is probably delays in doing all of those things, I guess.

[Spencer E. Joyce:]

Okay, fair enough. I did hear you there on the non-reg side, some potential cost-cutting to the back half of the year.

[Edward J. Graham:]

Yes. Yes, we're -- yes.

[Spencer E. Joyce:]

Okay. I wanted to stay on the non-reg side for another minute. In the press release mentioned $125 million of solar into service this year. Is it too early to get a read on how much we may have in the service in '14?

[Edward J. Graham:]

It is, but I can tell you that we're very comfortable with the queue of prospects we have for next year. One of the things that's interesting about the projects we are working on is the economics have improved significantly. The cost of projects have driven down to well below half of where they were a year ago, in fact, maybe more like 2 years ago. Likewise, the SREC values have doubled over the last year. So the economics are great. We have a queue, and I think we're in a fortunate position to really invest as much as we'd like to in those projects and its -- because it begins a balancing process of a wealth of natural gas-fired project opportunities and how to allocate our resources.

[Spencer E. Joyce:]

Okay. Yes, you mentioned a kind of interesting phrase. As much as you'd like to, is that $125 million about where you'd like to be or like to stay?

[Edward J. Graham:]

I think, again, we look at the quality of projects. And I think, more than likely, we're certainly going to evaluate what the best projects for the future growth of the company are. So if it was a number like that and they were all very strong projects, we'd certainly entertain them. But more importantly, our primary interest, really, is building CHP and thermal facilities, and certainly, the hardening opportunities that also add emergency generation and fuel cells to that portfolio.

[Spencer E. Joyce:]

Okay, fair enough. On the CHP side, I thought the language was a little interesting in the press release, talking about the CHP and thermal being highly profitable. I was wondering if you could espouse on that a little bit or give a little bit of color of this roughly $7 million or so of earnings for that piece of retail. How much can we attribute to CHP and thermal? Or maybe over the first half, I guess, it's close to $18 million.

[Edward J. Graham:]

I'm looking now. I guess I don't have a breakdown, but I think when we look at our performance, I would say that it's probably several million, and that what we've seen in terms of our performance is some of the offsetting impacts on the renewable side between landfills and the performance of SRECs in the first half of the year. However, I can say on both of those fronts, we see both of them improving considerably with some of the maintenance work we've done on the landfill generating projects, as well as the improvement in SREC value. So we'll have to get back to you with an exact number, but it's probably several million, I think.

[Spencer E. Joyce:]

Okay. Yes, that would be great. I guess, a final follow-up maybe on the SRECs. I know you all don't disclose exactly how many generator or how many cell, but can you give us any kind of feel of what roughly, what kind of sensitivity you guys have to that particular price? I mean, if SRECs are up $100 and you all are pumping out 50,000. I mean, it's pretty easy to see maybe what the earnings impact would be. Is there any kind of extra color you may could give there?

[Edward J. Graham:]

I'll ask Mike Renna to help me on that one.

[Michael J. Renna:]

Yes. Where you were is probably a pretty reasonable estimation of what our sensitivity is. I mean, we have x amount of projects right now that are operating. I don't know the exact amount of megawatts or SRECs that are produced off the top of my head, but yes, every $100 movement is going to have an impact on bottom lines.

[Spencer E. Joyce:]

Okay. Yes, and that should be almost straight margin right there. I mean, if we see a $1 rise, I mean, that's going right in the pocket?

[Michael J. Renna:]

Well, no, not necessarily because we do have 85% of our SRECs are hedged into 2014. So not an exact linear equation. But we have 60,000 SRECs that we are currently producing, so a $1 movement is going to have a slightly less than $60,000 impact on the bottom line. And I can't say -- fortunate in our hedging program to lock in some very attractive pricing.

[Spencer E. Joyce:]

Okay. Yes, I think I understand that point there. One other just final follow-up on the SRECs. Did you sound roughly the same number this quarter as you did in the year-ago Q2?

[Michael J. Renna:]

No. We would have sold more of this.

[Operator:]

[Operator Instructions] Our next question comes from the line of John Hansen [ph].

[Unknown Analyst:]

Just a follow-up. Most of my questions have been asked and answered, but you mentioned again the long-term growth rate, 6% to 7%, right?

[Edward J. Graham:]

Yes.

[Unknown Analyst:]

Just trying to see, as we look out, how important M&A might be in terms of helping to execute that. I know you guys reached out to Hartford in the one business, but just where do you see M&A needing to be done or not needing to be done in terms of the CHP business or the solar business or the LDC business or any other parts?

[Edward J. Graham:]

So we currently established all our targets in our strategic plan and 5-year plan based on organic growth. To the degree opportunities to acquire assets or businesses arise, that would be incremental and, of course, they'd have to be of the nature that would be accretive to our growth, not pull it down.

[Unknown Analyst:]

Good. What about geographic kind of considerations? I know once upon a time, we were doing something out in Vegas, but -- in the one business, but that was an internal development. What do you think about regional versus other areas like that for opportunities?

[Edward J. Graham:]

Well, we don't limit our interest to New Jersey or Southern New Jersey in terms of the retail marketing business. As an example, we're out through New England and the Mid-Atlantic states. Certainly, in terms of project development for CHP and thermal, a lot of opportunity in New Jersey, but we're actively looking at states contiguous to us, certainly, Pennsylvania, and for that matter, New York and even Ohio. In terms of fuel management opportunities for some of the electric generation that's going to be natural gas-fired, opportunities in New Jersey, but again, quite a bit of opportunity in Pennsylvania and Ohio. So we will, because of relationships, also go out of those areas if it makes good sense for an opportunity. And so, in occasions, we have been in other states. We've been in Maryland for landfill generating projects. We've certainly been in Las Vegas for a landfill generating project. So we see a lot of opportunity in the region, but we're not limited to it, if it makes good sense.

[Operator:]

With no further questions, I would now like to turn the call back over to Mr. Ed Graham for closing remarks.

[Edward J. Graham:]

Thank you. Thank you for the questions and the interest. If other questions arise or further information you'd like to know from us, please feel free to call Steve Clark, our Treasurer; or Ann Anthony, our Director of Finance and Investor Relations; or of course, Marissa, our new member to the team. Steve can be reached at area code [phone] extension 4260 or by email at [e-mail]. Likewise, Ann can be reached at extension 4143 and at [e-mail]. And Marissa, I don't have her -- 4227. So again, thank you, all, for joining us on the call today. Have a nice rest of your day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.