South Jersey Industries, Inc.
Q3 2013 Earnings Call Transcript

Published: 12 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 South Jersey Industries Earnings Conference Call. My name is Celia, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Steve Clark, Vice President of Finance. Please proceed, sir.

[Stephen H. Clark:]

Thank you, Celia, and good afternoon, everyone, and I'd like to welcome you to the South Jersey Industries Third Quarter 2013 Earnings Conference Call and Webcast. Joining me on the call today are Ed Graham, our CEO; 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 Marissa Travaline, our 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 usual, we'll be discussing SJI's results in the context of its 3 major business lines

[David A. Kindlick:]

Thanks, Steve. The third quarter income from continuing operations on an Economic Earnings basis reflects a loss of $1.1 million or $0.04 per share as compared with income of $4.1 million or $0.13 per share for the same period last year. The first 9 months of 2013, SJI posted income from continuing operations on an Economic Earnings basis of $57.2 million, or $1.79 per share, as compared with $62.7 million, or $2.05 per share, for the first 9 months of 2012. Our utility continues to grow at an annual rate that surpasses national peer averages, and our nonutility on-site energy projects continue to be profitable. However, our Wholesale business saw significant impacts from pipeline capacity constraints, which included margins on certain gas supply and delivery contracts. These impacts were the main contributor to the loss posted for the third quarter. We will discuss this situation in greater detail during this call. But first, let's look at the details related to South Jersey Gas. Third quarter of 2013, SJG grew its bottom line, posting net income of $900,000 compared to $500,000 in the third quarter of last year. On a year-to-date basis, the utility posted net income of $40.3 million as compared with $38.8 million last year. Third quarter saw an incremental $500,000 net income benefit from investments under our accelerated infrastructure programs versus the same period in 2012. The income benefit of these programs was recognized as AFUDC for the first 9 months of 2013. However, all investments made under our previous accelerated infrastructure programs were completely rolled into rate base as of October 1, and will be reflected as operating margin going forward. Accelerated infrastructure investments made this year through our current air program will continue to be reflected as AFUDC until rolled into base rates as part of a base rate case. During the first 9 months of 2013, we invested approximately $30 million under our Accelerated Infrastructure Replacement Program. We anticipate spending an incremental $5.2 million under the program by the end of this year. Investment from all of our accelerated infrastructure investment programs is expected to produce an incremental net income of $2.3 million over the prior year. Gas company has continued to focus on system safety and reliability in the years since Super Storm Sandy hit New Jersey. In September, at the request of the BPU, we filed a petition for a program that will complement our existing Accelerated Infrastructure Replacement plan. A new Storm Hardening and Reliability Program, or SHARP, proposes a $280 million investment over 7 years. The program will replace the lower operating pressure distribution system along the barrier islands with higher pressure systems, which are less susceptible to water and sand intrusion. If approved as proposed, the program will extend our ability to make and earn on system reliability investments through 2021. Moving on to customer additions. For the 12-month period ended September 2013, utility added over 4,800 net customers. This increase of nearly 1.4% to over 359,000 customers outpaces the national average of our peers as most recently reported by the American Gas Association. In total, our projected net customer growth for 2013 adds roughly $1.7 million in incremental net margin on an annualized basis. Going forward, we expect to continue adding customers at a brisk pace, as costs for heating with natural gas remain $0.60 to $0.70 below the cost of heating with propane, oil or electric. Now let's review the details of our nonutility businesses. These businesses posted a combined Economic Earnings loss of $2.1 million in the third quarter of 2013, as compared with Economic Earnings of $3.5 million in the third quarter of 2012. The year-to-date basis in nonutility operations produced $16.9 million in Economic Earnings versus $23.9 million in the first 9 months of 2012. We [ph] group our nonutility activities in 2 business segments

[Edward J. Graham:]

Thanks, Dave. As we look toward the future for SJI, we remain very confident in the framework we've developed for the success of each of our business lines. At our utility, we have made significant investments over the last 3 years in our gas distribution system that will enhance our ability to serve our territory, and technology improvements that will only increase the efficiency of our businesses going forward. On the nonutility side, as Dave noted previously, our Retail Energy project business continues to drive earnings as we develop and bring online additional on-site energy and solar generation projects. While our Wholesale commodity business has encountered some challenges this year, we expect to begin capitalizing on the additional capacity we procured as of November 1 and seeing improvements from some of the restructuring of contracts we have renegotiated to better protect margins. As we realign the future focus of this business away from capturing spreads on natural gas purchase and sales prices toward our growth as a leading provider of fuel management and supply services, we are confident in the long-term contributions this business can make to SJI. However, due to the challenges that we have seen year-to-date, we are guiding to the low end of our previously issued guidance range of 4% to 8%. We continue to pursue the opportunities that will propel our future earnings growth, and I'd like to take a few minutes to discuss those opportunities. Beginning with utility, which remains the core of our business, we expect to continue making and earning on system and infrastructure improvements for the foreseeable future. As we observed the 1-year anniversary of Super Storm Sandy just a few weeks ago, we were reminded of the state's continuing focus on ensuring that we are better prepared for and protected from future severe weather threats. For South Jersey Gas, the opportunities are twofold

[Operator:]

[Operator Instructions] The first question comes from the line of Spencer Joyce, Hilliard Lyons.

[Spencer E. Joyce:]

Just one quick point, I wanted to touch on guidance first. Should we be thinking about the lower end, 4%, as still a lower bound on what we will see this year? Or should we be thinking of that as more of a midpoint at this point?

[David A. Kindlick:]

I guess, in terms of guidance, we really hadn't thought about constructing a range around that number. And I think based on our current best information, we think we're in that ballpark right now, around 4%. So I hadn't really thought of establishing a new range in any way.

[Spencer E. Joyce:]

Okay, fair enough. On the Wholesale side, it looks like this quarter was somewhat weak, but you all have made some managerial changes around that or some moves there. Potentially looking out to next year, should the environment stay the same, the low/nonvolatile gas cost, how much rebound should we be thinking about next year, sort of giving those macro parameters unchanged?

[Edward J. Graham:]

As we look at Wholesale next year, we haven't really provided guidance as far as how we expect SJI or its companies to perform. We feel confident in the steps we've taken that are positioning us better, but still, it's a changing environment. So I don't want to speculate on what might happen next year, but I can tell you that we've taken some great steps in terms of adding capacity or changing some of our contractual arrangements. And the other positive effect that's happened as of this -- or this November is some significant capacity coming online on multiple pipes that are bringing gas to where the demand is, where in the past, even where there was adequate capacity, it wasn't necessarily getting to demand pockets in the shoulder months. So at this point, we don't have new guidance as to what next year will look like, but I think we've taken some great steps. In the long run, the capacity we've added will be invaluable, I think, down the road.

[Operator:]

[Operator Instructions] With no further questions at this time, we'll turn the call over to Mr. Ed Graham for closing remarks. Please proceed, sir.

[Edward J. Graham:]

Well, thank you. And at this point, if there's no other questions, I still want to refer to you the opportunity to send questions or call us after the call. And so if anything arises, please contact Marissa Travaline, our General Manager of Investor Relations, or Ann Anthony, our Director of Finance and Investor Relations. Marissa can be reached at area code [phone] extension 4227, 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:]

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