South Jersey Industries, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q3 2014 South Jersey Industries Earnings Conference Call with Marissa Travaline. My name is Marie, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. But now, I'd like to hand over to Marissa Travaline, General Manager, Investor Relations. Please proceed.

[Marissa Brooks Travaline:]

Thank you, Marie. Good morning, and welcome to the conference call for SJI's Third Quarter Fiscal 2014 Results. Again, I'm Marissa Travaline, General Manager of Investor Relations for SJI. I'm joined today by Ed Graham, Chairman and CEO; Steve Clark, our CFO; Mike Renna, President and COO for SJI; and Jeff DuBois, President of South Jersey Gas. As you may know, we issued a news release this morning announcing the results that we'll be discussing today on the call. That release includes an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of Economic Earnings. This measure eliminates all unrealized gains and losses on commodities and on the ineffective portion of interest rate derivative transactions. It also adjusts for realized gains and losses attributed to hedges on inventory transactions, for the impact of transactions or contractual arrangements where the true economic impact will be realized in the future period. The news release is currently available on our website at www.sjindustries.com, in the Newsroom section. Throughout today's call, we will be making references to 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 future results may differ materially from those indicated by these statements as a result of various important factors, including those we discuss in the company's Form 10-K on file with the SEC, as well as the most recently filed form 10-Q. We assume no duty to update these statements should actually events differ from expectations. That said, I'd like to turn the call over to our CFO, Steve Clark, to present our year-to-date and third quarter 2014 results.

[Stephen H. Clark:]

Thank you, Marissa. Good morning to everyone on the call and thanks for joining us. Today, we will discuss results framed in the context of our 2 business segments, utility results from South Jersey Gas and nonutility results from South Jersey Energy Solutions. Additionally, within our nonutility, we will discuss the performance of our 2 primary business lines, South Jersey Energy Services and South Jersey Energy Group. As Marissa noted, the measure we use to assess SGI's performance across all business lines is Economic Earnings. For the first 9 months of 2014, Economic Earnings continue to reflect the strength of our first quarter at $72.8 million or $2.20 per share, up from Economic Earnings of $57.2 million at $1.79 per share for the same period in 2013. For the third quarter 2014, we experienced a loss of $3.4 million in income from continuing operations on an Economic Earnings basis or a loss of $0.10 per share. For the same period in 2013, SJI experienced a loss of $1.1 million in income from continuing operations on an Economic Earnings basis, which resulted in a loss of $0.04 per share. Excluding the reserve we recorded related to our Energy Service to Revel in Atlantic City, Economic Earnings per share would have been $2.27 year-to-date with a $0.04 loss for the quarter. I'll touch on that more in a moment as I review performance within our business lines. Starting with the gas utility, utility earnings for the first 3 quarters of 2014 were up 5.2% to $42.4 million as compared with $40.3 million for the same period in 2013. For the quarter, net income was relatively flat at $974,000 as compared with $949,000 for the third quarter of 2013. Infrastructure investment and customer growth remain the key drivers of utility earnings to date, as the third quarter does not reflect any impacts from the base rate case that we settled effective October 1. When we look at infrastructure spending, in the first quarter, we experienced some tough weather conditions that put us a little bit behind in our construction activity, but as of the end of the third quarter, we've caught up. Through September 30, investments made within our AIRP totaled $26.6 million and are tracking to meet our investment target of $35.3 million for 2014. These investments are expected to generate incremental net income of $2 million on a full year basis for 2014. Strong customer growth also continues driving our regulated utility success as our year-over-year customer count for September 30 reflects an increase of 3,641 customers are the total for September 30, 2013. This also seems like an appropriate time to underscore some information regarding the current conditions in Atlantic City. For those of you who may not live as near to Atlantic City as we do and rely on national media for information about its condition, it's very easy to perceive a picture of dire circumstances and to interpret the news as having severe implications on our utility customer base. However, I'd like to try to help provide a clearer picture of the situation and its true impacts for our utility. First, the total number of individuals employed by the 3 casinos that ceased operations over the summer, Revel, Showboat and Trump Plaza, is approximately 6,100 according to a report issued by the Richard Stockton College of New Jersey. With the sale of the Revel property in October, we expect that at least this property will resume operation, ultimately reducing the number of workers impacted by the initial closings. We would also expect the other 2 properties to be repurposed in time. However, to provide a frame of reference, direct impact to South Jersey Gas if all 3 of these properties would remain closed would be under $0.25 million. We remain optimistic that although the near-term impacts will be significant for many individuals, the longer-term implications of rightsizing the Atlantic City casino gambling market will stabilize the market and the city's future. In either case, we see the direct and indirect impacts to our utility is negligible and we believe that regular growth in other areas of our service territory will more than offset any customer impacts we may ultimately experience from the casino closures we saw this year. To this end, we continue adding our conversion customers on pace to exceed 6,000 conversions for the year, our highest total ever. Our forecasted customer growth is expected to add approximately $1.7 million in incremental net income on an annualized basis. We support -- with support from low natural gas prices that provide cost savings to customers of as much as 70% versus heating with alternatives, we look forward to continuing growth for the foreseeable future. Now I'd like to discuss our nonutility results. Through the first 9 months of 2014, our nonutility businesses added Economic Earnings of $30.4 million as compared to $16.8 million for the first 9 months of 2013. For the quarter, the nonutility businesses combined for a loss of $4.4 million as compared with a loss of $2 million in the third quarter 2013. Now let's look at the 2 business lines that encompass our nonutility activities. As you'll likely recall, South Jersey Energy Services largely reflects our energy production assets within Marina Energy and our joint venture, Energenic. This includes bottom line impacts from our CHP and thermal facilities, and solar and landfill gas energy generation projects as well as those from our smaller HVAC and meter reading subsidiaries. South Jersey Energy Group reflects our activities related to the supply, storage and transportation of natural gas in and around the Marcellus. This includes our retail and wholesale commodity business lines as well as our royalty rights on shale acreage. South Jersey Energy Services contributed $21.5 million for the first 9 months of the year, matching the same period in the prior year. For the quarter, South Jersey Energy Services added 800,000 as compared to $3.1 million for the third quarter 2013. As I just mentioned, included within this business are contributions from our Energenic subsidiary, which houses our interest as the owner and operator of the cogeneration of thermal facilities at the Revel property. Reflective within the results of the third quarter is reserve against potential bottom line impacts the Revel bankruptcy may have on our energy facility located there. Energy Services recorded a loss of $3 million to reflect that action. We remain, however, an active party to negotiations with the new buyer and are optimistic that buyer will be able to successfully operate the casino and hotel facility. Despite the impacts of this activity, the overall operations of this business remain strong for the quarter, with contributions from both the CHP and solar seismic business. While contributions from our CHP portfolio were mitigated by the reserve taken for Revel, our other properties continue to perform as expected. For the quarter, this business line produced a loss of $2.2 million as compared to income of $1.9 million for the same period last year, obviously including the reserve. Within our renewable portfolio, target of solar development continues to boost energy services earnings as we add solar projects poised for both short and long-term profitability. Solar operating performance continued to improve in the third quarter, driven by improved SREC values and lower project development costs. Losses at some of our landfills have eroded a portion of our renewable earnings. However, we continue to work on operational issues that we expect will result in improved performance there over the long run. Our solar business provided Economic Earnings for this quarter of $3.5 million and reflected a like amount of ITC. For the third quarter of 2013, solar provided $1.5 million in Economic Earnings that included a $2.5 million benefit from Solar ITC. Through September 30, Solar ITC totaled $23.6 million for 2014 as compared with $20.1 million for the first 9 months of 2013 and we remain on schedule to record total ITC contributions for the year at or below the total recorded in 2013. Within the commodity segment of our business, South Jersey Energy Group's Economic Earnings for the first 9 months of the year remain significantly higher than the prior year at $8.8 million for 2014 versus a loss of $4.7 million for the first 9 months of 2013. In the current quarter, South Jersey Energy Group experienced a loss of $5.1 million in Economic Earnings, results that are consistent with the solar loss in the prior year. While we are redirecting this business towards the niche market of fuel supply management, we also continue taking steps to mitigate the residual impacts of some pipeline capacity constraints on certain older gas supply contracts. We remain focused on the longer-term potential for this business as fuel supply contracts commence and we expect to see full year 2014 results and begin to set the baseline for the positive net income impacts we expect this business to maintain. Finally, I'll provide a brief update on the balance sheet before turning the call over to Mike. As noted in the release, our quarter-end equity to cap ratio was 43% as compared to 44% in the prior-year period. Higher debt levels resulted from increased working capital requirements that were driven by deferred cost for higher natural gas prices that we purchased during the extreme cold of the last winter, as well as by infrastructure investments across the business. SJG began collecting this $50 million under recovery associated with those deferred gas costs through rates on October 1, with full collection to occur over a 2-year period. Our goal remains to ensure strong balance sheet for SJI. Through dividend reinvestment and optional cash purchases within our dividend reinvestment plan, SJI raised equity capital of $29.1 million through September 30, with additional equity expected to be raised in 2014 through the plan. As we noted previously, the impacts of this equity are already reflected in the guidance we provided. Now I'll turn the call over to Mike to provide some more detail on the opportunities we see for our business in the near term.

[Michael J. Renna:]

Thanks, Steve. Good morning. As we start to look out at the different pieces of our business, we are encouraged by the diversity of opportunities in front of us. Opportunities afforded by a strong reputation and a proven track record of success. Opportunities that complement the customer growth and infrastructure investments that are at the core of our regulated business. Natural gas saving as much as 70% versus other heating alternatives and a comprehensive conversion outreach plan that simplifies the process for applicants, we expect to continue adding utility customers at a brisk pace well into the future. This growth opportunity is amplified by the infrastructure investments that, in addition to providing an immediate return, also served to increase the number of households on or near our means. As you may know, we also settled a base rate case on September 30. $11.2 million of incremental income allowed through base rates covers the significant investments South Jersey Gas made to improve the safety and reliability of our system, as well as to improve customer interactions both in the field and within our Holsum [ph] based call center. Last of our major utility initiatives is a pipeline to serve the [indiscernible] generating facility and reinforce our natural gas distributions. As we continue our analysis of the most cost-effective and environmentally responsible way to implement this much needed project, we are encouraged by the broad support the project has received and we expect to see additional progress through year's end. On the unregulated side of our business, transportation capacity that we acquired throughout 2012 and 2013 supported significant gains in the first quarter and is expected to benefit this upcoming winter's heating season as well. We'll also support our fuel supply management portfolio into the gas-fired generation market, including the LS power facility that came online during the third quarter. Under a 15-year contract, we will begin -- we will be delivering 36,000 decatherms per day at this 738 megawatt New Jersey-based facility. After this, 2 additional multiyear contracts supplying up to 137,000 decatherms per day at the Panda Liberty and Panda Patriot plants in Pennsylvania, as well as 2 contracts pending announcement in the coming months. And it's clear why we have such confidence in the future of this business. Switching to South Jersey Energy Services, CHP and solar development remain key priorities for this business. Both have proven to be significant contributors to SJI and we are committed to targeting projects that will reinforce the longer-term benefits of on-site and distributor generation. While the lead time required to develop a CHP project is substantial, each new facility can contribute significantly to the bottom line. With a strong queue of potential projects in our region and a track record of success serving customers such as Borgata Atlantic City, downtown Hartford, as well as Montclair University, we expect continued success from our CHP system. Finally, as Steve mentioned, solar development remains a key contributor to our energy services business. Strengthening SRECs, lower project development costs and a rich queue of projects make this an attractive market for us as we weigh the potential expiration of the 30% ITC credit at the end of 2016. We'll continue to drive SJI's performance on the investments we've made at the core of our organization to keep us well-positioned to pursue opportunities as we navigate the energy environment. I am confident you will continue to see us capitalize on opportunity and continue the record of growth we've demonstrated over the last 10 years. Thanks. And now, I'll turn the call over to Ed.

[Edward J. Graham:]

Thanks, Mike. Before we move to the question-and-answer portion of our call, I'd like to take a few minutes to highlight the key items that will help drive us through our growth goals, averaging long-term annual economic growth per share of at least 6% to 7%. At South Jersey Gas, we will grow the company by taking advantage of our premium product, natural gas, to convert customers from other fuels and develop a CNG market, as well as to continue to invest in our infrastructure through our AIRP and SHARP programs and the pipeline [indiscernible]. Within our non-utility, we have work to minimize risk and establish reliable and repeatable earnings streams that are the foundation of long-term growth. In our commodity business, we'll grow our portfolio of long-term supply, fuel supply contracts, as well as capitalize on our pipeline capacity and energy production assets. Within our energy services businesses, we are maintaining a diverse portfolio of assets from CHP and thermal facilities to fuel cells and targeted commercial solar development. One major growth initiative on a regulated side of SJI that will support our growth, comes from the formation of SJI Midstream, which will house our investment in the PennEast Pipeline project. Our $200 million investment will yield a FERC level return and will enable us to significantly add to our regulated income contribution as we reduce our solar investments. Opportunities like the PennEast Pipeline will drive us toward the earnings growth goals we set for the near and longer term, and we intend to keep our business well positioned to capitalize on these opportunities. With that said, I'll turn the call back over to the operator for the question-and-answer portion.

[Operator:]

[Operator Instructions] And we have our first question, and it comes from the line of Spencer Joyce from Hilliard Lyons.

[Spencer E. Joyce:]

Steve, just a quick one for you. Did I hear you mention in your prepared remarks what the combined net income impact from the casinos, the 3 big casinos there in Atlantic City, would be if they were to go to totally a 0 base. Did I hear a $250,000?

[Stephen H. Clark:]

Yes, it was less than $0.25 million of net income to the utility.

[Spencer E. Joyce:]

Okay. Fantastic. Yes, that's a good number to get out there. I've heard some larger, somewhat crazy numbers almost, but great, I just wanted to make sure I heard that correctly.

[Operator:]

[Operator Instructions] And we have another question and it comes from the line of Brian Minit [indiscernible].

[Unknown Analyst:]

Quick question. Ed, you touched on it briefly in your comments a moment ago about solar investments and they're going to be waning in the future. Can you kind of talk about your thoughts behind solar? A lot of firms have been monetizing that asset in a very attractive way and just kind of your views on solar as it goes forward as you can deploy capital elsewhere?

[Edward J. Graham:]

Sure. I thought -- our thought process is as we move towards 2017 when they're no longer offering 30% investment tax price, but rather 10%, that our investment will decline in that direction and the thought process is we'll have major regulated income coming from SJI Midstream, as well as probably at that point, another South Jersey Gas company and rate case, so we see a lot more regulated growth offsetting any decline in solar contribution. We also see, after the initial recognition of investment tax credit, the SREC market is continuing to strengthen and it actually will grow our -- the contribution from operations from solar. As far as interest where there are a number of people like us getting in -- structuring these deals as yield goes, we certainly would entertain anyone's interest over time if it made economic sense for us to sell projects, but we have not ourselves contemplated forming a yield co within our organization. But we're finding, not only with solar projects or renewable projects, there's a great deal of interest in value in CHP and thermal as well. The multiples on those continue to grow.

[Operator:]

And now, I'd like to turn the call back over to Ed.

[Edward J. Graham:]

Well, thank you. If there are no further questions, please feel free to contact Marissa Travaline, our General Manager of Investor Relations or Ann Anthony, our Treasurer, if you have further questions or comments. Marissa can be reached at [phone], extension 4227 or by email at [e-mail]. Ann can be reached at extension 4143 or by email at [e-mail]. And again, thank you for joining us today on the call and have a great weekend.

[Operator:]

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us and you may now all disconnect. Thank you.