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South Jersey Industries (NYSE:SJI)

Q2 2014 Earnings Call

August 06, 2014 2:00 pm ET


Ann T. Anthony - Treasurer

Stephen H. Clark - Chief Financial Officer and Treasurer

Michael J. Renna - President, Chief Operating Officer and Director

Edward J. Graham - Chairman, Chief Executive Officer and Chairman of Executive Committee


Spencer E. Joyce - Hilliard Lyons, Research Division


Good day, ladies and gentlemen, and welcome to the Q2 2014 South Jersey Industries Earnings Conference Call. My name is Whitley, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the conference over to your host for today, Ms. Ann Anthony, Treasurer for South Jersey Industries. Please proceed.

Ann T. Anthony

Thank you. Good afternoon, and welcome to the conference call for South Jersey Industries' second quarter fiscal 2014 results.

I'm Ann Anthony, Treasurer for South Jersey Industries, and I'm joined today by our senior management team, including Ed Graham, Chairman and CEO; Steve Clark, CFO; Mike Renna, President and Chief Operating Officer for SJI; Jeff DuBois, President of South Jersey Gas; and Marissa Travaline, our General Manager of Investor Relations.

We issued a news release this morning announcing the results we will be discussing on the call today. The news release includes an in-depth review of earnings on both a GAAP and non-GAAP basis, using our non-GAAP measure of Economic Earnings. You can access that release on our website at in the Newsroom section.

Please note that throughout the course of this 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 discussed 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 today's statements should actual events differ from expectations.

With that said, I'd like to turn the call over to our CFO, Steve Clark, to present our year-to-date and second quarter 2014 results.

Stephen H. Clark

Thank you, Ann. And thanks, everyone, for joining us today. Today, we will present results framed in the context of our 2 major business segments: utility results from South Jersey Gas and non-utility results from the South Jersey Energy Solutions. Additionally, within our non-utility, we will discuss the performance of our 2 business lines, South Jersey Energy Group and South Jersey Energy Services.

Across our businesses, the measure we use to assess SJI's performance is Economic Earnings, this measure eliminates all unrealized gains and losses on commodity and on the ineffective portion of interest rate derivative transactions. It also adjusts for realized gains and losses attributed to hedges on inventory transactions, and for the impact of transactions for contractual arrangements where the true economic impact will be realized in a future period.

The first 6 months of 2014 Economic Earnings totaled $76.2 million or $2.31 per share, up over 30% from Economic Earnings of $58.3 million and $1.83 per share for the same period in 2013. For the second quarter 2014, income from continuing operations on an Economic Earnings basis was $10 million or $0.30 per share as compared with income of $9.9 million or $0.31 per share for the same period last year.

Now I'll move through some of the components that produced that performance. Utility earnings for the first half of 2014 were up 5% at $41.5 million versus $39.3 million in 2013. For the second quarter of this year net income was $3.8 million, matching the $3.8 million contributed in the second quarter of 2013.

Infrastructure investment remains the key driver of utility earnings, with solid customer growth continuing to round out earnings year-to-date. As is typically the case in the second quarter, infrastructure investment picked up speed as the warmer weather permitted increased construction activities. Through June 30, investments made within our AIRP totaled $16.1 million, bringing us near to the halfway point of targeted investment for the year.

These investments are expected to generate incremental net income of $2 million on a full year basis for 2014. Customer growth also remains an engine of growth for the utility, as we continued converting homes and businesses within our service territory to natural gas from other heating fuel sources, like propane, electric and oil. Those conversions are saving customers as much as 74% when they switch to natural gas. For the 12-month period ending June 30, 2014, utility added over 4,000 customers. Additionally, on a year-to-date basis, we have added 2,600 of our targeted 6,500 conversions for the year. In total, customer growth is expected to add approximately $1.7 million of incremental net income on an annualized basis for all of 2014.

I do want to take a moment to make a point about Atlantic City, since it has been in the news a lot recently, with 3 casinos announcing plans to close or sell. While we are certainly sympathetic to the families who will feel the impact of these events, we anticipate no material impacts to the performance of South Jersey Gas now or in the future from them. We remain hopeful that Atlantic City will once again grow and thrive. However, from a purely financial standpoint, we are strategically prepared for its current economic environment.

Now taking a look at our nonutility results. The 2 areas of this business, Energy Group and Energy Services, have performed very strongly year-to-date, adding Economic Earnings of $34.7 million, as compared to $18.8 million for the first half of 2013. For the quarter their total contribution was $6.02 million, as compared with $5.9 million in the second quarter of 2013.

As you may recall, 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 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-to-energy generation projects, as well as those from our smaller HVAC and meter reading subsidiaries.

For the year-to-date, South Jersey Energy Group contributed $13.9 million to SJI's bottom line, as compared with $400,000 in 2013. In the current quarter, South Jersey Energy Group experienced a loss of $4.3 million in Economic Earnings in the quarter, as compared to a loss of $1.7 million in the second quarter of 2013.

The current quarter's loss resulted largely from demand and capacity charges associated with the same pipeline capacity and transportation that created tremendous upside for this business in the first quarter. We also saw negative impacts on certain gas supply contracts due to pipeline capacity constraints.

Mike will provide greater detail on the wholesale and retail performance from this business line later in the call, but we remain confident in the positive impact this business line we have on full year results. Additionally, we expect to see contributions from this business begin to normalize as fuel supply contracts commence and we move away from strategy, previously focused on capturing the value between summer and winter price differentials.

South Jersey Energy Services contributed $20.8 million to Economic Earnings for the first half of the year, versus an $18.4 million contribution in the prior year. For the quarter, South Jersey Energy Services produced $10.5 million in Economic Earnings as compared to $7.6 million in the same period last year. Of note, significant improvements in solar operating performance produced positive net income for the quarter. This performance is indicative of the longer-term potential for our solar business, which we have discussed with you on prior calls.

SREC prices continuing to strengthen and production from our 41 active facilities at or near peak, second quarter 2014 earnings from solar were $9.8 million as compared with $5.9 million in the prior-year period. Although these projects are front-end loaded with the ITC benefit, which added $9.6 million for the quarter versus $6.9 million for the same period last year, they're designed to provide a long term income stream, and recent performance reinforces those expectations.

Our CHP portfolio remains strong, as operating performance there drives repeatable earnings year-over-year. For the first half of 2014, CHP contributed $4.9 million in Economic Earnings as compared to $3.6 million for the same period last year. For the second quarter, CHP contributed $1.5 million as compared to $1.6 million for the second quarter of 2013.

As I alluded to earlier, the Revel Resort in Atlantic City has put itself up for sale. Energenic, our energy project's joint venture, owns and operates the energy facilities that serve Revel. An auction is expected to occur at the end of the week to facilitate the sale of Revel, and we anticipate that the property will continue to operate under new ownership. As an essential service provider to the property, I want to emphasize that we fully expect to continue providing Energy Services to the new owner.

Finally, before I turn the call over to Mike, I'll provide a brief update on the balance sheet. As noted in the release, our quarter-end equity-to-cap ratio was 44%, as compared to 46% in the prior-year period. While we continue to make significant infrastructure and energy and project investments, increased working capital demands associated with extremely cold winter accounted for most of the change. I do want to note SJI's strong liquidity position, as SJI closed on the first tranche of a $240 million private placement to be used to pay down short-term debt and SJG established a $200 million bank term facility, under which term loan drawings can be made through January of 2016.

Our goal remains for SJI's equity-to-capital-ratio to average 50% on an annualized basis for dividend reinvestment and optional cash purchases. Within our dividend reinvestment plan, SJI raised equity capital of $17.1 million through June 30, with additional equity expected to be raised in 2014 for the plan. As we've noted previously, the impacts of this equity are already reflected in the guidance we've provided.

Now I'll turn the call over to Mike, to detail what we expect from the remainder of 2014.

Michael J. Renna

Thanks, Steve. Good afternoon. Our year-to-date performance has us well positioned to achieve the upper end of the 6% to 12% Economic Earnings per share growth we've targeted for 2014. Longer-term, we fully expect to achieve our targeted average annual Economic Earnings growth of 6% to 7% well into the future. From significant investments in our system, to initiatives promoting the use of clean, inexpensive natural gas over alternative fossil fuels, our utility is poised to deliver exceptional service to our customers and growth to our shareholders over the next 3 to 5 years.

Within our nonutility, the diversity in our energy production assets and our expanding portfolio of fuel supplied management contracts have us well positioned for success as the future of our region's energy needs evolves. Beginning with South Jersey Gas, year-over-year customer growth remains strong, this 1.1% increase is representative of market conditions that support conversion to natural gas and outreach efforts to educate customers about its benefits.

In the second half of this year, we expect to dramatically improve our customer prospecting to access and to enhance demographic information. They're also establishing a dedicated call center that will accelerate and simplify the conversion process for customers.

Additionally, we continue to regularly provide customers with conservation information or Conservation Incentive Program. On May 21, South Jersey Gas received approval from the state's Board of Public Utilities to continue this outreach, as they made our CIP program permanent. The CIP enables South Jersey Gas to encourage conservation, while protecting the utility from the financial impact of reduced sales volumes.

[indiscernible] natural gas technology also remains a long-term growth driver for South Jersey Gas. This progress continues on our pilot project with Wawa. We are very -- we are also very pleased to have just brought online a new station with a dedicated fleet of customers. So the fourth station did help to develop in our service area. We are excited by the prospect of helping to mainstream CNG fueling infrastructure, expand the base of potential customers who can access it.

Also driving our growth is considerable infrastructure investment focused on improving the safety of our system and the reliability of our service. Year-to-date, we remain on track to complete full-year accelerated infrastructure investments under our AIRP program of $35.3 million. Based on the timing of investments and subsequent recovery, we expect these investments to generate incremental net income of $2 million for 2014.

Additionally, we continue the targeted replacement of lower pressure distribution lines along the barrier islands, consistent with our SHARP filing, currently under review by the Board of Public Utilities. Settlement discussions are underway, consistent with programs approved for other utilities in New Jersey. We expect to have approval for a multi-year program this fall, with investments in the range of $30 million to $40 million per year, a significant contribution to net income beginning in 2015.

Finally, as noted in our earnings release earlier this morning, we're enjoying very productive settlement discussions around our base rate case, and are consistent with our previously expressed expectations. We remain optimistic about the settlement in time -- about settlement in time to benefit fourth quarter results.

Rounding out our utility priorities for 2014 is the development of a pipeline to serve the BL England generating facility and reinforce our natural gas distribution system, both of which have broad support from key stakeholders. Recent recommendations from PJM indicate $144 million in necessary electric transmission upgrades, largely within the Pinelands, if BL England shuts down.

Additionally, New Jersey DEP recently provided an extension of this facility's operating permit to allow coal-fired electric generation to continue, in order to meet the region's electric needs. We believe these recent developments underscore the need for swift action to move towards a more viable and environmentally responsible long-term alternative of natural gas.

Looking across our non-utility businesses for the remainder of 2014, the first quarter gains made in our wholesale commodity business will help support full year targeted earnings contributions from the nonutility. And on the current year, transportation capacity we have acquired will be vital to the continued growth of our fuel supply management portfolio, serving the gas-fired generation market. To this end, the LS Power facility we are contracted to serve is commencing commercial operation in the third quarter. We expect to announce very soon a new contract to manage Marcellus' supply, a merchant generating plant in the mid-Atlantic.

These facilities -- as the facilities these contracts serve come online over the next 3 years, the multi-year fee-based stream of income they provide help reinforce longer-term expectations of a more utility-like earnings profile within our nonutility business.

Within our retail commodity business, we still see an opportunity to grow customers and improve margins. Our New England and Pennsylvania businesses have outperformed prior year results significantly. We remain optimistic about growth there in particular. Shifting our discussion to South Jersey Energy services, the CH portfolio remains a key priority for SJI. The long term nature of the contracts associated with these projects helps add stability to non-utility earnings. The potential to contract for the addition of several new projects in 2014, we remain very bullish on the prospects of this business line. Also, as we highlighted in our release, Energenic remains an active party to discussions around the Revel bankruptcy filing. We expect these assets to remain a valuable part of our portfolio and the resort's future success.

Finally, solar development remains a key driver for earnings. In addition to the solar ITC that contributed $20 million for the first half of the year, we are seeing significantly improved solar operating performance. Vying with the anticipated operating improvements at our Nevada landfill generation site, our renewable business could see considerable earnings growth in the coming year from existing assets, as well as from the addition of new solar projects.

Strengthening SRECs, lower project development costs and a rich queue of available projects continue to make this an attractive market for us, even with an eye toward the potential expiration of the 30% ITC credit at the end of 2016.

Depending upon the development timeline of certain projects, we can see as much as $16 million in additional ITC from planned projects, which could impact 2014 or 2015. All the initiatives I've discussed represent both near and longer-term drivers of growth in the nonutility. Our ability to use our experience, relationships and strong capital position to take advantage of valuable opportunities in the energy sector has us well positioned for continuing the significant growth we've experienced over the last 10 years.

I'll turn the call over to Ed.

Edward J. Graham

Thanks, Mike. Before we open the line for questions, I would like to highlight a few areas of our performance that I expect to have a significant long-term impact on our business.

Record capital investment by our utility over the next few years underscores our commitment to reinforcing our infrastructure towards safety and reliability of our service, all of which will also serve to continue to meet that exceptional growth we expect in terms of financial performance.

As natural gas continues to be our nation's most valuable natural resource, we expect it to support growth throughout all of our businesses. It is this diversity and our strategic planning and this type of layering of opportunities that I see driving us to achieve Economic Earnings per share growth in 2014, in line with the upper end of our 6% to 12% guidance, as well as looking longer-term at averaging EPS growth targeted at 6% to 7%.

So with that said, I'd like to turn the call back over to the operator for the question-and-answer portion.

Question-and-Answer Session


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

Spencer E. Joyce - Hilliard Lyons, Research Division

Steve, just a quick one for you here. Saw the announcements on the $240 million in debt that we're looking to take down this year. And my only question is, is any of that going to go to retire any outstanding issues or tranches, other than issues that maybe maturing in '14 or '15? Or is that full amount going to be a net addition?

Stephen H. Clark

We looked at -- we do plan, as we look out, Spencer, we have some money coming due in -- at the end of the first quarter next year. So this is kind of factored into our expectations of addressing that money coming due. In the interim, we do, as we draw that down, we'll just pay down short-term debt with that.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. One other question. You mentioned working capital having some lingering effects from the winter on the cap structure and kind of the cash flow situation. I would have thought that a lot of that would have unwound kind of here during the second quarter, April, May, June. Can you kind of walk us through what is still lingering from the winter that may be impacting working capital?

Stephen H. Clark

Spencer, you're absolutely right. Normally you would -- in a typical situation, you would expect to see that unwind in that quarter. However, remember because of the way utility set rates and the way we set prices for what our customers are paying for their gas during a particular period -- or actually during a year, as a result of gas prices going up during the course of the winter, that clearly wasn't built into those rates. So back in, I believe, it was the end of the May, we filed for a new BGSS rate, which will go into place as of October 1. It will start addressing the fact we haven't collected the cash that's associated with those sales that occurred last winter. So in the utility model, you do get an overhang until the rates get adjusted to reflect that.


[Operator Instructions] There are no further questions in queue. I will now turn the call back to Ed Graham for closing remarks.

Edward J. Graham

Well, again, I'm so pleased that you were able to join us today, but if there are questions that arise later, please contact Marissa Travaline, our General Manager of Investor Relations or Ann Anthony, our Treasurer. And to reach Marissa, she may be reached at (609) 561-9000, extension 4227, or by e-mail at Ann can be reached at extension 4143, or by e-mail at

So again, thank you for joining us today, and have a nice rest of the week.


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

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