South Jersey Industries' (SJI) CEO Steve Clark on Q2 2016 Results - Earnings Call Transcript

| About: South Jersey (SJI)

South Jersey Industries, Inc. (NYSE:SJI)

Q2 2016 Earnings Conference Call

August 05, 2016, 11:00 ET

Executives

Marissa Travaline - Director, IR

Steve Clark - CFO

Mike Renna - President & CEO

Greg Nuzzo - SVP

Analysts

Chris Ellinghaus - Williams Capital Group

Stephen D'Ambrisi - Castleton Investment Management

Spencer Joyce - Hilliard Lyons

Operator

Welcome to the Second Quarter 2016 South Jersey Industries Earnings Conference Call. My name is to Tawanda and I will be your coordinator for today. [Operator Instructions]. I would now like to turn the conference over to Marissa Travaline, Director, Investor Relations. Please proceed.

Marissa Travaline

Thank you. Good morning, everyone and thanks for joining us as we review South Jersey Industries second quarter results for FY16 and provide an update on our business. Joining me to present on the call today are Mike Renna, President and CEO of SJI; and Steve Clark, our CFO. We also have several additional members of our senior management team available today to help address any questions you may have following our prepared comments. Earnings release was issued to the media yesterday after the market closed. It is also available on our website at www.sjindustries.com.

The release and the associated 10-Q both provide an in-depth review of earnings on a GAAP and non-GAAP basis, using our non-GAAP measure of economic earnings. Reconciliations of economic earnings to the comparable GAAP measures appear in both documents.

Let me note that throughout today's call we'll be making references to future expectations, plans and opportunities for SJI. 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 forms 10-K and 10-Q on file with the SEC. With that said, I'll now turn the call over to our CFO, Steve Clark, to detail our year-to-date and second quarter results.

Steve Clark

Thanks, Marissa. Good morning to everyone on the call and thank you for joining us. Let me begin by highlighting that within our earnings release issued prior to this call, you'll find detailed information regarding GAAP earnings. I would encourage you to review that information at your leisure. For purposes of this call, however, we will focus our discussion on economic earnings, as management believes that this measure provides valuable insight into the performance of our business. SJI's year-to-date economic earnings were $65.7 million as compared with earnings of $60.8 million for the first half of 2015. Economic EPS for the first six months of 2016 matched the same period in the prior-year at $0.89.

You will recall that the secondary equity offering we executed in May resulted in the issuance of just over 8 million additional shares in the current year. Since per-share performance is calculated based upon average shares outstanding for the period, that issuances impacted the year-to-date comparison and the quarterly comparison even more so. For the second quarter of 2016, economic earnings were $8.7 million with economic EPS of $0.12 as compared with $1.9 million and $0.03, respectively, for the second quarter of 2015.

Now will take a closer look at the items driving performance within our individual business lines, beginning in our utility, South Jersey Gas contributed $49.5 million year to date economic earnings the first half of 2016, as compared with $47.8 million in the same period last year. For the second quarter utility provided $5 million of economic earnings as compared with $5.2 million in the prior year, with higher depreciation, compliance, governance and miscellaneous corporate expenses impacting the quarter. The primary contributors of incremental income for the utility were the investments made under our Accelerated Infrastructure Replacement Program or AIRP and our Storm Hardening and Reliability Program or SHARP. We have invested $40.8 million year to date towards improving our gas distribution system under these programs.

During the first half of 2016, the AIRP and SHARP produced an aggregate incremental net income contribution of $3.2 million compared to the prior-year period. These programs, designed to replace bare steel and cast iron mains and to upgrade infrastructure along the barrier islands to high-pressure distribution, are expected to remain strong drivers of growth within our utility.

To this end, earlier this year South Jersey Gas filed with the New Jersey Board of Public Utilities for approval to continue the AIRP for an additional seven years past its current program expiration at the end of 2016. As filed, the petition calls per investing a total of $500 million to continue improving our distribution system. Safety and reliability were at the forefront of this filing and we look forward to extending our successful collaboration with the New Jersey BPU as we work together to address the issue of aging infrastructure.

Also of note are two additional infrastructure projects. First is the proposed BL England pipeline project which we look forward to beginning construction on as soon as pending legal appeals are addressed. Written briefs for those appeals were filed in June with oral arguments now expected to begin in October. The second project is the $40 million liquefaction facility at our McKee City site. Construction of this facility is designed to maintain operating pressures on our distribution system. It's nearly complete and we look forward to the benefit it will provide for customers in the upcoming winter heating season.

Another key component of near and longer term utility earnings performance is customer additions. For the 12 months ending June 30, 2016, our customer base grew by 1.3%, bringing our total number of customers served to a little over 374,000. This growth was achieved despite the impacts to our customer count resulting from increased collection activities throughout the quarter. We expect this number to rebound by year end as services resume on some accounts where it is presently suspended.

During the 12 months ended June 30, 2016, we achieved incremental net margin of $2.7 million from customers additions in the utility. We anticipate our historical record of strong customer growth rates will continue as customer additions from conversions continue to drive growth based on low natural gas pricing and value versus other heating fuels. In the meantime, new construction activity remains solid following an increase in new construction customers obtained in 2015.

Turning to our non-utility businesses, they contributed a total of $16.3 million in economic earnings for the first six months of 2016, as compared with $13 million of economic earnings for the same period of 2015. For the second quarter, our non-utility businesses provided aggregate economic earnings of $3.8 million in 2016, as opposed to an economic earnings loss of $3.3 million in the second quarter of 2015. There were some significant factors that drove these results and I'll address them now as I discuss our two primary non-utility business lines. Our wholesale and retail commodity businesses, housed within South Jersey Energy Group, contributed $11.8 million for the first six months of 2016 as compared with 8.5 million for the same period in 2015.

Performance for the quarter reflected a $300,000 loss versus economic earnings of $700,000 in the second quarter of 2015. Year-to-date economic earnings growth at South Jersey Energy Group was driven largely by the optimization of our transportation assets supporting our wholesale and retail marketing contracts. Additionally, for the first six months of 2016 we saw an increase in the average volumes delivered in support of our fuel management contracts with merchant generators as compared with the first six months of 2015. This increase reflects the capacity associated with three contracts that commenced in 2016 which were not active in the prior-year period.

Two of the three only came online in June so we expect future periods to reflect the full benefit of those contracts. The performance comparison for the quarter reflected more favorable spreads in transportation premiums than were available in 2015 versus what we saw second quarter of 2016. Our energy projects business, South Jersey Energy Services, contributed economic earnings of $4.5 million for the first six months of 2016, essentially the same as the $4.6 million reported in 2015. For the quarter, this business produced economic earnings of $4.1 million in 2016 versus a $4 million loss in 2015.

Comparative results for Energy Services were heavily impacted by two nonrecurring events and a significant change in the amount of investment tax credits that we're recording in 2016 as compared with 2015. The nonrecurring events included the $10.9 million after-tax charge related to the write-down of our assets at the Revel facility taken in the second quarter of 2015 and a $1.3 million interim after-tax gain realized from a dispute settlement in the second quarter of 2016.

Contribution to earnings from investment tax credits declined from $17.3 million for the first six months of 2015 to $2.8 million for the first six months of this year. Comparing second quarters, ITC declined from $7.1 million in 2015 to $1.1 million in 2016. These reductions were consistent with our strategic decision to substantially reduce investment in renewables in 2016.

What's important to note within Energy Services performance though is that if we adjusted the nonrecurring and ITC impacts both the second quarter and year-to-date results from operations improved year over year. These improvements, totaling $1.9 million for the second quarter and $2.1 million for the first half of the year, are largely due to solar operating performance that benefited from increasing SREC values and increased SREC production from our expanded fleet of solar assets.

Within South Jersey Energy Services, the focus in 2016 is on optimizing operating performance from our existing energy production assets which includes solar, CHP and landfill gas-to-electric projects. Contributions from CHP and landfill projects have begun to normalize a bit through 2016, as the write-down of our ACR facility is behind us and the Energetic transaction we completed at the end of 2015 has reduced the drag on earnings from our landfill gas-to-electric projects. Additionally continued improvement in SREC values combined with increased generation from new projects has driven strong revenue growth year over year, as our year-to-date SREC production grew from 66,000 in the first half of 2015 to 106,000 in the first half of 2016.

Our focus on minimizing risk where possible is also evident within this business as the hedging strategy implemented with regard to SREC has us 95% hedged for projects currently online in our largest market, New Jersey, for the current energy year. At this time, I'll turn the call over to Mike to further discuss the current performance and future initiatives.

Mike Renna

Thanks, Steve. Good morning, everyone. Year-to-date performance reflects continuing focus on our core businesses, where regulated investments, long term contracted assets and customer growth lay the foundation for achieving $150 million of economic earnings by 2020. This emphasis on high-quality earnings helped drive an 8% year-to-date increase in economic earnings, growth we achieved despite a significant reduction in ITCs. And that has us well-positioned to achieve our 2016 targeted economic earnings per share range of $1.29 to $1.35.

As most of you know, the second quarter was an eventful one for SJI, as May saw us capitalize on favorable market conditions and clarity in our strategic plan to execute a highly successful secondary equity offering that generated net proceeds of $203 million. Not only was our follow-on five times over-subscribed, but it also generated significant post-offering demand, as our stock price was up 7.3% on the day following the offering.

Our equity-to-cap ratio now sits at 51.1%, providing strength in our balance sheet and positioning SJI to take full advantage of the more than $1.5 billion of regulated and infrastructure investments we expect to make over the next five years. Investments critical to the reliability of our system, including infrastructure projects like the nearly complete liquefaction facility at our McKee City site and the planned pipeline to supply BL England. Of note, just this week the New Jersey DEP, citing the potential for a more than 50% reduction in air pollutants, granted a key air permit needed to repower the BL England facility with natural gas.

Our regulated investments also include projects like the PennEast pipeline which, when complete, will bring a critical supply of reliable low-priced natural gas to New Jersey. Just two weeks ago this project took another big step forward when FERC issued a preliminary report suggesting that any adverse environmental impacts from the proposed pipeline could be reduced to less than significant levels with the implementation of PennEast's proposed and FERC staff's recommended, litigation measures.

We're equally encouraged by the recent public outreach which indicates that a growing number of our state's residents support PennEast and the lower energy costs and energy independence the pipeline will deliver. This support comes in addition to the 20 state- and federal-level legislators, over 30 business associations and 11 labor and construction trades who have already endorsed the project.

With these key facts in mind, we look forward to FERC's final environmental review in December 2016 and remain optimistic that a certificate of public convenience and necessity will be issued in early 2017, with the project scheduled to come online in the second half of 2018. Contracted assets, in particular those related to our fuel supply management portfolio, remain another key focus of our strategy. The startup of the Moxie Liberty and Moxie Patriot plants in June, along with our recently announced contract to serve the Lackawanna Energy Center add to the momentum we're realizing in this niche business.

Moving forward, the 10 contracts we've already secured will help our commodity business realize its target of contributing roughly 20% of economic earnings in 2020. Within South Jersey Energy Services our focus is on the performance of our existing assets. This means ensuring peak operations at solar facilities to maximize SREC production and a disciplined hedging program that works to ensure a reliable income stream and minimize risk. Ensuring peak performance within our CHP and landfill gas-to-electric generation facilities is also paramount.

The repositioning of this business at the end of last year has already had a positive impact on performance across our landfill gas-to-electrical fleet is marked improvement. And our flagship CHP facility serving Borgata continues to be a solid and reliable contributor to earnings. As Steve noted, in the aggregate these areas produced a $2.1 million improvement year to date and a $1.9 million improvement in the second quarter.

In closing, I want to reiterate that we remain highly confident in our ability to deliver on the performance targets we have set for 2016 and beyond. I think our performance to date highlights an ability to execute on the strategic initiatives in place since last May, including growing high-quality earnings from core operations, minimizing risk where possible and maintaining a strong balance sheet that affords the flexibility necessary to pursue growth opportunities. I'm also very pleased that the detail we provided around these plans has helped increase the visibility of our story, driving an extremely successful equity offering, enhancing the attention SJI has received from analyst community.

With that said, I'll now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Chris Ellinghaus with Williams Capital. Please proceed.

Chris Ellinghaus

Given that you've achieve the 10 contracts minimum, can you give us any thoughts on your expectations going forward for possible additional contracts?

Mike Renna

I'll put Greg on the spot. I have great expectations and ambitions but I won't let that influence Greg.

Greg Nuzzo

Yes, there is a good robust queue that we're targeting now and again as we end contracts or put contracts in place will come on probably 2019. So it takes a couple years for negotiations. But I can't get into specifics but I'm excited about there's a few ones that are coming close and we're negotiating now.

Chris Ellinghaus

Okay.

Greg Nuzzo

So hope to keep the new growing portfolio certainly.

Chris Ellinghaus

Steve, can you give us any color or any stats on improvement on landfill gas versus last year?

Steve Clark

If I remember the numbers right, Chris, our target this year was to bring this landfills in at probably with maybe a total loss of about $1 million. I think that a lot of that was focused on optimizing -- a number of steps were taken to optimize. I think for the year to date they're probably right around $750,000 on the negative side which is less than half of what the number was last year through the first six months. We're still going through our optimization processes on those. We're still pretty optimistic that there's a lot of improvement that we can get out of those.

Chris Ellinghaus

Okay. Have you got any thoughts about the Taj and general thoughts on AC right now?

Mike Renna

As far as the Taj goes, it's disappointing that this is the outcome. I think the labor strike -- it certainly appears to be something they couldn't overcome. The optimist in me hopes that it's posturing and that they're able to come to the table and reach some kind of a settlement and reopen the Casino because I think it's in everybody's best interest and certainly not just the workers but the overall community.

As far as Atlantic City goes, again, I think, Chris, it's a lot of the same. There's a lot of strengthening in the market. I think the right-sizing has had the desired effect. The Casino performance, probably with the exception of the loan exception of the Taj, has year over year been improving. Again, you're seeing a diversification of the economy down there, so an increase in retail and commercial support of the Casino. We're excited be a part of it.

Operator

Your next question comes from the line of Stephen D'Ambrisi with Castleton Investment Management. Please proceed.

Stephen D'Ambrisi

Just a quick question, I don't know if I missed it in the script, but did you guys talk about how much what the megawatts installed you have of solar is as of 2Q? And what SREC generation was in the quarter?

Mike Renna

The amount that we have that is ready for intended use is 194 and I think is was 106,000 SRECs.

Operator

Your next question is a follow-up from the line of Chris Ellinghaus with Williams Capital. Please proceed.

Chris Ellinghaus

Can you give us your fill out or remind everybody of what your anticipated PennEast cost and schedule are? We do get some competing opinions from some of the other partners. So can you lay out your PennEast figures and expectations?

Greg Nuzzo

Our goal is in the timeline and I believe all our partners are expecting this, as we continue to expect second half 2018 in-service dates. So certainly with the latest release with FERC, that's right in line to our timing. Next step is to get the certificate in early 2017. That all fits into a second half of 2018 start. And I believe PennEast, on their public information also says that, so that should be consistent.

In terms of the cost, we're still, I think, about $1 billion to $1.1 billion in terms of what the latest forecast says for PennEast. And of course we're a 20% share of that. Still in line to what we've been saying initially, just, again, when we had to delay the pipe on our last update. But again, expectations are second half of 2018.

Chris Ellinghaus

Okay. Given the schedule for oral arguments on BL England, have you got an anticipated court schedule or expectation for how that gets wrapped up?

Mike Renna

Chris, what I would say is that right now the original mandate was oral arguments were to occur in September. And I think what they ended up doing was, they struggled for a date so it's now supposedly going to be at the beginning of October. That's still our expectation. That may not take that long. Frankly, from our view, the appeals, we feel really strongly about our ability to succeed against those appeals. But you would think that getting those addressed during the fourth quarter is something that we could expect.

Chris Ellinghaus

Okay. And as far as the way El Nino operated in 2015, how do you anticipate that the alleviation of El Nino might impact you favorably or unfavorably in the fourth quarter? And how are you preparing for that?

Mike Renna

Somebody could Google that really quick. Honestly, I don't think -- what's that?

Greg Nuzzo

I didn't know if you were specifically asking in terms of our utility or the non-utility business.

Chris Ellinghaus

I'm really thinking in terms of non-utility and Energy Group and what that might present as an opportunity if you see one. Just general thoughts there.

Mike Renna

What are you looking at for this winter?

Greg Nuzzo

Yes, the winter, from our transportation book, basis is a strong relative to the what we see in last year. Our capacity, what we're seeing, is attractive in terms of values. We're actively hedging that, locking that in to secure our budget and our forecast. But to the extent there's volatility, we'll be in a position to certainly take advantage of that with our other mechanisms of how to do that, playing both sides of it, locking in attractive values. But if there's weather and volatility, which there always is, throughout this winter, we'll be able to take advantage of that and upgrade certain things.

Operator

Your next question comes from the line of Spencer Joyce with Hilliard Lyons. Please proceed.

Spencer Joyce

First, congrats on a pretty clean quarter here and commend you guys for really continuing to refocus the story here. Really a pretty resilient quarter, I think. Just really one high-level question from me. We're a couple of years removed from the last base rate case taking initial effect. It's my understanding there is likely to be a base rate case within the to 2020 guidance. Is it too early to talk about any kind of preliminary work on when that may be filed? Are there any thoughts there?

Steve Clark

Spencer, it is Steve. We're required to file, I believe it's before the end of 2017 anyway. And obviously we've invested a lot to date. We don't have a specific date out there. We haven't talked to you about a specific date. But clearly we have a case coming up sooner rather than later. It's would not be unexpected for us to be filing earlier than the mandated late 2017 requirement.

Spencer Joyce

Okay. And the mandate is like 12/31 year end, calendar year end.

Steve Clark

I think it was by 2017, so arguably it would be the fourth quarter there.

Operator

[Operator Instructions]. At this time there are no further questions in the queue. I would now like to hand the conference over to Mike Renna for closing remarks.

Mike Renna

Before we wrap, up as always, please feel free to contact Marissa Travaline, our Director of Investor Relations or Ann Anthony, our Treasurer, if any follow-up questions arise. Marissa can be reached at 609-561-9000, extension 4227 or by email at mtravaline@sjindustries.com. Ann can be reached at extension 4143 or by email at anthony@sjindustries.com. Again, thank you for joining us today and for your continued interest and investment in SJI.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.

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