SJI (2019 - Q4)

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 South Jersey Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Dan Fidell. Thank you. Please go ahead, sir. Dan Fide

Thank you. Good morning everyone and welcome to SJI's fourth quarter earnings conference call and webcast. I'm joined today by Mike Renna, our President and Chief Executive Officer; as well as several additional members of our senior management team. Our earnings release and the presentation slides that accompany the call were issued yesterday, after the close of the market and are also available on our website at www.sjindustries.com. The release and the associated 10-K provide an in-depth review of our earnings on both the 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. Throughout today's call we will 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. And with that said, I’m pleased to introduce our CEO, Mike Renna, who will review our current operations, significant initiatives, and outlook. SJI's Chief Financial Officer, Cielo Hernandez will then review the financial performance of our individual segments and our financial outlook. Mike will then offer some final remarks. After that, we'll be happy to take your questions. With that introduction, let me now turn it over to Mike.

Thanks, Dan, and thanks for joining us today. I am pleased to report that our 2019 economic earnings came in at the higher end of our guidance range, a testament to our 100 sorry -- our 1,100 employees who delivered these results while advancing our integration to business transformation efforts. We accomplished all of our primary strategic objectives in 2019. First and foremost, we successfully executed our system modernization plan, with more than $500 million spent on safety and reliability improvements on behalf of our existing customers. At South Jersey Gas, annual customer growth remained solidly above national averages fueled primarily by conversions. While Elizabethtown Gas, efforts to integrate our sales team and culture led to a nearly 35% improvement in year-over-year in customer growth. I'm extremely encouraged by these results, with nearly 9,500 new customers added in 2019 highlighting the sustained fuel natural gas across geographies and across demographics. The integration of Elizabethtown is also doing very well. It remains a largely efficient process with full integration of services and systems, including the wind down of our TSA with Southern tracking in line with our expectations. On the regulatory front, we are busy in 2019 planning and executing several important long-term initiatives for Elizabethtown and South Jersey Gas. Last summer, the BPU approved a five-year $300 million infrastructure replacement program for Elizabethtown, authorizing the replacement of 250 miles and aging cast iron and bare steel pipe. This important modernization program is very similar to South Jersey Gas' AIRP program and includes annual rate true-ups each October. Also last fall, the BPU approved the rate case settlement for ETG authorizing an increase of $34 million in base rates to new rates effective on November 15, 2019. In December, we filed an engineering and route study with the BPU related to a critical supply redundancy project. This non-pipeline solution will help ensure continuity of service to South Jersey Gas customers and we have done an Interstate pipeline interruption, a resolution is expected in coming months. And lastly, on the financial front, the sale of our non-core assets over the past year, as well as our refinancing activities is steadily improving our balance sheet. The sale of these assets generated more than $300 million of proceeds which will be used to repay debt -- which were used to repay debt. In last fall we successfully completed a $200 million offering with junior subordinated notes due in 2079. The long duration of which is viewed favorably by rating agencies from an equity perspective. Before I turn it over to Cielo, let's review our financials and guidance, I want to speak to about an important event that will reshape how New Jersey and SJI think about energy. On January 27, Governor Murphy unveiled a state's updated Energy Master Plan, outlined key strategy to reach the administration's goal of carbon neutrality by 2030. The updated EMP varies dramatically from Governor Christie's 2015 master plan which centered on natural gas as abundant, clean and affordable, supporting aggressive expansion to homes and businesses across the state. SJI supported the clean energy goals of the Energy Master Plan. We've spent more than a decade modernizing our infrastructure, improving reliability in reducing fugitive emissions, encouraging conservation and efficiency through regulatory initiatives and investing in renewable. At the outset, let me reiterate our core strategy at SJI remains unwavering in our mission to provide safe, reliable, affordable energy to the nearly 700,000 customers we are honored to serve. And let me also assure you that just the release of the Energy Master Plan, we have working together with our board and hard work evaluating how best strategically align with the Master Plan, while continuing to promote the clear environmental and economic benefits of natural gas. As a result, we intend to initiate carbon reduction investments across both our utility and non-utility businesses over the next five years, investments that will be incremental to our prior utility capital plans. Specifically, we plan to focus on areas that reduce energy consumption and emissions, accelerate deployment of renewable energy, educate customers on maximizing energy efficiency, and modernize via technology innovations. As a starting point to further address emission reduction and renewable deployment, we plan to invest approximately $100 million of our $600 million capital budget in 2020 on solar installations, with a targeted focus on SJI corporate facilities, landfill properties, community solar, and other development projects. In our utilities, we remain committed to an acceleration and expansion of utility infrastructure modernization aimed at lowering fugitive methane emissions. But on a parallel path our utilities will be aggressively developing renewable gas and power to gas opportunities, while also bringing the benefits of smart meter technology to our 700,000 customers. Collectively, these investments not only advance the region's energy goals, they reinforce our efforts to reduce the effects of greenhouse gases and to lower the carbon content of our energy. Because SJI particularly in our utility we are uniquely positioned and prepared to make critical investments in supporting greenhouse gas production and sound energy policy, a policy that will transform how we develop and use energy. Thank you. And with that, I will turn it over to Cielo to review our operating performance and guidance.

Thanks Mike. As Dan mentioned, the earnings release and the slide deck provide detailed information regarding GAAP earnings. I encourage you to review that information. For this call, we will focus our discussion in our non-GAAP measure of economic earnings. We believe this measure provides valuable insight into our business performance. We have a structured representation of our response into two categories, utilities and non- utilities. We believe this format provides a more timeline view of earnings, just following the state of non-core assets in 2019. Additional segment details might be found in the Appendix of our earnings presentation. For 2019, SJI recorded economic earnings of $1.12 per share compared with $1.40 in 2018. The balance reflects increased gas utility operating performance that was offset by a decline in non-utilities and other operating performance. Overall, we are pleased with the full results, which fell above the mid-point of our guidance. On utilities considering earnings of $1.32 per share compared to a $1.05 in 2018. Results reflect full ownership of ETG, customer growth, freight increases related to the SJG infrastructure organization products. And the ECG rate increase that become effective in November. Our non-utilities operation contributed $0.15 per share compared with $0.53 per share in 2018. The variance primarily reflects lower wholesale marketing results, driven by tight spreads, mild weather, new pipeline operating rules, and headwinds from negative contracts. The wholesale marketing decline was partially offset by increased fuel management activities and the sale of retail gas marketing operations in late 2018. Our other segment contributed a loss in economic earnings of $0.36 per share, compared with a loss of $0.21 per share last year. Reflecting the impact of acquisition-related financial partially offset by debt repayments from non-core asset sales, employers financing activities. Turning to the results for the fourth quarter, SJI reported economic earnings of $0.47 per share compared with $0.39 in 2018. The balance was driven by its strong performance including utility business. Non-utilities and other operations were in line with 2018 performance. Our utilities contributed $0.60 per share compared to $0.42 for 2018. Positive contribution for the rate increase in consumer growth were a primary driver for the year-over-year expansion in earnings. Our non-utility operations contributed $0.07 per share, which was flat to 2018 results. Our other segments contributed a loss in economic earnings of $0.36 per share compared with a loss of $0.21 per share last year. Reflecting the impact of application-related financing that were partially offset by debt repayment through stockings on non-core asset sales and other financing activities. In 2018, our capital spending was $504 million, which 90% invested in our utility operations and approximately 80% invested in critical safety and reliability improvement. Turning to our finances. We remain committed to improving the strength of our balance sheet and credit metrics. As of December 31, 2019, equity to total capitalization was 29.6% compared with 28.9% at December 31, 2018. The improvement reflects the issuance of our equity forward, junior subs equity content, and more than $300 million in debt repayments from asset sales. As you know, our growth plan includes our mandatory convertible equity unit of $287.5 million due in 2021. Including conversion, our adjusted equity to total capitalization ratio, a non-GAAP measure, was 37.5% as of December 31, 2019, and 35.3% at December 31, 2018. As discussed in prior calls, we anticipated cost saves from the recent sales of our Marina Thermal Facility and the pending sale of ESA will be used for further debt repayment in balance sheet strengthening. Turning now to our guidance. SJI expects 2020 economic earnings of $1.50 to $1.60 per diluted share, with guidance to the mid-point of the range. We have narrowed our guidance on our previous -- prior and wider range of about $1.53 to $1.67 per diluted share. As previously communicated, our prior guidance embedded various scenarios, including our expectation to be at the lower end of the range given potential delays with the PennEast Pipeline project. Our updated guidance remains consistent, reflecting recent regulatory and legal actions that have delayed PennEast. Updated guidance also incorporates new renewable energy and sustainability investments in support of the EMP and SJI's goal of reducing its carbon footprint. We expect 75% of the earnings coming from our utility operation with the remaining 25% of earnings coming from non-utility operations, excluding acquisition-related financing costs. Utility growth is expected to be driven by new customer growth, infrastructure, modernization, execution of regulatory initiatives, and lower costs for our ongoing business transformation. Non-utility growth is expected to be driven by new solid investments in support of EMP and a steadily improvement wholesale results from new fuel management contracts, a retail portfolio, and the installation of negative contracts. Our 2020 capital guidance has been upgraded for more than $600 million compared with our previous guidance of $555 million, with approximately $500 million for utility growth, safety and reliability, as well as customary $100 million for non-utility dollar investment in support of the EMP. Our capital plan for 2020 includes the mix of approximately $465 million in financing with approximately $100 million from asset sales, $260 million or more in debt issuance, and $150 million or more of equity in support of the SJG redundancy projects. That concludes my remarks. I will now turn it back to Mike. Thank you.

Thank you, Cielo. As we begin 2020, our strategy and priorities remain focused on delivering the majority of our earnings for utility operations and the heavy capital plan focused on critical safety and reliability projects. Our regulatory initiatives, including the base rate case filing for South Jersey Gas and advancing the critical supply redundancy project, I mentioned earlier. On continuing to effectively integrate Elizabethtown and achieving significant cost savings from our business transformation initiatives. I'm moving forward with targeted clean energy investments in support of our commitment to sustainability and the goals of the Energy Master Plan and on further balance sheet strengthening using the proceeds from a non-core asset sales and additional refinancing activities. As I conclude my remarks, my thanks as always to our 1,100 employees for their outstanding work. The transformation path of this company has been on for the last several years has required enormous dedication. This dedication throughout 2019 is worthy of high praise. On behalf of the entire senior team, our deepest thanks in the continued efforts to improve the lives of our customers and their families. Operator that concludes our prepared remarks. We're now ready to open the line for questions.

[Operator Instructions]. And your first question comes from the line of Tate Sullivan with Maxim Group.

Good morning. Focusing first please on Slide 21 on the non-utility economic earnings guidance, and specifically on the $14 million non-utility to $45 million, I mean can you remind me of the current framework for investment tax credits related to your solar installations primarily, and I mean will all that be recognized or what else is that? Can you just provide more context. Sorry if I missed it?

Well, that would yes -- that would include actually wholesale. That would include midstream because we're putting midstream in the non-utility. So it would be AFUDC related to PennEast and it will also include ITC, related to our companies sold in that.

Right. Just I'm trying to break-down that figure. But it would include the ITCs, okay. And then, on the fuel management, list of fuel management contracts you put in their back, is there any changes to those compared to I think I've noticed one contract a small contract was not in there, or can you give an update on those contracts please?

Yes, that -- hold on. I'm just trying to get to that page.

Thank you.

Do you know which one has gone on this?

Calpine.

Yes, there was one on their previously for Calpine, that was a contract that it rolled-off. It was a very small contributor. And we have in our guidance numbers for 2020, the addition of the Tier energy decree run project. And then we're also working on the renewal of several of the contracts that will be coming up for expiration in 2020 and 2021.

Okay, thank you. Mike back to solar, sorry I forgot task is -- I mean are there operations still in place from the solar efforts you had from a couple of years ago or is it a new -- or what do you have to do to go back to investing in solar?

So we have a couple of assets that are still being held-for-sale that were part of the original Goldman deal that that we were not able to successfully close on, but we're actively looking for and have our discussions with other potential buyers. Now this would be -- this would be a clean re-entry phase. Something that we started thinking about last year around this time, really specifically thinking about how are we targeting our own sustainability, right finding ways with which we could green our buildings and our facilities and obviously solar was one of those options. We've also been looking at as a solution to replace the engines at the landfill operations that we have, which is as you know, they have been underperforming now for several years and we believe that solar is a viable means with which to reposition those contracts, while still providing energy to the counties and to the landfills but also do it in a way that's profitable. And so that was really kind of our first thoughts about a re-entry. But then when -- when the state released it's Energy Master Plan, it became very clear that we had to rethink our position in the state and specifically how SJI was going to align itself with the goals of the state. So it would require -- it is going to require a re-entry we begun some business development activities, and as I said, I mean our target, really, in terms of priority our own buildings, landfills, community solar, which we think is a great way to align ourselves with the state and our landfills would actually be -- well, the landfills, the site where we have our landfill gas operations would be a great option for community solar and we're looking at other C&I opportunities that fit our risk profile and think our strategic reentry into this market.

[Operator Instructions]. Your next question comes from the line of Scott FinTech [ph] with ExodusPoint.

Good morning, thanks. Just one quick follow-up on that the solar assets that you're going to be spending on for this year. Will they all be entering into service this year at some point or another or some of that in this year and some in next year?

Yes, it'll be -- it'll probably be both. There's obviously always risk around getting to be ready for intended use status or meeting that criteria. I think that certainly we would, I think I feel pretty comfortable about our own facilities being something that will be ready for intended use by the end of this year. There are a few other projects that we're looking at right now that would be constructed in 2020. Some of the other ones could potentially stretch into 2021.

Okay. And then the ones that are you -- I'm sorry, are you contracting to yourself? Or is there another party that your contract into for some of the facilities on your sites?

Our sites, yes, we will contract ourselves.

Okay. And so, some of that is obviously the ITC coming in, then does that going forward? Will that then, do you get recovery of the purchases and rates for your gas distribution utilities or that foot to a loss in the future? How should we think about that?

We would be doing it -- at it through the parent company. So the parent company would make the investment to put the solar facilities on solar assets on our facilities. And we would pass on the energy savings to the different facilities, maybe a gas or utility.

[Operator Instructions]. Your next question comes from the line of Stephen [indiscernible] with Granite [indiscernible].

Just had a quick one or two quick ones, I guess. First question, restarting the solar, do you guys expect this to be like an ongoing spend of $100 million or is this just for this year as a bridge or how should I think about that?

It's great question, Steve. I think, look as I mentioned before, this is a decision that we have made in an attempt to better align SJI with the energy mass player. So the way we're looking at this is we made the decision to exit solar five-years ago, it was a very different solar market, but it was very different New Jersey energy market as well. Now, fast forward five-years. And what was once a plan that called for the rapid expansion of natural gas is now calling for the rapid expansion of renewable energy in particular solar and wind. And we think that -- well, to be completely frank and honest we're in New Jersey utility, the Energy Master Plan and informs and shapes our strategy. And maybe more importantly, it shapes it informs how we're regulated. And so I think we have to be responsive and agile. We can't be an outlier. We can't be seen as business, we have to be seen as a partner. And I think that includes solar. So I would expect us to make very modest, very targeted investments in solar where we think that it can have direct line of sight to the state and really to the region. And this isn’t just something that's isolated from New Jersey; this is a broader regional thing of around renewables. What I can tell you is -- this we are not returning to the day where solar represents 40% of our earnings. It'll be much more modest and much more targeted.

Okay. So but for baseline assumption, it does sound like there will be some ongoing spend. But I'd say targets --

There'll probably be some.

Okay. And so I guess the other question I had was just from a funding standpoint, obviously, you guys have talked about $125 million plus of equity previously. Now it's $150 million to $175 million, I understand you've taken up spending, so I get that. But going forward, if you're going to be having these spending levels, what do you look? What do you I guess, what are you guys projecting in terms of equity needs on a go-forward basis? Obviously, this year is helped a little bit by the asset sale proceeds. So just trying to level set for expectations going forward?

Another great question. The way we're looking at it is we're certainly trying to remain flexible. A lot of what I've talked about particularly in these, what I'll call it's called non-traditional utility investments. Investments bank more contemplated we put this original plan together and our original financing plan things like RNG, things like smart meters, things like power to gas. And also, this modest re-entry into solar, we're going to protect the balance sheet. These were -- these were investments that fell outside of our original plan and what we thought were our -- what we thought were original equity needs. We particularly with utility investments, we believe this to be consistent with what we've done in the past, which is that we will protect our balance sheet, particularly when it relates to utility investments, and that would be our plan. We can't quantify that at this point in time because again, we have -- these are all initiatives that we're in the process of developing, don't really have a lot of specificity around cost and timeline, but these are all fundamental to our five-year strategy going forward. More to come, I mean I think by -- I think a lot from this year we will be able to speak with more specificity around cost and timing and equity concerns, but suffice it to say that we will certainly protect our balance sheet to make these investments.

Your next question comes from the line of Phil Covello with ExodusPoint.

Just wanted to I mean, I guess you kind of answered it there. I was just looking for more color around the equity. If you could tell us anything about potential timing or the conduit whether that makes a block or ATM and whether it's forward sale or not, but it sounds like we have to stay tuned for that unless there's something else you can offer there?

Phil this is Cielo. We are looking at import, ratio of equity, including 18 programs, as we board of many owners, and we plan to issue the equity as we retain additional clarity on terminable projects and in conjunction with the market condition. But we assure you is that any employee that we contemplated with tighter specific projects and with a elegant string attached to it.

Yes, a lot of the timing I think will be -- for this at least for 2020 will be driven by the BPU decision around our LNG project. We're expecting that to be somewhere around mid-year.

Okay. And then just to be clear on the sizing, so whether it's $150 million or $175 million, is that just a function of the CapEx need or is there also a balance sheet consideration in?

It's CapEx related to the LNG project that we discussed earlier.

[Operator Instructions]. Your next question comes from the line of Matthew Davis with Carlson Capital.

Just quickly can you first-off, just remind us what the targeted credit metrics are in terms of whether you're looking at FFO to debt or debt-to-cap?

Thank you, it's Cielo again. 2020, we expect our FFO to debt to be around 10% and we continue to strengthening forward to 12% in the upcoming years. And the reward rating agencies would like to see as a BBB+ and this is contemplated in our five-year plan.

Did they give you a targeted FFO to debt?

Yes, it's 12% around that.

Okay. And then secondly, as you think about the Energy Master Plan in New Jersey, how do you see that if at all impacting the core LDC business in New Jersey, over the medium and long-term?

Great question. We're still in kind of a -- to be determined phase, I think certainly there's a -- there's a big push towards renewable to use a language. I'm encouraged by some of the language in the Energy Master Plan that calls for carbon neutrality versus a complete elimination of carbon. I think the important thing for all of us to think about is how critical our infrastructure is to advancing the State's Energy Master Plan objectives. The things that we can do, the investments that we can make particularly as it relates to renewable gas and power to gas, they really do support this move towards -- towards clean energy. And that's where our focus is. At the end of the day it's -- we're an infrastructure company and our infrastructure is just critical and invaluable, not only to serving the customers today, and for the next 30 years, but also going forward in terms of how much value it can bring to this -- this renewable energy future. So I think a little bit more specific in terms of the very near-term, look, critical utility investments in terms of safety and reliability. I fully expect we're going to have 100% support from regulators and from the administration, as well as from the legislature in the State of New Jersey. I do not see any kind of impact to that. I think that we're still going to be able to add customers. And I don't see anything in the immediate future that's going to prevent us from achieving our customer growth targets, longer-term. I mean, that that could certainly be something that could be a risk, but I certainly don't see it anytime in this five-year horizon. And then, I think the biggest thing is, I believe that the state understands that the redundancy, the supply base investments that not only South Jersey Gas, Elizabethtown Gas has to make but every gas utility in the state has to make, they understand the business case, they understand the immediacy of it, and they understand the necessity of these investments. And I really believe that we will have support for these non-pipe supply and redundancy solutions. And that's our focus, that's at the basis of our five-year plan is safety and reliability type investments, the modernization investments, and it's incredible redundancy investments. Look and then every five years we have a new Energy Master Plan. So we could be -- we could be in a totally different place in the next five years, but I think from an SJI perspective, the most important thing that we can be is market responsive and agile.

And then -- just thank you for that. And then just going back to the solar build out, given it’s more, I guess directed investment in targeted year. How do you see the earnings profile from that business going forward? Meaning do you anticipate being able to maintain the same level of earnings contribution in 2021 as 2020 or will it be more variable given the timing of investment and value of ITCs?

Yes, I think as Mike mentioned earlier, I think as we get into future years, we will be continuously evaluating the level of those investments. I don't think $100 million of CapEx that we've targeted for this year is just that a target for this year. In the next coming years, I think we can expect to remain involved in the market because of the goals of the Energy Master Plan. But ultimately those earnings contributions will be -- will not as Mike said get up to the level that they had been historically when we're really investing heavily in solar, and will ultimately be replaced by some of the other renewable type investments that we intend to make at the utility level, things like renewable natural gas, and other things.

I think again, I think our plan really does support the move within our -- from a contribution perspective for our utilities to be 80% -- no, 85% of our earnings. And again, a lot of that's going to come from kind of a parallel traditional utility investment and then now some of the more renewable-based utility investment. But to Steve's point, I think you can expect the utility to continue to grow as a relative percentage of our earnings.

Your next question is a follow-up question. And it comes from the line of Tate Sullivan with Maxim Group.

Thank you. And the detail on the solar is helpful too. And I mean, I understand EMP, it's every five years and you did mention is another way to address that planned installation of smart meters. What is that for the natural gas meters? And can that be a spending on the utility side that can get approved quickly? Can you give more context to that please?

Tate, this is Dave Robbins. I think the way we're looking at smart meters is smart meters has many benefits. It's going to help encourage conservation, which is perfectly aligned with EMP. As far as greenhouse emissions, it's going to eliminate a lot of truck roll as we do not have to send crews out to take the meters, it'll all be done automatically so lot of benefits from that program. And as Mike said earlier, we're in our really exploring how this is going to work. We've talked to a couple of gas utilities who have the program. So we're getting a lot of good information. And the way we see this investment in both of our utilities, we believe it would work kind of as a tracker, because it will take probably our estimate, maybe five years to put the program in across our customer base. So we think it’s a great opportunity for utilities.

Ladies and gentlemen, I would now like to turn the call over to Mr. Fidell. There are no further questions at this time. Are there any closing remarks you would like to make at this time, sir?

Yes, thank you all for joining us this morning. As a reminder, a recording of our call today will be available on our website. And as always, please feel free to contact me Dan Fidell for Analysts and investor questions or Marissa Travaline for media inquiries. Our contact information may be found on our earnings release in the earnings presentation material. So again, thank you for joining us today and for your continued interest and investment in SJI. This concludes our call. Have a good day.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.