Folsom Aug 7, 2015 (Thomson StreetEvents) -- Edited Transcript of South Jersey Industries Inc earnings conference call or presentation Friday, August 7, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ann Anthony South Jersey Industries Inc - Treasurer * Steve Clark South Jersey Industries Inc - CFO * Mike Renna South Jersey Industries Inc - President and CEO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Please stand by for realtime transcript. Good day ladies and gentlemen and welcome to the Q2 2015 South Jersey Industries earnings call's call. My name is Greta and I will be your operator for today. (Operator instructions) I would now like to turn the conference over to your host for today, Ann Anthony, Treasurer. Please proceed. -------------------------------------------------------------------------------- Ann Anthony, South Jersey Industries Inc - Treasurer [2] -------------------------------------------------------------------------------- Thank you. Good morning and welcome to the conference call for SJI's second-quarter FY15 results. I am Ann Anthony, Treasurer for South Jersey Industries. And I'm joined today by members of our senior management team including Mike Renna, President and CEO of SJI; Steve Clark, our CFO; Jeff DuBois, President of South Jersey Gas; and Marissa Travaline, our Director overseeing Investor Relations. As you may know we issued a news release this morning announcing the results will be discussing on the call today. That release includes an in-depth over 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 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 or contractual arrangements where the true economic impact will be realized in a 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 provision 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. We assume no duty to update today's statements should actual events differ from expectations. Also note that our 2014 numbers have been adjusted to reflect the impact of the stock split that occurred on May 8. With that said I'd like to turn the call over to our CFO, Steve Clark, to detail our year-to-date and second quarter 2015 results. -------------------------------------------------------------------------------- Steve Clark, South Jersey Industries Inc - CFO [3] -------------------------------------------------------------------------------- Thank you, and good morning to everyone on the call. Thanks for joining us. As we stated in the release earnings were impacted by a breakdown of our investment in costs associated with central energy facility that had previously served the formal former rental property in Atlantic City. We discussed on previous calls Revel's bankruptcy and closing in mid-2014 in the long drawnout sale process that was completed in April of this year. Since our central energy facility is a logical source of power for the Revel property we anticipate our contract will provide heating cooling and power to the facility will be renegotiated to some reduced level with the new owner. Unfortunately, the new loan owner has shown little to no interest in reopening Revel or striking a deal for energy services. While we remain ready to provide service to Revel the lack of any recent and meaningful progress toward the new deal warranted the write-down we took in the second quarter. This write-down reflects our investment in central energy facility of Revel. It does not include the value of our cogeneration equipment, located within the facility, as we expect to be able to repurpose that equipment to serve our customers. Now let's review results. The year to date economic earnings totaled $68 million. Excluding the year to date Revel related write-down of $11.1 million, operating results would have reflected economic earnings of $71.9 million for the first half of 2015. As compared with $76.2 million for the first half of 2014. Remaining variance between these year-over-year periods largely reflects the significant contribution to economic earnings from our wholesale guest marketing business for the first quarter of 2014, which directly resulted from the (inaudible) tax we experienced in the early part of the year. The variance also reflects a reduction invested tax credits from solar development. For the second-quarter economic earnings totaled $1.9 million in 2015, excluding the write-down of $10.1 million for the quarter. (sic - see press release "$10.9 million"). Operating results were reflected an economic earnings of $12.8 million as compared with $10 million for the second quarter of 2014. The biggest drivers of the quarterly improvement in operating results between 2014 at 2015 are contributions from our utility due to infrastructure investments and customer growth, as well as significantly improved performance from our wholesale commodity business. Actual economic earnings per share for June 30, 2015 were $0.89 as compared with $1.16 for the first six months of 2014. For the quarter, economic EPS totaled $0.03 compared with $0.15 for the prior year period. Excluding the impact of the thermal facility write-down, 2015 Economic Earnings per Share would have totaled $0.19 for the year to date and $1.05 for the second quarter. Now I will detail the results of specific areas of our business, noting those business lines or segments for the write-down that had a major impact on economic earnings. Within the utility, South Jersey gas, South Jersey's gas net income for the first half of 2015 was up 15% at $47.8 million, as compared with $41.5 million for the first half of 2014. For the quarter, utility net income was $5.2 million, significant increase of the second quarter of 2014 contributions on $3.8 million. This improvement reflects the benefits of last year's rate case, our accelerated infrastructure programs, and customer positions. Investments under our accelerated programs total $28.7 million year to date and added an incremental $1.7 million in net income for the first half of 2015. We planned investments of nearly $65 million for 2015. Our AIRP and SHARP programs will continue to reinforce our system through the replacement of bare steel and cast iron gas mains and the replacement of low-pressure gas main with high-pressure main along Barrier Islands. Also worth noting, we're moving forward again on our pipeline project to provide natural gas to the [BLA] and electric generation station and enhance service reliabilities to customers in the southernmost portions of our operating territory. In May, South Jersey gas filed an amendment to our 2013 project applications still pending with the New Jersey Pinelands commission. The amended application highlights the enhanced reliability and environmental benefits this project will provide customers across the region. We remain optimistic that the compelling benefits of this project to all residents in southern New Jersey will ultimately result in its successful completion. Customer growth continues to be significant up over 6400 customers or 1.8% for a 12 month period ending June 30, 2015. On an annualized basis these customers will be worth approximately $1.7 million of net income in future years. Our growth continues to benefit from strong conversion activity, nearly 2800 new customers coming from convergence during the first half of 2015 and a target of 6500 for the full year. I do want to point out that the collection of differed gas costs for the winter of 2014, combined with the extremely cold winter this past year, has resulted in higher receivable balances as of the end of June, which in turn have resulted in higher receivable reserves and utility. The boosted reserves by roughly $800,000 for the quarter, or $500,000 after-tax, reflect the situation and we will continue to monitor it closely. Now we will move over to the non-utility side of our business to discuss from South Jersey Energy Services and South Jersey Energy Group. Energy services largely reflects our energy production assets with [renewable] energy and our energy project joint venture, Entergenic. Energy group reflects our wholesale gas and retail gas at electrical commodity business activities. The first six months of 2015, these non-utility businesses contributed a combined $13 million as compared with $34.7 million compared with 2014. The year over year variance stems from two major events. First being the noted write-down of our essential energy facility assets. The second is the nonrecurring benefit to our wholesale business realized from the polar vortex in the winter of 2014 that drove gas volatility and ultimately net income in the first quarter of that year. The reduction in solar ITC also played a smaller role in the year-over-year decline. In the second quarter of 2015 our non-utility businesses reflected a loss of $3.3 million as compared with economic earnings of $6.2 million in the prior-year period. We will take a look at the other drivers of these results in each of the business lines. Beginning with South Jersey Energy Services this part of our businesses directly absorbs the full write-down noted previously. However, for the purpose of comparing operating results in the context of this discussion I think it is more meaningful to present economic earnings that exclude the impact of the write-down, which amounted to $11.1 million for the first half of the year, and $10.9 million for the second quarter. With this in mind economic earnings for the first half of 2015 for South Jersey Energy Services excluding the write-down were $15.7 million as compared with $20.8 million for the same period in 2014. For the quarter, results were $6.9 million as compared with $10.1 million for the second quarter in 2014. Lower levels of ITC reported for both 2014 and 2015 year to date had second quarter periods accounted for the majority of the variance. The first-quarter 2014 polar vortex related performance in our wholesale gas marketing business in 2014 earnings from our energy facilities serving Revel, were obviously not repeatable. Excluding the impact of the write-down, operating performance for our CHP business line reflected economic earnings of $2.6 million per year to-date as compared with economic earnings of $4.9 million in the first half of 2014. For the quarter operating performance for this business reduced economic earnings of $300,000 as compared with $3.5 million in the second quarter of 2014. (sic - see press release "$1.5 million"). In addition to legal costs incurred in income loss from operations at Revel, 2015 did not see a repeat of the benefit that occurred from optimizing these assets. I am specifically talking about the energy production assets around extreme price gas volatility that existed in 2014. Going forward we expect our operating projects to be steady and positive contributors to economic earnings. Turning to renewables, our solar operating performance improved by nearly $400,000 year over year. This is reflected in our year to date solar economic earnings of $15.1 million, which included investment tax credits of $17.3 million, as compared with the prior year economic earnings of $17.5 million, which contained ITC of $20.1 million. For the second quarter, solar contributed $7.2 million, including $7.1 million of ITC, as compared with $9.8 million that included $9.6 million of ITC from the prior-year period. The increase in 2015 solar energy production, particularly in the second quarter, has not yet been fully recognized in earnings due to the timing of the certification of renewable energy certificates, particularly as it relates to Massachusetts. That certification process can take up to six months. We expect to see those benefits in the second half of this year. We do expect to see improved operating performance at year-end as we remain on track for the full-year SREC production of 135,000 SREC. SREC values and New Jersey continue to strengthen, stock market prices now around $237. We also remain very active in the Massachusetts market where SREC stock market values are closer to $465. For the first half of 2014 our landfills produced a loss totaling $2.3 million as compared with a loss of $2.2 million in the prior-year period. However, in the second quarter saw operationing performance improved a reduced loss of $900,000 in 2015 as compared to a loss of $1.3 million for the second quarter of 2014. We remain optimistic that the operational initiatives implemented over the last two quarters will help drive continuing improvement for these projects. Turning to South Jersey energy group the commodity marketing segment of our business, the first half of the year reflected solid performance with economic earnings totaling $8.5 million. As compared with $13.9 million for the first half of 2014. These results reflect the benefits of price volatility associated with the 2014 polar vortex. As we told you to expect, on previous calls, performance for this business improved significantly in the second quarter. This segment contributed $671,000, as compared to a loss of $4.3 million in the second quarter of 2014. With the declining drag from less profitable legacy marketing contracts that began rolling off at the end of March with the contributions from the [two] fuel management contracts that are currently active and with another pending commencement later this year, we expect continued improvements in this business throughout 2015. Finally, taking a look at the balance sheet our equity to cap ratio was 43% the end of second quarter as compared to 44% in the second quarter of 2014. We used our dividend reinvestment plan issue to activate and will continue to do so in 2015 in support of our significant capital growth efforts. We also have accumulated $300 million of deferred tax benefits related to our investments that we expect to realize between now and 2020 that will support our goal of delevering the balance sheet. At this time I'll turn the call over to Mike to discuss the [forward] to our business. -------------------------------------------------------------------------------- Mike Renna, South Jersey Industries Inc - President and CEO [4] -------------------------------------------------------------------------------- Mike thank you Steve. Good morning. As Steve highlighted in his comments the write-down of our investment in the energy facility serving Revel, gave us much of the positive performance for the quarter. I think most of the detail around that transaction has already been articulated here today, as well as within our earnings release and the 10-Q filing. The one thing I would like to add is that we are encouraged by what we see happening and in Atlantic City. We look forward to the day when the [forer] Revel property becomes part of the city's broader success. But ultimately, we decided that the best thing for our company is to look forward, doing so will allow us to focus on the business lines that are the foundation of our growth. Businesses, after backing out the impact of Revel, actually supported economic earnings-per-share growth of 4% to 8% in 2015. With an emphasis on earnings quality we look forward to the continued strong performance in our utility. Increased contributions from our commodity business, stable performance from our operating energy production assets. As we move forward we do so with a model that emphasizes our regulated businesses and those areas of our nonregulated businesses, we have a demonstrated ability to compete and succeed. Most importantly we will remain confident in our ability to deliver economic earnings of $150 million by 2020. I think focusing on earnings from operations provides a meaningful year-over-year comparison for performance, while also highlighting the strong potential for our business overall. Year to date performance of our utility highlights the potential of South Jersey gas with an increase to contribution to SJI earnings from roughly 60% to 65% to upwards of 70% to 75% as we approach 2020. Significant customer growth fueled by the compelling economics of the natural gas as a heating fuel is expected to add an incremental $11.8 million in by 2020. Accelerated utility infrastructure investment is projected at nearly $350 million over the next five years, adding roughly $18 million in incremental net income by 2020. These initiatives combined the benefits from the new CNG infrastructure and development of a reliability pipeline to serve construction of a can liquifier at our natural storage site, and a future rate case adjusted our utility for incremental net income contribution of roughly $30 million, again by 2020. On the non-regulated side, strong margins on our commodity business and the commencement of at least five new fuel mass contracts and improving operating performance across our energy production assets, support earning [contra patents] of $30 million-$40 million by 2020. Most importantly, this growth is targeted without reliance on investment tax credits from renewable projects coming instead from an expanded and improved performance across our core business. Finally, we expect our investment in the (inaudible) pipeline to contribute at least 10% of total net income by 2018. This fully [described] pipeline is being driven by more than 8000 (inaudible) in recent activities in activity affiliates. It is expected to be in place by late 2017. While there is certainly vocal opposition to some five pipelines, we expect the overwhelming benefit it will provide the region will ultimately overcome the opposition. Before we conclude, I would like to highlight strategic priorities we share during the second quarters [comments]. As we work toward our goal of achieving $150 million in economic earnings by 2020 we are committed to strengthening our balance sheet, maintaining a low to moderate risk profile, and perhaps most importantly improving volume of earnings to ensure that the foundation of our businesses build on regulated and reliable income streams. Thank you and now I will turn the call back to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator instructions) I am not showing any questions at this time. I would like to turn the call back to Mike for closing remarks. -------------------------------------------------------------------------------- Mike Renna, South Jersey Industries Inc - President and CEO [2] -------------------------------------------------------------------------------- The script says if there are no other questions at this time (laughter) -- so please feel free to contact Marissa Travaline, our Director overseeing Investor Relations, or Ann Anthony, our Treasurer, for any follow-up on the items we discussed today. 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 aanthony@sjindustries.com. Again, thank you for joining us today. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- 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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