Q3 2019 Earnings Call
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I would now it to hand, the conference, which you speaker Mister <unk>. So please go ahead.
Thank you <unk> you morning, everyone welcomed us realize third quarter earnings conference call and work.
I'm joined today by Mike run, our President and Chief Executive Officer, as well as several additional numbers of our senior management team.
Our earnings releasing the presentation slides for the company the call were issued yesterday. After the closing the market are also available on our website that W.W.W. dot S.J. industries Dot com the release and the associated 10, Q. provide and up to review earnings on both the gap and non got basis, using or non get measure of economic earnings <unk>.
Liaisons of economic hurting so the comparable gas measures appear in both documents.
Let me note that threw out today's call will be making references to future expectations plans and opportunities for restaurant.
Actual results may differ materially from those indicated by these statements as a result, the various important factors, including those discussed in the company's forms 10, K. and 10-Q . on file with the S.P.C.
With that said, please introduce R.C.E.O., Mike Rannow Little review, our current operations significant initiatives and outlook S., you guys Chief financial officers Yellow Fernandez, well then review the financial performance of our individual segments and discuss our ongoing balance sheet strengthening activities. Michael 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 thank you for joining us today.
Please report that our third quarter results were in line with their expectations and that our transformation efforts continue to proceed on track.
Before we review the third quarter financials, I want to give you an update on several p. pieces of our strategic transformation.
The integration of Elizabeth town is going very well it remains a largely efficient process. Thanks to the hard work of our dedicated employees with full integration of services and systems, including the winding down of R.T.S.A. with southern on tried to be completed in Q1 2020.
We're encouraged by this continued strong demand for natural grass across the different regions. We serve at South Jersey gas annual customer growth remains solidly above national averages fuel primarily by conversions.
At Elizabeth town gas, we expected steadily improving customer growth numbers as we integrated our sales teams I have very encouraged by early results, particularly a new construction.
Highlighting the sustained appeal of natural gas across geography and across demographics.
On the regulatory front as you know we've been busy this year planning in executing several important longterm initiatives for Elizabeth town.
In June the Beep you approved a five year 300 million dollar infrastructure replacement program for Elizabeth town authorizing the replacement of 250 miles of aging cast iron and bear steel pipe.
Recall this important modernization program is very similar to South Jersey gases A.I.R.P. program and includes annual rate true ups each October .
And in April Elizabeth Town filed a petition with the B.P.U. requesting a revenue increase of approximately 65 million to recover 346 million in system improvements that are not currently reflected in base rates.
Cases proceeding on track and we are pleased with the settlement. We've recently reached with all parties were in the final stages of memorialize in the settlement for Beep you review and look forward to conclude in the case soon.
Last on the financial fraud, the sale of on an encore assets over the past year as well as our refinancing activities steadily improving our balance sheet. As you know, we previously sold or solar assets and our retail gas assets using more than $300 million a net proceeds to repay debt.
In September we successfully completed a 200 million dollar offering of junior subordinated notes do 2079, the long duration of which is viewed favorably by rating agencies from an equity perspective.
Throughout 2019, we've been focused on building a foundation of solid regulator performance. We are pleased with our progress and encouraged by the strong demand we continue to see for natural gas.
As a result, we are reaffirming or 2019 economic earnings guidance of a dollar five to $1.15 per share.
Looking forward, we remain steadfast in our commitment to advance the regions energy goals, we all must do our part to reduce the effects of greenhouse gases and to lower the carbon content of our energy.
Played an integral role in helping the U.S. become a world leader and Decarbonisation, while simultaneously playing a key role in both our decade long economic expansion and energy independence.
So whether it be through Modernising, our infrastructure to reduce fugitive methane emissions, where the investments that help customers use energy smarter and lower consumption or new technologies that allow us to leverage bio fuels to lower the carbon content of natural gas are utilities are uniquely positioned and prepared to make critical investments in support of greenhouse gas production.
Sound energy policy policy that will transform how we develop and use energy.
As we headed to the final quarter of the year, our priorities remain unchanged.
Focused.
I continuing to effectively integrate Elizabeth town, achieving significant cost savings from a business transformation initiative and effectively executing are pending regulatory proceedings.
We are also reaffirming are 2020 economic earnings per share guidance of $1.53 $2 67, driven by strong customer growth and infrastructure investment at our utilities improved communications from our nonutility operations and additional productivity and efficiency gains from our business transformation initiative.
Our strategy remains unchanged as those are committed to high quality regulated earnings.
Would that on now turn it over to see able to review our operational performance.
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During the latest period wait successfully completed in offering of $200 million in junior subordinated knows do in 2079.
Giving their long duration and deeply subordinating knee sure, it's M.P.S. signs, 50% equity credit to the note.
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Include my remarks, my Thanks is always to our approximately 1100 dedicated employees for their outstanding work to execute the strong growth flat Grove past, we've outlined for you.
Before we open it up for questions I'm sure. Some of you have questions regarding our pennies project, which has been in the news quite a lot lately.
Let me be very clear pennies member companies remains fully committed to the project and affordable reliable service it will bring to the region, including 9 million New Jersey residents.
This is a vital project for our state pen used was 90% subscribe before the project was announced five years ago and the knee has grown substantially since then we along with other natural gas utilities in New Jersey continue to express series concern about the lack of infrastructure capacity and an inability to reliably serve families and businesses would depend on.
Natural gas service.
In September of U.S. Court of Appeals for the third circuit ruled that pennies does not have eminent domain authority overstayed on Lance.
In October the N.J.D.P. denied without prejudice our application for several permits, citing the third circuit decision. We believe both actions were profoundly wrong based on established legal precedent under the natural gas Act and we are currently pursuing legal and other options.
As I mentioned on our second quarter call the duration of the permitting and now legal process of the project are key components to watch it bears repeating that are 2020 economic earnings Guy Who's range of $1.53 to $1.67 that we are we from today contemplates various outcomes from our business segments, including the potential for a delay.
And east.
As previously communicated where you expect to be on the higher end of our 2020 range of we receive better than expected outcomes for our our pending regulatory initiative.
Higher level of synergy benefits from our business transformation effort.
Or witnessed an expansion of the currently tight wholesale spreads next winter.
Conversely, we would expect to be at the lower end of our range, if pennies where to face delays extending beyond 2020, if regulatory outcomes are business transformation cost savings were below our expectations.
Wholesale Martin's tightened significantly from already low levels.
Back from includes are prepared remarks, we are now ready to open the line for questions.
Thank you as reminders to ask a question for me depressed star wandering your telephone.
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Withdraw your question please stand by while the compiler <unk> roster.
Our first question comes from Chris <unk> half of Sieberg Williams align herself huh.
Oh, sorry, hi, good afternoon everybody.
<unk> can you give us any color additional nonregulated.
Fill progress.
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<unk>, where we're continuously evaluating those assets, we're still looking at various options, we have nothing to announced today, but if someone that that happens we will let you know.
Okay.
Can you give us any color on the Elizabeth town settlement.
[laughter] cheap.
We are we're in the final stages of memorialize in that settlement our expectation is that it will be in front of the D.V. you for approval.
Very shortly once that happens and the terms are made public we'd be happy to see more about it.
As far as the energy services quarter when.
Led to the fairly sizeable positive swings for C.H.P. and solar.
[noise] well in in.
[noise] C.H.P. I think it's it's just a function of the the timing of the year, Chris We we tend to the way the contractor designed the summer months tend to be the more profitable months for C.H.P., which is you remember right. Now is is just R.M.T.F. asset. So I think that that's really behind the perform.
Is there.
As far as solar goes.
Believe that's just that's there were two assets that we ultimately did not transfer as part of the the sale with Goldman Sachs.
We are actively negotiating a sale of those assets, but in the interim as they are still assets held for sale. We do book the S. rack revenues associated with those projects [noise].
Okay with their.
Projects, maybe some of the better performing projects that would be an odd.
Set of assets to leave behind but.
There were there were as you can imagine I mean, I don't remember the exact number of of sites that were part of the deal, but you know each other each of the sites is unique each of the contracts.
Had some differences there were there were some.
Issues around gaming the consent for those those two projects and ultimately.
Goldman Sachs just determined that they were not assets that they wanted to acquire a but they are they were relatively newer projects. So.
The cost to construct those projects was on the lower end in our portfolio. So.
They are they are strong performers.
One less thing have you gotten any kind of feedback maybe from for staff in terms of what their thoughts are in in defending and natural gas act against the circuit courts ruling.
We have an I'm gonna Melissa the to speak to that.
Thank you okay.
We have communicated with her.
Files and.
Or you know meeting for amputated anything affectionately.
Okay. Thanks, guys appreciates color extra thanks, Chris.
Thank you I next question <unk> telephone on maximum group you align ourselves huh.
Oh. Thank you. Thanks for the comments earlier on the E.T.G. customer growth from one per cent. The prior quarter to 1.2% is that and you mention sales. So is that more housing constructional lawn existing distribution lines or is it expansions or can you talk more about that.
Davis into that.
I'm sure.
Tape really was if we're very pleased with the growth that we're seeing that Elizabeth town and that's really coming from.
Ticking, new construction, particularly in the northwest territory, but there's quite a bit of conversion opportunities that we've been able to capitalize on in the Union territory. So it's it's really not a nice mixture of conversion growth and new construction and we expect that trend to continue.
Okay, great. Thank you and then can you talk about what you have to finalize in terms of the redundancy plan is the internal engineering designs or the or the layout of the pipes to potential energy storage tank or what are the steps there. Please.
So I'll I'll take that one as well we have finalize to our engineering studies.
We are getting ready to very soon to go socialize that with staff. Once we socialize that again that option is backed by a redundancy study that we had performed by a third party.
We'll socialize the project and then we would expect probably by the end of the year, we would make a filing for engineering and route which would be customary so that the projects picking up steam we really like it it's a critical supply redundancy.
[noise] strategy for us as we mentioned it would probably be about a two bcf tag located strategically on our system and and would mainly serve as a as a 15 day Ah peak supply facility.
Okay. Thank you for that and and might just can can you I mean last year given the time in a dividend announcement just refresh on par you're looking at the dividend payout and given the increase in E.P.S. potentially in 20 as well please.
Yeah, well first it's it's it's a decision of the of the board we do review.
Our our dividend policy annually and then we'll be doing it again this November .
Our policy right now is to bring our payout ratio down to.
55% to 65% range.
We expect a while we're getting to that range, we'll be paying at a dividend at around three per se.
Or a dividend growth rate of around three per side and.
Once we get into that range, then our plan would be for our dividend growth rate to reflect R.E.P.S. growth rate.
Great. Thank you for that.
Yeah.
Thank you again, if you like to ask a question. Please press star than one on your touch tone telephone.
Our next question Cosmo, Chris Tonya of J.P. Morgan you align itself.
I want to goes a bit Chris I want to follow up on on pennies to bit here, just with the kind of major headlines over the past two months what exactly is the the legal path forward here in kind of what are the different permutations I'd forgotten and otherwise.
[noise] I'll be happy to answer that but it's probably better to have.
<unk> Melissa answer answer that question, but before I turn over to her there are legal options available to us as a as a group. The partners are exploring those those legal options certainly one was to ask for for an oddball uncaring, which is you know.
On Tuesday was denied so as far as future options go just turned over to Melissa.
So we can we don't want to get out of having honey or we you can hear it can can you do have option that we are exploring and the board would mean committed can't seem to project through.
So it's easy you can be more clear about specific legal pass me well.
Yeah.
Okay, and and can you remind us of the current Capitol. That's been spent at the project level and at the S.J.I. level as well and then just you know you touched I think Mike on this and you're prepared remarks, but if the project was not to deploy.
Any any additional capital through 2020 would you still be able to hit the low end of your U.P.S. guidance range for for next year.
Yeah.
As as far as the total amount of of capital that we've spent.
For us individually for for pennies.
I believe it's around.
80 million.
So I guess as a partnership it'd be about 400 million I guess, there's five partners.
Do the math [laughter].
As far as you know how this impacts our our 2020 guides, you're you're you're correct Chris.
We set our target to the midpoint of a rather wide range. If you remember we did say 2020 guidance.
This past may.
And at the time that we said we did caveated way that there's a lot of things that can happen both positive and negative over the nearly two years.
That we're ahead of us.
And one of those one of those risks was was penny eastern a and a delay in in construction.
We are given that the the decision or the third circuit just came out Tuesday were in the process right now revising our expectations with respect to Capitol and pennies there are options in front of us where there could be activity as early as the.
Fourth quarter next year, but there are also options in in front of us where that could be delayed into into 2021.
Ah, it's <unk> until we settle on.
An exact illegal strategy and and get a better sense of the timing on that it's a little you know difficult for us to kinda pinpoint when the spend might occur.
Certainly I think it's it's fair to say that you know the project is going to be is going to be delayed and it's we're not going to be in service by by the end of 2020.
As far as how does that affect our.
Our earnings.
Again, if if.
Pennies were to be delayed.
Or pennies, there's delayed and we're unable to accomplish any of the things that I outlined in in our prepared remarks with respect to new investment opportunities.
Synergies regulatory outcomes, then yeah, we would we would be below the mid point, but to the extent that we are able to either exceed expectations in any of those three categories or if there is if pennies does happen to get on a fast track and we do begin some.
Preparation activities in the fourth quarter, we can be we can offset the impact of a delay and construction.
Okay. That's that's fair I, I think I kind of understand the message, they're so certainly a.
Material negative for 2020 based on what you're kind of seen so far for pennies in of itself, but you you built in kind of a lot of other you know puts and takes into 2020 for other business segments and you know should those kind of materialize.
Rough mid point of the range or better that would keep you within the overall guidance range, yes is that sir.
It is.
Okay and then.
[noise] remind me of your your financing plan underlying the 2020 guidance again and kind of what that is contingent upon if if anything, especially now that you've done the junior subs.
We have.
Back last October so little over a year ago.
We had disclose that.
Roughly 125 million.
Equity was built into our into our long term plan without equity.
Being issued in in 2020, and it was tied to the redundancy project that that Dave just spoke about we've also since that point said that you know that that number was flexible and would move up or down depending on the size of the project. The project is now and it's.
Further along in terms of of design. So we have a better sense of.
What what the ultimate capital outlay would be for that project, but there's still a few moving pieces, mostly around timing, but also around the potential to upsides the project.
And and and sell some of that capacity to a third party. So.
Basically once we announce the final plan and we have a number out there for the for the final construction costs. You can assume you know sort of a traditional utility capital structure around that so.
The the are equity would reflect that.
Okay, and if for whatever reason that is.
Delete or there's a minimal amount of capital tied to that and 2020 your messages that you would not need equity mixture.
No I think we would still at our plan is still the equity to issue the equity in advance of the project is because we'll be going.
[laughter].
There, there's there's such significant investment in South Jersey gas company in particular, but possibly also we could be accelerating some things that Elizabeth town again, it's a little premature. These are just things that we're exploring right now as we kind of lay out our regulatory strategy over the next five to seven years.
But if we were <unk>.
Assuming we move forward on this project with some of the other projects that we have in the utility again, some of which were actually now not a part of what our original plan was in in October of last year.
Largely driven by the energy Master plan and things will be doing in the utility that I touched on a little bit to complement and support the the states energy objectives.
We could be spending significant unplanned capital at at the utility so well.
We're going to raise equity to support the ballots you to the utility so to the degree that there are projects that fell outside of the original plan that will ultimately drive the amount of equity, but we will certainly need equity in 2020.
Okay, that's that's very clear thinking like.
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Thank you next question costume shop or is that after going home partners. Your line is okay.
Hey come way Mike <unk>.
So I jumped in.
Can only there's a couple of calls going on but just cushion and it may be for the most says the the more applicable to her but.
You know obviously you guys are going the appeal pass around this process, but you know and and you're probably not in a situation where you want to talk about next steps, but I'm curious like when you sort of look at the third circuit a decision they didn't really delineate like why sovereign immunity applies equally to land that the state claims and interesting.
But doesn't actually own versus the land the state actually owns right. So I'm curious like is an avenue and if it's if it really is just the clickable to land that the states own right fee simple is an avenue to just simply re route 'cause, it's there's a big difference with what the.
States have a claim on and versus what they own. Some curious if that's an angle and you guys are kind of looking at an is that a potential.
Yeah.
Thank you for that question when I can tell you anything.
We are looking at all huh.
Ah okay, okay, but but so <unk> would you agree that they didn't really <unk> and just I'm I'm curious like when you read the okay, <unk> and I see the distinction that your time.
Okay.
You still.
There is there game issued its decision on the on Bach.
You're all action, Yeah, and you have other legal options to first you as well as you.
You know operation.
And just curious on on just just just to remind us the the state owns two properties right and claims on 40 properties is that right.
Yeah, that's approximately cry between 40 and 47 yeah.
Okay Grant that was that was it sorry for the procedure question about Oh, great. Thanks sharp.
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Thank you are next question comes from eight Solomon a maximum group realize okay.
Oh. Thank you a quick follow up can you talk about fuel management, but I can go back and see the last print printed schedule the contracts, but you've mentioned ate a lot of 11 are operating or their renewals coming up or can you give an update on the fuel management. Please.
Absolutely I don't have the schedule right in front of me.
I I know they ranged from.
For 20 plus years, the some of the ones that are that we brought online early in the development process or would be coming up.
Somewhere in the next couple of years for renewal we have been inactive.
Discussions with with those.
Those facilities.
I I think you know I can say that it's the conversations continue to go well we continue to perform a critical service for them.
I think we're we're doing an excellent job.
And.
You know, we're we're really critical to that plan and that that plants reliability and so I think.
There's a very strong likely that I have a high confidence level that that will be able to extend these contracts and.
In in many cases will be able to do it under under a better better terms you know as as you can imagine as you get into these things you you see where you bring value and I think it's it's fair for us to be compensated for the value that we bring.
Okay. Okay. Thank you might have a good.
<unk>.
Thank you are next question comes from Chris <unk> I've Sieberg <unk>.
You guys.
One of Delevers like you were saying you're definitely going to do equity to support the capital projects, but there's one of the leavers in terms of the 2020 guys the timing of the equity.
And as far as the potential for incremental projects.
With any of those be covered under sort of contemporaneous Ah revenue riders.
It's great question correct, yes, one of the levers would be the timing of of the equity for sure and again, we're gonna we're gonna do in such a way that.
Both in in form and timing, we're gonna want the equity to match up with the regulatory outcomes. So I think there is some flexibility around form.
And there's also some flexibility around around timing, but.
No we were very sensitive to to delusion and to making sure that you know we have we have significant progress on the regulatory regulatory side I would want to have a high confidence interval before we start issuing equity.
As far as whether or not some of these could be in a rider shore I I think you know when you look at.
<unk>.
Dates energy Masterplan fundamental to it is is decarbonization and I think you know as it as a utility operating in New Jersey.
We have to be sensitive to to what the goals of the state are we can't bear ahead in the sand and hope that this stuff goes away like we have to partner with the state. There are things that we can do to lower the carbon content of the gas flowing through our to our system that I would expect those kinds of projects would be ready base.
To the degree that there are things that we can do that are relate to energy efficiency or relate to say smart meters. For example, I think those the kind of things that you would see in a in the form of a tracker.
Okay, and lastly, there's there's a little bit attraction, taking place and through the industry on renewable gas and you have some landfill gas experience is that something that the company's looking into.
Yeah, it absolutely that when I mentioned.
Ways that we can lower the carbon content of our gas.
Bio gas is is one of them and.
We are actively right now assessing both service territories, Elizabeth town, and and South Jersey gas.
And I <unk> identifying landfills that are situated.
You know near our our infrastructure and looking at.
R.N.G. as a as a potential means with which to lower the the carbon content I think again everything that we can do to position ourselves as a partner to the state as opposed to an obstacle for the state is is to the to the betterment of of of S.A.I. and and the gas industry in.
General.
Next back appreciate it.
Thank you.
I'm sure no further question at this time I like from the conference back over to Dan find out for any closing remarks.
Thank you very much Valerie. Thank you all for joining US. This morning, as a reminder, or recording of our call. It will be available on our website as always please feel free to contact either myself down, but l. or objectives and four analysts investor questions were Morris traveling for media inquiries or contact information may be found.
On earnings releasing on earnings presentation materials again, thank you for joining us today and for your continued interest investment necessary.
I can't lose our call have a good day.
Thank you late isn't down this close today's conference. Thank you for participating you may now disconnect.