Q3 2020 South Jersey Industries Inc Earnings Call
Jersey Industries' third quarter 2020 earnings conference call at this time, all participants are listen only mode.
The speakers presentation, there will be a question and answer session to ask a question. During the session you would need to press Star then one on your telephone keypad. If you require any further assistance. Please press Star then zero.
At this time I would like to turn the conference over to Mr., Dan Fido.
You may begin.
Thank you good morning, everyone and welcome to <unk> third quarter 2020 earnings conference call and webcast.
I'm joined today by Michael <unk>, our President and Chief Executive Officer, Steve Koji, Our Chief Financial Officer, as well as 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 Dot that's treat industries dot com.
Lease and the associated 10-Q provide an in depth review of earnings on both 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.
Throughout today's call, we will be making references to future expectations plans and opportunities for us.
Actual results could differ materially from those projected in any forward looking statements.
A discussion of factors that could cause actual results to differ please refer to our SEC filings.
That said I'm pleased to introduce our CEO, Mike Brown will review our business operations and endemic response.
Our CFO Steve coach. He will then review, our third quarter financial performance and financial outlook.
Mike will then review our key priorities for the remainder of the year and offer some closing remarks after that we'll be happy to take your questions with that let me now turn it over to Mike.
Thanks, Dan and thanks to all of you for joining US today I Hope you and your families are safe healthy and well.
I'd like to begin my remarks, with an update on our operations and the significant progress we've made in executing our business priorities and 2020. Despite this terrible pandemic.
Our top priority remains the safety of our employees and the shoring critical gas delivery to our 700000 customers.
Overall, our businesses continue to operate very effectively doing the pandemic.
Thanks in large part to the dedication of our exceptional employees.
As you know throughout this pandemic, we have incurred incremental costs to keep our businesses running and maintain high levels of service.
We have also experienced higher uncollectibles as shut offs in new Jersey have been suspended since March with our full involuntary support.
Thankfully in July our regulators unanimously approved an order authorizing the state's utilities to establish a regulatory asset, allowing the deferral of these incremental expenses for future recovery.
We have also completed multiple steps in 2020 to strengthen our balance sheet and liquidity.
Eliminated a majority of our debt maturities for the next five years and ensure the ongoing funding of our capital program.
Having taken these proactive steps, we feel confident our ability to continue to successfully navigate through the impacts of COVID-19 going forward.
Turning to our business results successful execution of our priorities combined with a fourth consecutive quarter of solid improvement in our financial results shows that our business transformation efforts over the past few years are paying off.
Consistent with our goals, our utility South Jersey gas and Elizabethtown gas represent the majority of our earnings.
Margins have increased significantly in 2020, reflecting above average customer growth positive base rate case outcomes decoupling in weather normalization riders critical infrastructure modernization programs and trackers and effective when our management.
With respect to customer growth natural gas remains in strong demand across our territories and across new Jersey with more than 40000, New South Jersey gas Elizabethtown gas customers, adding service in the last 12 months alone.
The bulk of our new customers continue to come from conversions with roughly two thirds converting from alternative fuels, such as heating oil and propane to cleaner burning and lower cost natural gas.
Our regulatory relationships remain constructive and strong, resulting an amicable settlement in record time, we desired results at both our utilities.
Our utility infrastructure modernization programs critical to assuring safe and reliable service to our customers have the added benefit of significantly reducing methane emissions.
Over the last 12 months, we've invested more than 150 million.
To replace aging cast iron and bare steel main across our system and on October Onest, we adjusted our rates with regulatory approval to begin recovering these important investments.
Our non utility operations have also experienced significant improvement this year as well largely as a result of a rightsizing and a refocusing of business priorities.
Our wholesale business has delivered solid year over year improvement driven by strong performance related to our fuel management contracts the roll off of legacy contracts reshaped portfolio and asset optimization opportunities.
Finally, our energy services business has delivered on our commitment to align and advance the clean energy goals of our state and region in August we announced the new joint venture with our partner cap tuna to invest in renewable projects and at the same time announced the acquisition of two fuel cell projects in New York City. These.
Projects, along with targeted solar investments at our corporate facilities landfills and select other projects to fill our clean energy investment goals for 2020.
And provided a solid 12 cents per share ITC benefit to third quarter results.
Overall, we are very pleased with the execution of our business plan in 2020.
At this time I will now turn it over to Steve to review, our third quarter results and guidance after which I look forward to offering some closing remarks.
Steve.
Thanks, Mike.
Good morning, everyone as.
As Mike noted despite the continuing pandemic, our business performed well in the third quarter and year to date and Weve experienced no material financial impact from the pandemic.
As Dan noted earlier, both the earnings release and the slide deck Weve made available we'll provide you with detailed information regarding GAAP earnings and I would encourage you to review that information as well.
For the purposes of this call as we normally do we'll focus our discussion on our non-GAAP measure of economic earnings as management believes that this measure provides valuable insight into the performance of our business.
Third quarter 2020, economic earnings were a loss of six cents per diluted share.
Compared with a loss of 30 cents per diluted share and third quarter of 2019 roughly.
Reflecting improved profitability from both our utility and non utility businesses.
Our utilities contributors third quarter loss and earnings of 18 cents per share compared to a loss of 24 cents per share in 2019.
Improved results, primarily reflect the TG rate case that became effective last November.
Positive customer growth and base rate rowlands related to ESG infrastructure modernization programs.
Our non utility operations contributed 21 cents per share compared to two cents per share in 2019.
Improved results were driven by increased profitability at both energy group and energy services.
[noise] Energy group contributed third quarter earnings of six cents per share compared to a loss of one cents per share in 2019.
Reflecting additional fuel management contracts became operational over the last 12 months higher volumes and improved asset optimization opportunities, resulting from efforts to reshape our portfolio.
Energy services contributed third quarter earnings of 14 cents per share compared to two cents per share in 2019.
Primarily reflecting the recognition of 12 cents per share in investment tax credits related to fuel cell and solar acquisitions that were announced or achieved operation during the latest period.
Our other segment contributed a loss in economic earnings of nine cents per share compared to a loss of eight cents per share in 2019.
Reflecting an increase in outstanding.
Partially offset by debt repayments and refinancing activity.
For 2020 year to date.
Economic earnings were one dollar four per diluted share compared to 65 cents per diluted share for the comparable period, a year ago again, reflecting improved profitability for both our utility and non utility businesses.
Driven largely by the same factors this third quarter.
As Mike mentioned throughout 2020, we've completed steps to strengthen our balance sheet and liquidity and ensure the ongoing funding of our 2020 capital program.
In July we refinanced at S.J. I $200 million 18 month term loan in two tranches with maturities of seven and 10 years respectively.
And on July 30, Onest, we closed on our sale of Elkton gas to Chesapeake utilities for approximately $15 million in cash with the proceeds fuelling further debt reduction.
As of September Thirtyth, we have $1.1 billion in total credit facilities and approximately $450 million of available capacity on our revolvers and feel confident in our ability to manage through the impacts of Cove at 19, our balance sheet continues to strengthen in 2020.
Equity to total capitalization was approximately 33% at September 32020.
Compared with approximately 30% at December 31, 2019, roughly.
Reflecting debt and equity financing and repayment of debt using proceeds from asset sales.
Including the conversion of mandatory convertible equity units due in 2021 and equity credit from rating agencies for long duration debt.
Our adjusted equity to total capitalization ratio a non-GAAP measure was approximately 40, 41% at September Thirtyth 2020.
Compared with approximately 38% at December 31, 2019.
Turning now to guidance.
Our capital expenditures year to date were approximately 410 million.
Primarily reflecting investments for utility infrastructure upgrades system maintenance customer growth and clean energy investments.
We continue to expect capital spending of approximately $600 million in 2020.
With approximately $500 million for safety and reliability investments at our utilities.
And the remainder for non utility clean energy and other investments.
We're pleased to report solid third quarter and year to date results.
Excluding the recognition of 12 cents per share in itcs related to our clean energy investments and the latest period.
Our third quarter results still showed a sizable 12 cents gain per share improvement versus the comparable period, a year ago again, driven by improved results at both our utility and non utility segments.
As we head into the fourth quarter, we now expect 2020 ongoing economic earnings at the upper end of our dollar $52 60 per diluted share range with approximately 75% of earnings from our utility operations excluding interest costs.
As a reminder, while we have thus far witness no material financial impact from the pandemic, we're continually monitoring all facets of our operations for potential future impacts to our financial projections.
That concludes my remarks, and I'll now turn it back to Mike Thanks, Steve.
Before we conclude I want to say a few words about our continuing strategic priorities.
Above all else, we remain committed to the safety of our employees our families and our communities.
We are functioning very effectively from a largely remote platform and we'll continue to make decisions and formed by directives.
From our leaders and health experts.
On the regulatory front, we have several important clean energy focus regulatory initiatives pending before the BPM.
In June the BP you issued an order directing the state utilities to file expanded energy efficiency and demand response programs, where the program effective date of July 1st 2021.
Three year term.
These programs designed to reduce consumption and lower customer bills have the added benefit of being a significant job creator.
Consistent with our existing energy efficiency programs, we would expect our cost to be recoverable through a surcharge.
In September our utilities file proposals to expand our energy efficiency programs, representing $267 million in new investment.
We are also proposing a decoupling mechanism for Elizabeth town similar to the one currently in place at South Jersey gas that will further encourage reductions and consumption.
We expect the resolution of these request in the second quarter of next year.
We also expect to file a request to extend South Jersey gas companies accelerated infrastructure replacement program before year end.
Hunters with the state working hand in hand toward achieving and again, even accelerating the goals of the energy Masterplan.
The energy Master plan as a blueprint holds great opportunity for us to grow through a strategic clean energy and D carbonization initiatives and investments.
At our core we already 3 billion rate based infrastructure company or pipes of the ground or a valuable asset paid for and serving serving customers safely reliably and affordably for decades. In fact natural gas continues to heat approximately 75% of homes and business.
As in New Jersey, with thousands of new customers added every year.
Safety reliability and affordability are at the core of our mission.
We are prioritizing critical infrastructure investments investments double modernize our system greatly reduced fusion of methane emissions and ensure a critical supply in system redundancy.
And we are equally committed to sustainability and are encouraged by the potential offered by technologies that lower consumption and the carbon content of natural gas Ah regulators continue to demonstrate their solidarity with us by approving and in fact mandating regulatory initiatives that support these priorities.
As I've said many times, we remain agnostic in terms of the molecules flowing through our pipes, whether it's clean burning natural gas renewable natural gas or hydrogen or pipes will remain a vital energy delivery system for new Jersey for decades to come.
We are proud New Jersey company, we are partner with the state and it has never been more important for utilities across New Jersey to support our economic recovery efforts with the shovel ready jobs to get our staying back to work.
Let me conclude my remarks by once again thanking or 1100 employees for your commitment to each other and to our customers.
Your tireless work ethic throughout this crisis is why we continue to deliver on our mission.
By continued admiration and deepest thanks to all of you.
Operator that concludes our prepared remarks, and we are now ready to open the line for questions.
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Our first question My comment comes from the line of Richard Sunderland from J P. Morgan Your line is open.
Hi, good morning, and thanks for taking my questions good morning rich.
Just wanted to start off on the LNG redundancy project could you provided and updated those kind of where the regulatory process stands for that project and kind of any upcoming timeline or hurdles.
Yeah, Hi, Rich this is Dave Roberts, so as you know we file.
Last December it's been slow to move admittedly up at the Beep you. There has been some communication with staff in the last month, we have received a few discovery questions.
There were some technical aspects of the filing which were minor that we were asked to do so that has been reintroduced back to staff. So we expect another round of discovery relatively soon again, we we don't have a definitive.
Timeline for getting ultimate B P O approval, so it's moving but certainly been a little slower than than we would have liked.
Got it understood.
And then maybe switching gears a little bit the.
The financing done this year the equity financial give you specific you know if you can.
Part that was originally tied to this LNG redone too project, just kind of taking longer term here about future equity needs, whether specifically for this project or other programmatic spending of disgust you can you outline what kind of like the the timing and an overall need for equity at this point.
Yeah.
Sure Hey, Rich this is Steve Kochi Uhm. So I think you know as we've always said, we <unk>. We we intend to continue to to finance the business in our grow throw a mix of debt and equity.
I.
I think we've got a tremendous amount of growth opportunities in front of us and and have.
Demonstrated good regulatory outcomes and support from our regulators to continue to invest in our systems in New Jersey. So.
What will will likely do as you know as we've done in the past will will have some guidance that will will speak to <unk>.
Next year at some point and we will have more.
More detail around specific equity plans at that point.
Okay, Great and then if I could just sit and one more quick one there's been talk at times about local stimulation, how the the gas system and associate the investment Claire might be a way to put.
Kind of jobs and money into the local economy could you speak to what you're hearing on this end.
Maybe additionally.
Kind of thoughts on any incremental programmatic attract capex if that would be added to your plan or if that would offset kind of current higher lag spend.
Hey, Richard It's Mike I'll I'll take that one.
You know there there has not been any kind of formal announcement from from the state.
With respect specifically to utility kind of driven stimulus those conversations continue to happen I think that there is.
There are certainly strong support in the front office as well as at with our regulators.
Around.
Utility investment as a means with which to get new Jersey's economy.
You know.
I I guess, you know jump started particularly on the job front.
So you know we stand ready as do all of utilities in the state with shovel ready jobs to get our our state back to work in our in our economy going again, I I do think that there will be very specific stimulus based pro.
Grams that come out of the utilities I think a lot of reason for the delay is is just.
You know, it's the overall management of Covid or you will know you know New Jersey got hit very hard it took us.
Probably a month if not longer to begin the reopening of process of our economy. You know, we're just now getting through the summer and kind of.
Heading into the fall and and and so.
Things are not fully reopened here, we're still taking a very measured approach and so I I I believe that as we've kind of gotten this health crisis, hopefully under control the state and the and certainly to be P. You are now turning your attention to to the economy and getting people back to work and I've had conversations.
<unk> very directly with.
With folks at the leadership at the B P U who fully understand and appreciate how critical utilities are to that.
Great appreciate the caller. Thank you.
Thanks for it.
Q. Our next question or comment comes from the line of gay Marine from Missoula. Your line is correct.
Hey, good morning, everyone can I ask a little bit on bad that expense and I guess in the context of the moratorium on shut off being extended.
How are you reviewing bad here going into the winter heating season, and maybe can you also remind us just.
What the mechanisms will be ultimately for the recovery.
How 'bout asset when when the time comes.
Yeah. This gave you sure at this gave Robbins uhm.
You know, we a lot of our customers are pain and as Mike mentioned, we do have a regulatory mechanism put in place for recovery.
Of of bad debt.
In our regulatory asset so yeah, we're we're really doing some some soft collections, obviously the moratorium for voluntary shut off on.
Residential has been we've agreed to through March 15th we are continuing to pursue our our commercial.
Uhm delinquents, we have not really seen really noticeably issues with our large volume customers. So we're still waiting for some guidance from staff as far as.
When recovery will be filed for but we certainly have approval to defer those costs and and we are doing that today.
Great. Thank you and then maybe if I can switch to sort of the renewables opportunity.
And talking about the catamaran J V. Just how much I guess of your intended future investment will happen within that J V is there anything that we should know in terms of capital contribution sharing or tax credits and how it comes out of that J V.
Going forward I guess, just also in the bigger picture, you know and thinking about 21, the $100 million ish. How are you thinking about that number going into 21.
Hey, gay, but it's Mike all I'm Gonna ask Steve to jump in here and help me, but let me I'll. He can talk more specifically about.
How potential future deals might look between us and catamaran and the and the sharing of the the <unk> the.
The cat batch and and any associated ITC that might come from that.
But you know as far as kind of thinking about our renewables investment I I.
I would be remiss, if I didn't kind of go back to when we first.
Uhm started discussing are kind of targeted reentry into insure nobles eight.
It was as we've said all along you was designed to be very measured very targeted and to demonstrate suppor for the clean energy initiatives.
Uhm in New Jersey, and the broader region clearly you know the energy Master plan. There. There is an emphasis on on clean energy type of investments, we felt that at that time strategically it was to our detriment too.
To not or to be the only utility in the state that was it was not you know, making any kind of investments in clean energy. So we committed to doing that in support of the state's priorities, but.
We've also said all along that that our goal and our focus with these investments would be on on the type of clean energy and renewable investments that we're going to benefit our utility.
And our utility customers. So our focus has been on the longer term potential a R. N G smart meters certainly a power to gas. So as we think you no longer term around our spend I mean, that's where are our priorities wood wood rest the fuel cell. We thought was a real you.
<unk> opportunity for us to make an investment in clean energy and you know and the clean I guess consumption and use of of natural gas and we thought that was a great strategic fit.
But.
You know beyond that I think <unk>.
We would not be looking to you know.
Yeah, We've kinda said all along our overall Capex plan for this would be somewhere around $150 million to $200 million range over a three year period, those would be for for non utility investments and I and I think that that's a pretty safe sort of assumption. So.
I think we're somewhere right around 100 million for this year. So we've got somewhere between 50 and I I.
I.
Think hunter another hundred million would be at the very very high end of our our range and I will say this to uhm any investment that we make they've got a clear very rigorous internal hurdles. We're not doing this to to simply you know changed after I T. C. We want these investments to be strategic M. A.
Aligned with our plan.
Thanks, Mike No that's helpful or maybe if I could just follow up with one more a sort of an orangy and just.
You know about 50 to 100 million questioning just how much might be R. N G and and you know your ability to do it within the utility outside of utility and if you do you know how how you do it in terms of recovering.
I guess the guys calls from from Orange Yeah.
Great question, you know Orange G as a little bit of a longer term play certainly not as long term is something like power to gas and hydrogen, but I think you know as as.
The state, where we're certainly well positioned with all the plan offshore wind for something like power to Gasped again I think that's you know that's a that's.
You know that's a longer term kind of play an opportunity I think there is there is a more immediate opportunity and an R. N. G were encouraged by the conversations we're having within New Jersey as you can imagine you know most of the opportunities in new Jersey would be around food waste landfills wastewater treatment.
<unk> not an abundance of dairy farms in New Jersey, but there are you know the the the potential of of dairy farms and the.
The ability for them to very quickly.
Have a meaningful impact on carbon intensity because of because of you know the.
The the positive nature of.
Methane that is generated from from really manure is is something where we're actively looking at is as well as how do we.
You know a few for for US It really becomes you know it gets back to this this this vision and there's goal of being a clean energy company and finding ways to Decarbonize are are you know the gas flowing through our pipes. So we as a company or committed to that and we are looking.
<unk> every and all opportunity to do that.
Gotcha. Thanks My.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question My comment comes from the line Richard Ciccarelli from Bank of America. Your line is open.
Hey, good morning, Thanks for taking my question here.
Just curious on the on the updated guidance Uhm that you provided you obviously has some nice tailwind in the corner on the 90 until the side with the turn around then.
Oh style marketing and also the the I T. C. A recognition that you mentioned just curious if you can provide a little bit more color on what's driving the upper end of the range and maybe speak of though.
Sustainability of that and into next year.
Sure Hey, Richard Steve So look it it's really being driven by by the strong performance across the business. This year that utilities have had incredible performance for a variety of reasons.
Including you know kind of you know a strong regulatory outcomes and.
You know maintaining a strong focus on achieving efficiencies and and and cost controls.
Uhm and then at the non utility as you've seen our our wholesale business has has outperformed this year as well based on a lot of the things that we've talked about you know over the last couple of years intentional efforts to reshape that portfolio to shed assets that are not performing up to our expectations. So.
We expect the you know the that to carry through to the end of the year and we expect to see.
<unk> additional positives in the in the remainder of the year based on some of the the regulatory outcomes and the performance of the business that we've seen thus far and that's really what's driving us to to the upper end of the range as far as as next year and going into the future as I said earlier, we would.
We would expect to to come out with guidance at some point as we normally do and we'll be able to give a little more concrete ranges around our expectations for next year at that time.
Alright, that's that's very helpful. Appreciate the color of their and then.
Just separately on on the pennies project any expected updates on when we <unk>, we should at birth rule on the the Tuesday is approach and just curious I mean, I know and is the <unk> you mentioned, you're still committed to the project.
Nah, that's lately seen several of their peers you know.
I'd like to that that's the or spend some of their midstream asset.
Just curious how you're thinking about that project overall.
I'll take this one Richie it's it's it's Mike as far as you know any updates with dark as as I'm. Sure. You you can imagine first is very tight lipped with respect to when we might.
We might get the the final approval for the phasing of the project. We do have the E. A in hand, and I would expect us to.
To to receive the the notice to proceed I and not anticipating where have I heard that there's any kind of issues from from a <unk> perspective, you know on a parallel path. The solicitor General is reviewing the case and we will make a recommendation to this.
Supreme Court and again I, you know, we're not getting a lot of.
Direct you know kind of indication as to when that that might be but you know, we we continue to to view.
You know things things very positively that it tends to be sort of a general kind of feel around things.
As far as our commitment to the project I I, I think where you know.
Where it differs from some of these other projects is.
You know this this pipeline has a very direct.
An absolute impact on our on our customers you know as as in it's in its entirety right. So phase one phase too.
So I think for you know for the utilities in New Jersey, Elizabeth Town, New Jersey natural gas in South Jersey gas, you're talking about being able to afford your customers access to the arguably the cheapest natural gas in the country and so.
More than anything our our commitment is rooted in to constantly doing what is best for for our customers and and that is so reliable affordable service.
Yeah that that makes a ton of sense. That's helpful. And then just one more if I may just gone through utility side as you all begin to gear up for your your filing fly or for the rider renewals uhm there any.
Learn lessons from your inside pair with their filing.
Or or how are you guys kind of just thinking about that overall.
So Richard it's stay Robyn so I'll take that one so.
You know as you know, we we have a great opportunity in front of us to continue to make investments in our infrastructure and we all know the benefits of these programs being under riders, we do expect to file.
The next South Jersey gas.
Accelerated program, probably within the next couple of weeks.
Certainly if you're referring to our peers, we certainly saw the new Jersey natural filing and I think there were certain costs that were removed from that case, but we're talking about.
An opportunity to in the name of safety and reliability.
Make some significant investments into our inventory pre code steel and that'll a so we're still finalising the number of the finally.
You know given the creation of jobs by these programs, we do expect the regulators to take a a really good look we've had some preliminary discussions there's lots of support for these programs, particularly in these times as a generate jobs, but we have.
Quite a bit of opportunity to to make these safety and reliability investments both at S. J G. N E T J, but look for an S. J I R. S. J J filing like I said within the next couple of weeks.
Alright, perfect. That's very helpful. That's all I had.
Thank you I'm sure know additional questions in the queue at this time I'd like to turn the conference back over to to Mister Dan find out too close to <unk>.
Well. Thank you all very much for joining us. This morning, as a reminder of recording of our call today is gonna be available on our website and is always please.
Please feel free to contact me and find out for analyst, an investor questions or Marissa traveling for media inquiries. So again, thanks for joining us today and for your continued interest and investment in history I operated this concludes our call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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