Q2 2021 South Jersey Industries Inc Earnings Call

Good morning, and welcome to the South Jersey Industries second quarter 2021 earnings Conference call.

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After todays presentation, there will be an opportunity to ask questions.

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Please note this event is being recorded.

I would now like to turn the conference over to Dan Fidell. Please go ahead.

Thank you good morning, and welcome to Sji's second quarter 2021 earnings conference call and webcast Joy.

I'm joined today by Mike Renna, our President and Chief Executive Officer, Steve Kochi, 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 S. J industries Dot com.

Let me remind you that throughout today's call, we will be making references to future expectations plans and opportunities for SJI actual results could differ materially from those projected in any forward looking statements for a discussion of factors that could cause actual results to differ please refer to our SEC filings.

In addition, the earnings release and the 10-Q provide an in depth for a review of earnings on both a GAAP and non-GAAP basis, using our non-GAAP measure economic earnings reconciliations of economic earnings for the comparable GAAP measures appear in both documents.

At this time I will now turn the call over to our CEO, Mike Renna Who'll review, our accomplishments and strategic priorities through the remainder of the year, our CFO, Steve Kochi will then review, our second quarter and year to date operational performance and financial outlook, Mike will conclude by offering some closing remarks after that be happy to take your.

Questions and with that introduction, let me now turn it over to Mike.

Thanks, Dan Good morning, and thank you for joining us today.

I'm pleased to report that SJI notwithstanding the challenges of COVID-19 delivered solid performance in the second quarter and through the first half of 2021.

Year to date, we felt economic earnings increased by roughly $25 million.

Up nearly 24% over the same period in 2020, reflecting strong performance in both our utility and non utility businesses.

Consistent with our strategy, our utilities, South Jersey gas and Elizabethtown gas represent the majority of our earnings.

Margin growth remained strong reflecting above average customer growth.

Positive rate case outcomes infrastructure modernization programs and effective O&M management.

Natural gas remains in strong demand across new Jersey, with our utility, adding more than 11000, new customers in the last 12 months alone.

And while we are seeing increased new construction across the state the bulk of our growth continues to come from customers converting from heating oil and propane to clean burning low cost natural gas.

For infrastructure modernization investments critical to ensuring safe and reliable service remain on track and have the added benefit of significantly reducing methane emissions.

Non utility operations also experienced meaningful second quarter and year to date improvement.

Largely the result of new clean energy investments and restructuring of our wholesale marketing portfolio.

Both our energy management and energy production segments delivered strong results for.

For them as an energy management reflect solid results for both our traditional wholesale marketing and fuel management activities.

While energy production reflects strong performance from our renewable investments, particularly our Staten Island fuel cell as well as initial contributions from our equity interest in our Orange development partner Rev. LNG.

Throughout 2021, we've made significant progress in our efforts to reposition SJI.

At the forefront of a decarbonize energy future.

In March we executed several financing transactions designed to strengthen our balance sheet improve our credit ratings and significantly fund our capital plan.

In April the <unk> approved a substantial expansion of energy efficiency programs at both of our utilities.

These innovative programs are a cost effective way to reduce greenhouse gas emissions by lowering usage.

Program also allows for a decoupling mechanism on Elizabethtown gas similar to the 1 we have at South Jersey gas.

Also in April we announced an industry, leading commitment to decarbonization setting an aggressive goal to reduce our operational emissions at consumption, 70% by 2030 and 100% by 2040.

We also announced the commitment to deploy at least 25% of annual capital spend towards sustainability investments moving forward.

These targets are passed those established under the Murphy administrations energy Master plan.

We were excited to see Atlantic shores awarded a project to develop 500 megawatts of clean renewable wind energy for our state.

Our partnership with Atlantic shores on a green hydrogen pilot project will be essential to unlocking additional de carbonization energy sources for New Jersey, and diversifying our renewable energy mix.

And finally in May we hosted our virtual Investor day, which afforded us the opportunity to lay out our long term vision.

And the priorities and strategies that support our mission.

Delivering safe reliable affordable clean energy energy that supports the economic prosperity and environmental goals of New Jersey.

As we look to the balance of the year, we remain focused on delivering on our commitment to clean energy and de carbonization and on successful resolution of our pending regulatory initiatives.

On the clean energy front in June we announced the acquisition of a 5 megawatt fuel cell project in the Bronx.

This fuel cell, which will be our third of catamaran <unk>.

Similar to the 2 Staten Island fuel cells that were brought online in 2020.

It's eligible under New York's velar program, which fix for 75% of revenue is supported by an O&M agreement the guarantees 95% availability.

And long term off take agreements with credit worthy anchor customers like.

Like our previous fuel cell investments S. T. I received 92% of the ITC cash flows and net income Inc.

Accordingly. This project supports a substantial portion of our ITC goals for 2021.

On the regulatory front as you know we have requested 742 million in phase III infrastructure modernization investment at South Jersey gas.

This critically important program targets coated steel and vintage Adelaide plastic pipe.

Supporting the Murphy administration safety and reliability job creation and environmental goals.

Settlement discussions are progressing towards the final resolution.

At this time I'll turn it over to Steve to review, our financial performance and outlook after which I look forward to offering some closing remarks, Steve.

Thanks, Mike and good morning, everyone.

As Mike noted our businesses performed very well for the first half of 'twenty 'twenty 1.

And as Dan noted earlier, both the earnings release and the slide deck. We've made available will provide you with detailed information regarding GAAP earnings and I would encourage you to review that information for.

For purposes of this call as we normally do we will 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.

Second quarter economic earnings were $2 million compared with a loss of $900000 for the comparable period a year ago, Inc.

Proved results reflect increased profitability from both our utility and nonutility operations, partially offset by the impact of financing activities.

Our utilities contributed second quarter earnings of $3.3 million compared to $3 million last year.

Improved results, primarily reflect rate relief at South Jersey gas strong customer growth and base rate rowlands related to infrastructure modernization investments under our authorized plans.

Our non utility operations contributed second quarter economic earnings of $8.1 million compared to $5 million last year.

These improved results were driven by increased profitability at both energy management and energy production.

Energy management contributed second quarter economic earnings of $7 million compared to $6.3 million last year.

Primarily reflecting improved asset optimization opportunities as well as fuel management contracts that became operational over the last 12 months.

Energy production contributed to second quarter economic earnings loss of $200000 compared to a loss of $2.4 million last year.

Primarily reflecting contributions from our fuel cell and solar investments over the past year.

And our midstream segment contributed second quarter earnings of $1.2 million compared to $900000 last year, reflecting a few D C related to our pennies pipeline investment.

Our other segment contributed a loss in economic earnings of $9.3 million compared to a loss of $8.8 million last year.

Reflecting an increase in outstanding debt, partially offset by debt repayments and refinancing activity.

For the 6 months year to date economic earnings were $139 million compared with $106 million last year.

Reflecting improved utility on non utility profitability.

The improved utility results largely reflect S. Jg's base rate relief, which became effective on October 1.2020, as well as positive customer growth and the roll in of infrastructure modernization programs.

Improved non utility results largely reflect the same factors as previously discussed benefited second quarter results.

Our capital expenditures in clean energy investments for the year to date were approximately $270 million with more than 80% of this amount allocated for regulated utility investments in support of utility infrastructure upgrades system maintenance and customer growth.

Our balance sheet debt and credit metrics have all improved over the past year and support our growth plans.

We remain committed to a capital structure that supports our regulated focused capital spending plan, while maintaining a balanced equity to total capitalization ample liquidity and a solid investment grade credit rating.

Our GAAP equity to total capitalization improved to approximately 37% as of June 30, compared with approximately 32% at December 31.2020.

Reflecting debt and equity financing and repayment of debt using proceeds from asset sales.

Our non-GAAP equity to total cap, which adjusts for mandatory convertible units and other long duration debt improved to approximately 45% at June 30, compared with approximately 40% at December 31.2020.

We continue to have ample liquidity at both S. J I and our utilities with $1.18 billion in total cash credit capacity and available through our equity forward.

Approximately $1.14 billion available as of June 30.

In addition, with the proactive refinancing efforts, we've undertaken over the past year as well as our repayment of debt from our transactions and the remarketing of our prior mandatory convertible units.

Shanghai has no significant debt maturities due in the near term.

Turning now to guidance.

Based on solid operational performance through the first half of the year, we are reaffirming our expectation for 2021 economic earnings of $1.55 to $1.65 per diluted share.

Our long term economic earnings per share growth target remains 5% to 8% with significant step ups expected in 2023 and 2025.

Driven by timing associated with utility rate cases, and clean energy investments.

We're also affirming our 5 year capital expenditures outlook through 2025 of approximately $3.5 billion.

And our expected 2021 investment of $740 million to $780 million.

With $490 million to $510 million for utility investment and $250 million to $270 million for non utility investment primarily focused on de carbonization and renewables.

That concludes my remarks, and I'll now turn it back over to Mike.

Thanks for the update Steve.

Q2, 2021 represents the sixth consecutive period of steadily improving financial results results have been achieved despite a global pandemic turmoil in trading markets political upheaval and shifting priorities and energy policy.

Looking back the past few years has been 1 of unprecedented change for our industry.

The world is moving towards a clean energy future.

He is investing in our strategy is centered around it and our team is executing on it every day we.

We are excited by the progress we've made so far and remain highly confident in our ability to execute on our plan to safely and reliably deliver the clean decarbonize energy of the future.

So fully modernized 21st century system.

We also know that it is incumbent upon us to continue to execute effectively and consistently to reward your confidence and investment in us.

Before opening up for Q&A, Let me conclude my remarks by once again thanking our 1100 employees for all their continued hard work and dedication to our mission.

Operator that concludes our prepared remarks, we are now ready to open the line for questions.

Thank you we will now begin the Q&A session.

To ask a question you May press Star then 1 on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble our roster.

And the first question will be from Richard Sunderland with Jpmorgan. Please go ahead.

Hi, good morning, Thanks for taking my questions today, good morning rich.

Good morning Rich.

Maybe just starting with the Iot could you speak a little bit too just for your timing expectations at this point or any other color you can provide against the backdrop of a still a pretty busy schedule overall in the state.

And I'm happy to take that good morning.

So as you noted in your question. It has been a busy time for the E. P. You, but I'm happy to say that they do recognize that this is a critically important project for the safety and reliability for our system. So I think we're nearing the end of the army.

Hershey Asian so.

Hoping for a resolution.

Later, but we're still on track.

Yeah.

Got it understood.

And then maybe switching gears for the Orange juice side, just curious about the 8 farms under development right now and where that puts you towards the 'twenty 2 'twenty 3 step up in the business as the contributions ramp could you maybe just outline a little bit more about these forums versus the overall development activities in the.

Context of bridging to that 2023 contribution from the business.

Sure rich its Mike good morning.

Yeah.

The 8 farms that are currently working through the development process are expected to be online in 2022 and.

Producing brown gas than.

We would.

Currently remain on schedule there are some.

Supply chain issues that I think everybody is dealing with right now.

Regardless of what what sector you're in.

But we don't anticipate them to have a meaningful impact on our schedule. So we are on track for a 2020.

Commercial up 2022 commercial operations date.

During the course of 2022 will begin to.

Bringing the other remaining farms through the through the pre development process and would expect to.

Have the remaining farms the vast majority of the remaining farms in development in 2022 for a 2023 in service date. So.

Again, the first tranche 8 farms plus there are there are 2 other farms that are being developed by our partner Rev.

We expect all tend to be online in 2022.

And the vast majority of the remaining portfolio to be in construction in 2022 with an in service date of 2023.

Understood, Mike maybe just a quick follow up there.

Supply chain issues can you just speak a little bit more to that and if these are just kind of temporary impacts to the current development projects or.

You know something on your radar for the 2022 activities as well.

I think Richard it's it's in part the increased demand for anaerobic Digesters and RMG is it's pretty hot right. Now. So there are a lot of I think you know projects in the development queue across across the country. Most of the manufacturing is done in Europe.

<unk>.

So it was a matter for us of getting in and you know.

Securing those long lead items, which we've done so I think that's how we are mitigating the potential supply chain.

Issues getting in early and locking in those delivery dates.

Got it appreciate the color there. Thank you for the time.

Sure.

Once again, if you would like to ask a question. Please press Star then 1.

Again person Star then 1 will allow you to ask a question.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Dan Fidell for any closing remarks.

Okay.

Okay, well. Thank you all for joining US today as a reminder, a recording of our call today will be available on our website shortly.

As always please feel free to contact me, Dan Fidell for any follow up questions.

And again, thanks for joining us today and for your continued interest and investment in SJI. This concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Okay.

Uh huh.

Hum.

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