Q3 2021 South Jersey Industries Inc Earnings Call
Good morning, and welcome to the South Jersey Industries third quarter 2021 earnings conference call and webcast.
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I would now like to turn the conference over to Dan Fidell with Investor Relations. Please go ahead.
Thank you good morning, and welcome to Sji's third quarter 2021 earnings conference call and webcast.
I'm joined today by Mike Renna, our President and Chief Executive Officer, Steve Cocchi, 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 investors got S. J industries Dot com.
Throughout today's call, we'll 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 of economic earnings reconciliations of economic earnings to the comparable GAAP measures appear in both documents.
At this time I'll now turn the call over to our CEO, Mike Renna Who'll review, our operations and strategic priorities, our CFO, Steve Kochi will then review, our third 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 with that introduction.
Let me now turn it over to Mike.
Thanks, Dan Good morning, and thank you for joining us today I am pleased to report that SJI notwithstanding the continuing challenges of Covid again delivered solid performance in the third quarter and through the first nine months of 2021.
And we remain on track to achieve our strategic and financial goals for the year.
Through the first nine months, we have seen economic earnings increased by 12% or approximately $12 million, reflecting solid performance in both our utility and nonutility businesses.
Consistent with our strategy, our utilities, South Jersey gas and Elizabethtown gas represent the bulk of our earnings.
Utility 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 utilities, adding more than 12000, new customers over the last 12 months.
And while we are seeing increased new construction across the state most of our growth continues to come from customers converting from heating oil and propane.
Our infrastructure modernization and energy efficiency investments critical to ensuring safe and reliable service to our customers remain on track and have the added benefit of significantly reducing methane emissions on.
On October 1st in keeping with the cadence approved by the Btu. We began recovery of these investments made over the last 12 months.
I'm also pleased to report that our regulatory initiatives continued to advance in August the Btu approved South Jersey gases engineering and route proposal to construct needed system upgrades in support of a planned two bcf liquefied natural gas facility.
As you know the BP U S calls utilities in New Jersey to evaluate preparedness for potential gas supply interruptions.
This investment is critical to ensure them service is not interrupted in the event of a significant outage either behind our city gate or one of the two interstate pipelines that serve the South Jersey gas system.
Preliminary engineering and design of the project has commenced.
Regarding pending initiatives, we have requested $742 million in phase III infrastructure modernization investments at South Jersey gas.
This next phase of system modernization targets coated steel and vintage Adelaide plastic pipe supported the Murphy administration safety and reliability job creation and environmental goals.
The retirement of re council in September and the leapfrogging of approval of our LNG redundancy proposal has extended our anticipated timeline a bit but settlement discussions continue to progress and we remain optimistic for a positive resolution soon.
With regard to pending legislation the potential for rate base and more LNG and hydrogen investments in New Jersey continues to enjoy strong bipartisan support lines with governor Murphy's clean energy goals and is expected to be a priority item during the upcoming lame duck period.
As previously communicated we believe this legislation will encourage innovation and accelerate new Jersey's decarbonization efforts.
Turning now to our Nonutility operations, both our energy management and energy production segments delivered solid quarterly and year to date results.
Management results reflect strong performance in both wholesale marketing and fuel management.
Energy production reflects positive results from fuel cell and solar investments over the past 12 months, particularly our Staten Island fuel cell as well as contributions from our 35% equity interest in the RMG development partner rats.
I am pleased with our progress on our clean energy and decarbonization goals, a five megawatt fuel cell project in the Bronx that was announced in June is underdevelopment and moving forward similar to our two Staten Island fuel cells that were brought online in 2020, this fuel cell, which will be our started catamaran is eligible.
Under New York's Vida program, which 50% to 75% of revenue and is supported by O&M agreement the guarantees 95% availability.
<unk> will receive 92% of the investment tax credits cash flows and net income from this project.
Our de carbonization investments through our partner Rev remain on track as well are 35% ownership of Rab is now contributing nicely to our bottom line.
And our development of renewable natural gas and future injection into SJI system and other utility systems across the country continues to move forward.
Engineering and design work and eat dairy farms is wrapping up construction on deck and in service on track for the second half of 2022.
We have added a farm development status slide third quarter presentation to provide you with additional detail regarding these investments.
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 the latest period and through the first nine months of 2021.
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 as well.
For the 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.
For the third quarter SJI posted a loss in economic earnings of $18 $8 million compared with a loss of $6 million for the comparable period a year ago.
The latest period reflects improved results from utility operations, which was achieved despite the ongoing challenges of the pandemic and the inherent seasonality of our business.
These improved results from our utility business were offset by decreased profitability for nonutility operations largely related to year over year timing of the recognition of itc's from renewable investments.
Yeah.
Our utilities contributed a narrower third quarter law center earnings of $17 2 million compared to a loss of $18 $4 million in the third quarter last year.
Improved results, primarily reflect rate relief at South Jersey gas.
Customer growth and base rate roll ins related to infrastructure modernization and energy efficiency investments under our authorized plans.
Our non utility operations contributed third quarter economic earnings of $8 1 million compared to $21 $6 million last year.
Energy management contributed third quarter economic earnings of $4 $4 million compared to $6 $6 million last year.
Reflecting solid profits from asset optimization activities, albeit less robust than last year and improved profitability from our retail consulting activities.
Energy production contributed third quarter economic earnings of $3 9 million compared with $13 $8 million last year.
As previously mentioned the decrease largely reflects timing associated with the recognition of Itc's from renewable energy investments, which was partially offset by positive contributions from fuel cell and solar investments made over the past 12 months.
As well as contributions from de carbonization investments through our 35% equity ownership in Red.
Midstream contributed a loss in third quarter earnings of $300000 compared to earnings of $1 $2 million last year.
In the absence of a a few D C related to the cessation of development activity for the pennies pipeline project.
Our other segment contributed a loss in economic earnings of $9 $6 million compared to a loss of $9 $2 million last year, reflecting higher interest in bank fees, partially offset by lower outstanding debt.
For the nine months year to date economic earnings were $112 $1 million compared with $100 million last year.
Improved utility results and consistent nonutility results largely reflect the same factors as previously discussed that impacted third quarter results.
Our capital expenditures in clean energy investments for the year to date were approximately $434 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 and as always 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 35% as of September 30.
Compared with 32, 2% on 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 43, 4% at September 30, compared with 39, 7% at December 31 2020.
Okay.
We continue to have ample liquidity at both SJI and our utilities with approximately $1 $3 billion in total cash credit capacity and available through our equity forward in.
And approximately $1 $1 billion available as of September 30.
In addition, with the proactive refinancing efforts, we've undertaken over the past year as well as repayment of debt from our transactions and the remarketing of our prior mandatory convertible units SJI has no significant debt maturities due in the near term.
Turning now to guidance.
On solid operational performance through the first nine months 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 five year capital expenditures outlook through 2025 of approximately $3 $5 billion.
As you know Penn East Capex in our five year plan was relatively small approximately $100 million and we've identified a variety of utility in clean energy investments that match, our current strategic growth requisite to take its place.
That concludes my remarks, and I'll now turn it back to Mike.
Thanks for the update Steve we are excited by the progress we've made in 2021 and remain highly confident in our ability to execute on our plan to safely and reliably deliver the clean decarbonize energy of the future.
Fully modernized 20, <unk> century's system.
But before opening up for Q&A, Let me address a question that may be on your minds.
With regard to the recent rise in gas commodity prices, let me remind you that SJI has a prescriptive hedging plan in place approved by the Btu and designed to minimize the kinds of pricing volatility our sector as witnessed in recent months.
Just on this program any impact to customer bills would largely be resolved in our next bgs's discussions with our regulators.
New rates effective next October.
As I conclude my remarks, let me once again, thank all 1100 employees for all their exceptional work and dedication to our mission.
I also want to offer a special congratulations and thanks to Dave Robbins, who will be retiring from SJI at the end of this year after more than 25 years of service.
I know many of you have gotten to know when engaged with Dave over the years.
He has served our company admirably and with great distinction for many years, including most recently with the responsibility of leading all utilities, Dave from all of Us at SJI.
Thanks for a job very well done.
All the best for your next chapter.
Operator that concludes our prepared remarks, and we are now ready to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hey, it's Cody Clark on for Julian Good morning, Mike and Steve.
Good morning, good morning.
Steve You mentioned it briefly in your prepared remarks, but assuming penney's does not moving forward can you provide a little bit more color on the investment opportunities that would backfill the lost earnings from the project. So we can think about it is weighted more towards regulated or unregulated investments in any specific areas that you could point to would be.
It would be helpful.
Sure and thanks for the question.
First of all just to remind you.
At our Investor Day earlier this year, we had we had significantly back down the earnings contribution in our long term plan from Penn East.
Just based on what we were seeing at the time.
Our earnings guidance had only included a phase one portion of the project. So from an earnings perspective, it was really a relatively minimal contributor.
In terms of the plan that we put out in terms of replacement opportunity.
Really we've got we've got opportunity on both sides of the business.
Our regulated and nonregulated, ultimately where where the the the replacement earnings will come from it's going to be a mix of both we try to be.
Opportunistic and disciplined with our projects on the nonregulated side, but we've got a lot of opportunity as you know.
With the development of the RMG farms and our investment in in Rev. LNG and there is absolutely no shortage of of safety and reliability investments for us to make up the utilities. So hard for me to say exactly what the split will be.
But lots of opportunity in and no question in our minds and it won't be able to to replace those earnings in Capex.
Understood that's helpful and just thinking about the remainder of 'twenty, one you've reiterated the guidance range on strong performance year to date. So what are the drivers through the balance of the year that we should be thinking about and where would that put you within the range and then also if you have any initial thoughts on 2002.
And especially looking at the the R&D projects coming online towards the back half of that year and potentially some pickup in Rev. LNG ownership.
How are you thinking about 'twenty two at this point.
So for the remainder of the year I think the key drivers will really be either.
<unk> earnings business.
And we had our infrastructure program.
E T G roll in in October so that will contribute to our fourth quarter earnings nicely as well as our outlook.
Our typical drivers of customer growth, which has remained robust.
So that's where you're going to see really the primary drivers this year as well as you know we've seen some really terrific performance out of our existing fuel cell in Staten Island.
And in.
And are always looking to optimize our assets and opportunities at the wholesale business, which.
Has performed also very well this year and we expect that to continue through the balance of the year.
For 2022.
So at this point.
You know, we will we will typically put out our our annual guidance.
With our year end call. So in the in the February timeframe next year is what I would expect in terms of 'twenty two guidance.
What I can tell you is that what we what we laid out in our Investor day earlier this year.
We remain confident in there's a lot of opportunity.
At both the regulated and nonregulated businesses, we've talked about.
Our investments in R&D will begin producing.
Producing significant revenues with those projects going into service.
The expectation is later in 2022.
So.
If you can just stay patient we will put out our guidance at the beginning of next year, but we're not seeing anything at this point that would change our view as we laid it out in our Investor day earlier this year.
Okay got it thanks for taking my questions and I'll hop back in the queue.
Sure.
The next question will be from Richard Sunderland from J P. Morgan. Please go ahead.
Hi, good morning, Thanks for the time today, just wanted to start on the LNG redundancy side could you refresh us with the current project cost.
Construction started in service expectations.
Hi.
Sure Rich good morning.
It might be.
The cost is in the $300 million to $330 million range.
That would include both the construction of the liquid liquefaction facility as well as the storage facility and all the improvements that we'd be making in.
In our utility that Steve mentioned on the call or I mentioned on the call.
All related to the the engineering and design for the improvements that are necessary to be able to.
Supply the liquefaction facility, so again $300 million to $330 million.
We would expect and our projected in service date of 2025.
Oh My God.
And that we're now in.
The engineering and design phase once we receive that P. P is order in August.
Got it and then.
Are there any remaining hurdles procedurally or what have you here beyond just the.
The pre construction phase we're in right now.
Well the BPA you approval for the for the improvements was obviously, one and then we have environmental permits that we need to secure.
And again, we feel very confident about about those and things are progressing nicely. So beyond that now it would be once we have all the permits in hand, we would begin construction.
Great and then switching gears to the R&D side, you mentioned, a little bit about the local efforts in the state could you speak a little bit more to what you're watching for on that front and then maybe just federal efforts as well and kind of what's in focus for you right now.
Yeah.
Yeah sure I'd be happy to.
Start with the federal.
There are there is.
As part of the build back better plan there is a lot of incentives for.
De carbonization everything from the extension of the investment tax credits for traditional renewable investments, but also now the inclusion of tax incentives for RMG and hydrogen.
So that's you know that's working its way through reconciliation and we'll see ultimately what emerges but.
We're obviously encouraged by the fact that it is included.
In the Bill.
You know not only because.
It's certainly going to jumpstart the industry or.
Or development, but I think it's also a a reinforcement that de carbonization is on equal footing with electrification. So.
We're certainly encouraged on that front.
Similarly on the state level.
No it's been it was a.
Every seat in New Jersey was up for election on on Tuesday, So they were in recess.
We'll be until they they go into a lame duck.
The work was it was.
<unk> done.
You know these past few months on lining up sponsors and educating.
Legislators on on the importance of the Bill and how it is.
Again will help the <unk>.
The governor and the administration achieve their clean energy goals continue to see strong support bipartisan support.
And would expect this to be a priority during lame duck.
Great. Thank you for the color here.
Alright.
Thanks Rich.
The next question will come from Shah rear Peraza from Guggenheim. Please go ahead.
So <unk> got it.
On your own heart.
Hi, guys. It's James word on for Shar, how are you.
Good how are you doing.
Doing well.
The well the first if you wanted to cover was the post election, why don't you just touched on very well and thank you for the color there.
The.
The next element was.
I just wanted to confirm the combined annual growth rate that you're seeing between South Jersey gas and Elizabethtown, it's kind of that one to one 5% annual compound growth rate is that still the case and do you expect there to continue to see that through the forecast period as we model you up.
For customer growth.
Yeah sure.
Melissa how are you yeah, we're on track.
Perfect.
Awesome.
And then going back to the.
The tax credits.
And specifically looking at the federal continues to develop I know that the 40% to 45% equity target the non-GAAP target you've got there and bought the mandatory convertibles.
Is staying as it is you've reiterated your 12% to 13% episode of debt over the 21 to 25 period, but is there the potential.
Do you see or any of the tax credits being proposed.
In any way shape or form to potentially bolster.
Your episodes to debt is there any unexpected upside potential that could materialize there.
I I I'll, certainly ask Steve to add any additional color I would not expect it to again I think the way we're viewing it is we've committed to making a.
You know an average of about $50 million in traditional renewable investments over the prior year over the over the five year period.
I would think they will want a will want to balance the quality of our all of our earnings over that period as well I don't think we'd want to.
I have too much of our of our earnings in the form of investment tax credits. So I think you could see if there is legislation ultimately that that does provide for investment tax credits or production tax credits for RMG.
We may reduce the amount of of traditional renewable investments. So I don't think that would be incremental to the point, where it would have a significant impact on our on our metrics or our earnings.
Gotcha, Okay. So it wouldn't be a driving factor for changing the business mix. That's that's very helpful.
<unk>.
And the last one is back on the legislation.
Developing around Orangey.
You had mentioned in the past the way legislation is being written.
The rate baseball definitely in new Jersey, but possibly outside of the state as well picking to like work on our part in Oregon, and how should we think about your latest thoughts here on how that could develop whereas developing.
It's early stages.
It is early stages I think that there's there's certainly going to be.
Some modifications to what you know what as currently drafted.
It's premature to talk about exactly where to even try to you know.
Guess, what that might look like I think what would be a realistic.
Our approach would be perhaps a near term prioritization of New Jersey based projects again.
With the recovery in mind right getting people back to work, so I'm, making the priority.
Developing our N G.
Within the state.
And then perhaps the ability further down the road to be able to rate base RMG honesty.
I think that would be the probably the extent of any kind of adjustments that you would you would see again into the bill is really garnered very strong support from both sides of the aisle and we're really encouraged by.
You know by the feedback that we're getting.
That's terrific. Thanks for the color guys really appreciate it sure.
And once again, if you have a question. Please press Star then one.
Next question will be from Michael Gaugler from Janney. Please go ahead.
Good morning, everyone.
Good morning, Mike Good morning, Mike.
We're still going through a dark I just wanted to touch on one item and it was the credit ratings and we're right now Triple T.
You guys have been executing pretty well against plan.
Everything seems to be moving in the right direction I'm wondering how you're thinking about that are you looking for.
Push your ratings higher are there any reviews in the near term that could be positive in that regard.
Yeah.
Hey, Mike It's Steve So as you know we executed on a a.
Fairly significant equity.
The equity raise earlier this year and we were in very close discussions with the rating agencies both.
Around and following that that process and and those conversations were very positive and what we did there was very well received.
As was reflected in.
Some of their reactions that they published after the fact at this point, we you know what we've said in our plan as we are we are targeting to continuously improve our F. I voted that metric, which is what S&P looks at over the over the planned period.
We've got a lot of a lot of growth opportunity. There are a lot of capex in front of us that we need to finance.
But we also have a.
What we think is going to be a a.
A strong improvement in our cash flows and cash from operations as we bring on.
As we bring on these operating RMG farms next year as well as continue to pursue our regulatory strategy of of tracking approximately 50% or so of our capex recovering that alright annual basis, and then our kind of two to three year rate case cycle. So.
That's what we like what we laid out earlier this year remains.
How we're looking at this it is it is important to us to maintain a solid credit rating.
And with all the factors that I just discussed we see.
And ability to do that in the plan.
Alright.
All I had gentlemen, thank you.
Thanks, Mike.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the call back over to Dan Fidell VP Investor Relations for any closing remarks.
Well. Thank you all for joining us today great questions.
As a reminder, a recording of our call today will be available on our website 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. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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