Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Q2 2019, South Jersey Industries earnings Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If you require operator assistance. During the program. Please press Star then zero on your Touchtone telephone I would now like to do Softwares Conference call Mr., Dan why don't you may begin Sir.
Thank you Kevin Good morning, everyone and welcome to <unk> second quarter earnings conference call and webcast.
I'm joined today by Mike run, our President and Chief Executive Officer, as well as several 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 SJ industries dotcom.
The release and the associated 10-Q filed this morning provides 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.
Let me note that through throughout today's call, we will be making references to future expectations plans and opportunities for us to realize actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the Companys forms 10-K, and 10-Q on file with the FCC.
With that said I'm pleased to introduce our CEO , Mike Renna who'll discuss our current earnings performance guidance and outlook as <unk> Chief financial officers Yellow Fernandez will then review the financial performance, our our individual segments and our balance sheet.
Mike will 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 thanks to all of you for joining US today I'm pleased to report that our second quarter results were in line with expectations and that our transformation efforts are proceeding on track.
Across our utilities, we're making critical infrastructure investments to modernize our system and to meet the continued strong demand for clean reliable and affordable natural gas.
The integration of Elizabeth town at El Pen remains a largely seamless process.
Our regulatory initiatives are being executed as planned.
And the repositioning and monetization of our noncore nonregulated businesses continue at a steady pace.
All of which support our transition to a more regulated company with highly visible cash flows and earnings.
Accordingly, we are today, reaffirming our 2019 and 2020 economic earnings per share guidance.
Before we dig into the second quarter financials I want to give you an update on several key pieces of our strategic transformation.
As I mentioned the integration of Elizabeth town in Elton is going very well and remains a highly efficient process. Thanks to the hard work of our dedicated employees with full integration on track to be completed in Q1 2020.
On the regulatory front, a five year $300 million infrastructure replacement program for Elizabeth Town was approved by the BP you in June .
Authorizing the replacement of 250 miles of aging cast iron and bare steel.
This modernization program is very similar to South Jersey gas companies, a our people brands, including annual true ups.
In April Elizabethtown filed a petition with the BP you requesting a revenue increase of approximately 65 million to recover at 346 million in system improvements that are not currently in base rates.
The case is proceeding on track and we are currently in the discovery phase, we expect settlement discussions to begin in the coming months.
Followed by a final order inline with precedent from prior cases.
Finally on the financial front, the sale of our non core nonregulated assets continue at a steady pace.
Over the last year, we have sold our solar assets in our retail gas assets using the proceeds to repay debt and to strengthen our balance sheet.
As previously communicated we expect to announce further progress regarding our remaining noncore businesses during the third quarter.
Throughout this transformation year, we focused on building a foundation of strong regulated performance, we're pleased with our progress.
And encouraged by the strong demand, we continue to see for natural gas.
As a result, we are reaffirming our 2019 economic earnings guidance of one dollar five to $1.15 per share.
Our priorities for the balance of 2019 remain unchanged.
We are focused on continuing to effectively integrate or Elizabeth town, and Elton acquisitions, including the winding down of our T I say with southern.
Achieving significant cost savings for our business transformation initiatives and effectively executing our pending regulatory proceedings.
We also reaffirming our 2020 economic earnings per share guidance of $1.53 to $1.57.
Driven by strong customer growth and infrastructure investment at our utilities.
Improved contributions from non from our non utility operations.
And additional productivity and efficiency gains from our business transformation initiatives.
Our strategy remains unchanged as does our commitment to high quality regulated earnings.
We also recognize the operational goals of New Jersey Energy Master plan requires a sustained level of innovation and agility, we look forward to working with Governor Murphy. The BP, you and all key stakeholders to leverage the reliability and affordability of natural gas.
To live to deliver a balanced solution that promotes both the economic and environmental goals in the state.
With that I'll turn it over to Sheila to review our operational performance.
Good morning, everyone. Thank you, Mike as Dan mentioned, the earnings release, and it's like they provide detailed information regarding GAAP earnings.
I recommend that you review that information.
For this quarter would focus our discussion on our non-GAAP measure of economic earnings.
Management believes this measure provides valuable insight into our business performance.
It's <unk> second quarter economic earnings per share was a loss of 15 cents per share compared with seven cents per share into any like 18.
The buyers reflects the addition of eat town and as Doug Operation aim associated financing impact.
Non core asset sales and lower resource from wholesale operation.
Is the adoption is partially offset by increased repeat WPP put on so you'll see that.
I've got you PDP Sling TV did I lost art in earnings of two cents per share compared with 42 cents per share in 2018.
If I have largely reflects the addition of eat town and I Dunno Predations acquired into Lightweighting 18.
Oh say by their vote in opening batsman Oh.
For infrastructure replacement and because some of the growth.
Net cost them a good old as gross argued PT fees was 1.4% over the last 12 months.
A growth rate that remains above the national average.
Midstream earnings were consistent at one cents per share, reflecting eight S.U.D.C. related husseini pipeline project.
Turning to our non utility operations and if he could too conservative in lots of economic earnings per share of two cents compared to breakeven as we saw last year.
The decline replaced limited I think opening opportunities driven by tighter spreads mild weather and new pipeline opioid eating food.
Second quarter 2016, we saw it was also impacted by headwinds associated with severance legal quanta.
We'll begin to roll off in 2020.
And then he said he said it's going to vary a lot in economic earnings of one cents per share.
Bear with 44 cents per share last year.
[noise] out for that segment going see that it I love in economic earnings of nine cents per share compared with breakeven last year.
Reflecting a decision caused in financing for each one and done.
Turning now to copy data spending our year to date is Spain photos more than $220 million and we remain on track for around $540 million in copy that its spending in 2018.
We remain committed to improving the strength of our balance sheet and credit metrics.
As of June Thirtyth 2019, equate to total capitalization was 43.4% up significantly compared with 28.9% at December 31st 2018.
This reflects the issuance of our equity forward in January in more than 300 million in debt repayments for from non core asset sales.
As previously communicated our growth plan includes a mandatory convert it was equity units of $287.5 million.
Do into any to any one.
Including conversions out accessing it.
<unk> total capitalization ratio and non-GAAP measure was 49.6, they're saying at June Thirtyth 2018.
And 35 point people are saying at December 31st two any 18.
That concludes my review of our financial performance and balance sheet.
I will now turn it back to Mike for his concluding remarks.
Thank you scale up.
As I conclude my remarks, I want to thank our approximately 1100 dedicated employees for their outstanding work.
For all that they do each day to execute the strong growth plan path, we've outlined for you.
But before we open it up for questions I do want to address.
Questions as some of you may have regarding pennies, we certainly agree with our partners at the duration of the permitting process is the key component to watch.
New Jersey Department of Environmental Protection has up to a year to consider our application and while they can certainly take a full year to complete their review we remain optimistic that they will continue with past precedent and complete their review more quickly.
That said.
I want to remind you that our 2020 economic earnings guidance range of $1.53 to $1.67 contemplates various outcomes from our business segments, including the potential for a delay of pennies.
As previously communicated we would expect to be on the higher end of our 2020 range. If for example, we were to receive better than expected outcomes from our pending regulatory initiatives.
Achieve a higher level of synergy benefits from our business transformation efforts or witness an expansion of the currently tight wholesale spreads next winter.
Conversely, we would expect to be on the lower end of our 2020 range. If pennies were to face additional delays beyond 2020, if regulatory outcomes or business transformation cost savings were below our expectations for wholesale Mart and margins tightened significantly from already low levels.
It's important to remember that should pennies phase and in service delay the ultimate value and benefit of the project freshly I would remain unchanged, but the timing of the realizing realization of the benefits would be pushed more into 2021 to 2020.
Operator that concludes our prepared remarks, and we're now ready to open the line for questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then one key on your Touchtone telephone. If your question has been answered you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Chris Ellinghaus with Williams capital.
Hello, everybody how are you good morning.
Good morning, Chris.
Mike is you were discussing the potential range of 2020.
I don't know if you want to talk about this but.
What sort of timing for Penn East would put you in the upper end of that range and.
Obviously, if everything was pushed off into 2021, it would be certainly at the lower end, but can you give us a little color about inside that range with your timing reflects yeah sure.
The upper end of the range would be that.
You know D. P does follow past precedent and we would get our permits in less than a year, which would enable us to begin construction earlier in 2020, and then we have than Weve.
Then we built into our into our guidance and certainly as you know as you just mentioned if that takes the full 12 months or more extended a little bit beyond those 12 months it would it would push.
Our commercial operations back from our anticipated late 2020.
Okay can you can also give us a little color, what what kind of hurdles did you see and sort of the survey work being delayed by a couple of months.
You know what I mean, like we really didnt face any any any hurdles as far as completing the surveys I. We just we felt that the prudent way to do it was to let the process play itself out in the district Court and.
You know when we when they reaffirmed or the FERC decision we.
Accelerated the completion of our permits and I think we're we're sitting poised to submit that application.
Very shortly.
Okay.
Can you give us any color on you were talking about the year in the discovery process and Elizabeth towns case can you give us any color on what you're seeing in the tenor or types of.
Request that you're getting it might be surprising or any kind of color on the docket.
Yeah, I'm going to ask Steve coach you to answer that.
Hi, Chris. So we are we are towards the end of that discovery phase at this point.
I'm not seeing anything out of the ordinary we.
We've always viewed this case as a fairly straightforward infrastructure.
Based.
Rate case and that has not changed so.
Hopefully the discovery process gets wrapped up soon will commence.
Discussions with the parties this fall and and hopefully get through a resolution within the timeframe that that we have it in prior cases.
Okay.
One last thing about non core asset sales and Mike can you give us any color on how that process is proceeding and that also seems to be dragging on a little bit with what's going on in the market for those assets.
It is it is a it's taken a little longer than than we had anticipated I can tell you that there's.
There's nothing commercially that I'm concerned with it's just that.
You know some of these these are these sales have HM.
Are these these deals just have terms and conditions that have to be worked through contractually and that's just kind of what has caused some of the delays getting the necessary consents and.
And approval.
Okay and then the remaining.
Solar home phone call that remarketing of the sort of stub piece.
Is that your including that in the third quarter sort of timeframe as well.
We are yep.
Okay, great. Thanks, guys.
Thanks, Chris Thanks, Chris.
Chris.
Our next question comes from Christopher Turnure JP Morgan.
Hi, Chris.
Hi, Chris.
Good morning, guys.
I wanted to follow up on the pen East comments I, certainly respect that there's a range of outcomes and.
The 2020 guidance, but could you speak maybe a little bit more to perhaps the midpoint of that guidance just because there is such a big step up in your midstream segment of about $12 million year over year is that $12 million predicated itself on a 2020 commercial operations date.
Yeah, I mean, the $12 million would have would have.
Would have been based on it on a 2020 commercial operations date, but you know again I mean, we we we set the the range would be intent guiding towards the mid point and that midpoint reflects.
You know as.
Conservative a set of assumptions as we could put we could put in there. So you know we're still confident with with the range, we're not guiding towards the lower end arranged anything at this point in time, because we believe that there are there are still enough offsetting positives in our in our 2020 plan that we're comfortable maintaining our guidance.
Okay. So I guess.
Kinda stemming from that we shouldnt.
Stick as hard and fast to each segment's guidance and kind of a mid point year over year as might be implied in the walk in your slides and if things do not proceed quickly with Penn East.
Perhaps midstream is off but there are certainly other areas, where you feel comfortable I'm, making up the difference.
Yes, that's what I meant to say [laughter] well, that's not exactly thanks, okay perfect.
And then my second question is on equity financing you know you're pretty clear in both your 19 and 20 guidance kind of what your intentions are but since there is that 2020 need that your your your acknowledging at this point in time is there anything kind of.
That might benefit you by pulling that forward given you know just in general equity markets remain somewhat healthy utility valuations remain somewhat healthy and kind of getting that done slightly better cost of capital than might otherwise be the case, if you waited.
Yeah, I mean, certainly you know we.
Weve considered all of all of those those factors, Chris I think you know where we are right now is that that that equity is tied to a specific project that we.
We anticipate.
I'm getting approval for and.
Oh, well leased the prep work that needs to be done to build the project, we would need approval for and.
We would begin.
Construction in earnest in 2020 so.
Weird.
While there is there's certainly a a good an attractiveness to potential here in the equity markets early I don't want to get out over my skis and and.
And.
You know do it prematurely I'd, rather let the process play itself out as far as that that LNG project goes and make sure that we have that.
We have the need for the equity.
Okay and just on that.
What are the key milestones that you're looking for there.
We have to submit what is effectively a.
Our request for some system upgrades of the beep you because of those it will be increasing the pressures and I think the diameter of the line that would ultimately be feeding the plant.
And so we all need BPU approval for that so that's really the key milestone at this point in time is that the finishing of that engineering study the submission of that of that request for approval from the BP you.
And again, we've said that we anticipate doing that.
Late in the third quarter, if not early fourth quarter.
And that's been relatively quick turnaround.
Okay, that's going to be my next question great. Thank you guys.
Thanks, Chris.
Our next question comes from Cogs wouldn't with Guggenheim.
Hey, guys, it's actually a sharper Connor how are you doing.
Sure.
Do you guys touched on a lot of stuff today. So it's good to see the integration is going well. It's a good start can you just maybe touch a little bit on the balance sheet.
Slide on there, but sort of how sort of how you're tracking towards your 12% never thought of it that targets towers sort of conversations going with the agencies and is there an opportunity sort of hit your triple B plus or ahead of plan.
Hey did you see a little yes, we do go and no changes in the plan as we disclosed last time you open them once in place to go back to typically be within the next five years.
Oh, we have had good conversations with the agencies and we are looking at different alternatives to continue the strength of our balance sheet as we speak we continue to pay down debt based on our sales so far nucor safe acid.
Got it that's helpful. And then and then let me Mike Let me ask you because you guys have obviously seeing starting to see the benefits of.
Really going more regulated divesting assets that frankly, telling investors don't really value.
So you still have a wholesale gas business, you've got to fuel management business, it's not really super material, but I'm kind of curious in light of like the growth you're seeing at the core businesses is there an opportunity to look something look at something more strategic around that business completely get you know.
[laughter].
More or less a 100% regulated so how are you thinking about the remaining gas and fuel management business I guess.
I think the.
I think there is a distinction between the two although they are obviously very interrelated I think the fuel management business is very attractive as it plays to our strengths, it's very low risk and.
The longer term contracts, so you're not going to deal with the kind of wild swings than you may get in the wholesale business, depending on where you know.
Where prices are its much more predictable.
And so it's a business that I think really does kind of fit into our our general strategy and where we like to deploy our assets whether that's you know.
Human capital or or financial capital.
Wholesale look it's it's no secret it it was a challenge we were out in front of it last October .
And kind of you know solid solve the tightening of the of the spreads in the <unk> and the challenges that the market was facing.
It's a.
You know there is value short to the business for us and it does generate a a lot of cash it does produce a lot of earnings in you know.
When there is some when there's some volatility that we can we can take advantage of.
And those are earnings that we can then redeploy into our into our utility to continue to grow our core business. So.
We're assessing it and you know as we have with anything else, if there's an opportunity for us to monetize a business and and.
Again, we deploy that capital to strengthen our strategy and grow our core businesses and obviously, we would be we would be very interested in looking at that.
Got it terrific that was it guys congrats on a pretty good start.
Thank you Sean.
Our next question comes from Tate Sullivan with Maxim Group.
Hi, Thank you good morning, and I'm, just looking at the press release about the costs and the cost associated with the planned exit of the transition services agreement I mean, so those are additive to what what the baseline expenses and the T.S. They are can you give more context to that comment please.
Sure.
It takes this is Dan Yeah, I think as you're looking at what we're talking about trend or the the T.S.A. exit a there are certain costs.
At the TG level for on M.T.S.A. is one piece of them.
So if you're trying to sort of get to how much of I think if I understand the Genesis of your question how much is sort of weighing on the TG this quarter and how much will sort of be lift in a normal sort of runway kind of option for EPG.
This last period, we had a T.S.A. costs along with some on EM.
A bit of a higher own end piece.
Then we would normally expect associated with BTG.
So in total <unk>, you're asking for some specifics I think somewhere in the neighborhood of two and a half million to three and a half million for additional costs that you might expect would lift on a normalized basis.
Okay. Thank you and then does that is there very ability to closing that tranches since the transition services agreement or is that is that steadfast for one Q2 0.
As far as I'm concerned and steadfast I mean, we we we've committed to it and and.
You know we've mobilized resources on on.
Sci and Elizabeth town, and I know you know getting a lot of support from southern and we are on track to exit.
Fully accident in Q1 early Q1.
Yeah, Hey.
Take this is Dave Robin so we've been exiting portions of the service agreements throughout the year.
We're about two thirds of the way through we will be through the rest of the service agreements in Q3, So we'll be completely on track to exit the service agreements and then we'll exit the system T.S. say in early 2020, so as Mike said, we're on track to be totally out by Q1.
Okay. Thank you for that detail and then you put it into two Elizabeth town customer growth rate around 1% can you disclose or talk more about is that versus what it was the prior year are you, making progress and the conversion effort neat listen to Tom territory any context. There. Please you can.
We're making excellent progress as far as customer growth numbers. We're significantly ahead this year of forecast.
We've put our model that's been very successful at South Jersey gas in place.
We've staffed up to sales and marketing functions.
And there's a great demand for our product up there and as we continue to build out the system.
We're getting more and more calls not only for conversions, but for new construction, particularly in the northwest territory of Elizabeth town.
Okay. Thank you very much.
Thanks, Dave Thanks, Dave.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone.
Our next question comes from Dennis Coleman with Bank of America.
Hi, This is their core Walker on for Dennis Oh here and there.
Hi, guys. How are you doing a lot of my question to answer but you addressed the the LNG storage project question, but I believe there's a couple other redundancy projects kind of in the works.
I think there's one related to compression maybe a transition.
You might upgrade and.
Can you just speak a little bit to that to those projects and is did the b to B L. England alternative project I think to some of the legal and kind of permitting hurdles that you're kind of working through there.
Sure.
As as I said, you know, we're we're wrapping up all the prep work that we need to do.
In advance of the you know the large scale LNG project that we've we've contemplated will will help us.
Reduce any potential impact from the supply interruption and that's really what that project is designed to do it gives us a tremendous amount of redundancy.
Again in the event that there is some kind of a prolonged.
Supply would you know.
Issue in Southern New Jersey, we are evaluating the needs and potential solutions for Elizabeth town as well those are kind of longer term in nature.
And then there are there is.
A system redundancy need that we have.
That would allow us to maintain continuity of service to about 150000, plus customers and lower Atlantic County, and Cape May County that are served off of a single agent distribution line that I believe is nearly 40 years old at this point in time so.
We continue to.
Assess and evaluate the most economic and.
Expedient I guess from a permitting perspective a pass.
And we intend on you know again, we believe this is a critical project is it's something that we really have to do in order to maintain that continuity of service for our customers.
That will require us to guide.
Oh in all likelihood its going to require us to get up a Pinelands Commission approval. So we're you know we're starting to kind of line up that effort as well.
From a timing perspective, Derek I think that's something that you could anticipate.
I'm seeing a lot of momentum on towards the latter part of the five year plan, it's not something that that we expect that we would be able to get done and get built and we you know in the next two or three years.
That's helpful. Thanks, Mike appreciate it that's it from me.
And I'm not showing any further questions at this time, let's turn the call back over to do.
Well. Thank you all for joining us this morning, as a reminder, a recording of our call today will be available on our website as always please feel free to contact either myself, Dan, but al or Erik Jacobsen for analyst and investor questions or Marissa Travaline for media inquiries, our contact information may be found on our earnings release and earnings presentation materials again. Thank you for joining us today and for your continued interest and investment in S.J. <unk>. This concludes our call have a good day.
Ladies and gentlemen, ladies and gentlemen. This concludes today's presentation. You may now disconnect and have a wonderful day.
That ended.
So.