South Jersey Industries’ (SJI) CEO Mike Renna on Q4 2015 Results – Earnings Call Transcript

By | February 29, 2016

Scalper1 News

Operator Good day, ladies and gentlemen and welcome to the Fourth Quarter 2015 South Jersey Industries Earning Conference Call. My name is Lauren and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Ann Anthony, Treasurer. Please proceed. Ann Anthony Thank you. Good morning and thank you for joining us as we present SJI’s fourth quarter and full year fiscal 2015 results, as well as an update on our business. Joining me on the call today are Mike Renna, President and CEO of SJI; along with Steve Clark, our CFO; and Jeff DuBois, President of South Jersey Gas; as well as Marissa Travaline, our Director of Investor Relations. We also have several additional members of our senior management team available to help address questions following our prepared comments. Our earnings release was issued to the media this morning and is also available on our Web site at www.sjindustries.com. This release and the associated 10-K provide an in-depth review of earnings on both the GAAP and to 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 throughout today’s call, we will be making references to future expectations, plans and opportunities for South Jersey Industries. Actual results may differ materially from those indicated by these statements, as a result of various important factors, including those discussed in the Company’s Form 10-K on file with the SEC. Please be reminded that our 2014 per share numbers have been adjusted to reflect the impact of the stock split that occurred in May of 2015. With that said, I will now turn the call over to our CFO, Steve Clark to present SJI’s fourth quarter and full year 2015 results. Steve Clark Thanks, Ann and good morning everyone. To begin, our full year 2015 Economic Earnings results totalled $99 million as compared with $104 million in 2014. Economic Earnings per share for 2015 were $1.44 as compared with the $1.57 for the prior year. For the fourth quarter of 2015, Economic Earnings totalled $43.2 million as compared with $31.2 million in the prior year period. Economic EPS for the fourth quarter of 2015 was $0.62 compared with $0.47 for the same period in 2014. Major driver of the year-over-year decline is the write-down of our investment in the energy facility of the former Revel Casino property in 2015 and related cost we incurred. This non-recurring event reduced Economic Earnings on a compared basis year-over-year by $15.7 million. OpEx totalled $11.1 million which is attributable to the write-off of our equity investment in the project and a reduction in operating income compared to the prior year period. In the fourth quarter of 2015, we also took an additional charge after-tax of $4.6 million resulting from a payment to the formal bondholders to settle all claims associated with the project. We are currently pursuing recovery of that payment from our financial and legal advisors, as well as our insurance carriers. We’ll recognize that recovery in the future period in which it occurs. We also restructured our Energy Project business at the end of 2015, distributing the assets held within Energenic, our energy project development joint venture among the partners. Later in the call we’ll provide more detail around this transaction which resulted in a onetime after-tax charge of $1.7 million. The charge was entirely due to recapture of investment tax credits associated with several of the projects we divested. Excluding these non-recurring items SJI’s Economic Earnings and Economic Earnings per share for 2015 would have improved by $17.4 million and $0.25 per share respectively. With that said, we did see some very strong operating performance within our business lines that reinforces our potential for significant earnings growth over the next five years. I’ll detail that information now as we review the performance of each for our business lines. Looking at the utility, South Jersey Gases’ earnings for the year remained stable at $66.6 million as compared with $66.5 million in 2014. Fourth quarter utility net income was $22.2 million as compared to $24 million for the same period of 2014. Earnings was attributable to significant infrastructure investment and strong customer growth, was offset by higher charges related to uncollectible accounts and post-retirement benefits, as well as investments made to improve customer service. As we discussed in the last call, extreme cold experienced in the past few winters produced significantly higher customer bills. Also during 2015, we revised upwards our reserve percentages for age receivables based upon a recent experience. These events resulted in increased aging of those receivables and ultimately increased reserves and write-offs for those receivables. The after-tax charges for our uncollectable receivables totalled $8.8 million for the full year of 2015 and $3.8 million for the fourth quarter. This compares to after-tax charges of $5.6 million and $3.4 million for the same periods in 2014. We continue to educate customers of ways to reduced usage, excess programs for assistance and take advantage of the various bill repayment options we offer. As I mentioned earlier, customer growth and infrastructure investments remain key drivers of current performance and will continue to benefit utility earnings in the future. During 2015, we added more than 6,200 customers, brining our current customer count to 373,100. During the same time period, customer growth added 2.2 million in incremental net margin as compared with the prior year period. High for our industry, this 1.7% customer growth rate is supported by low natural gas prices from abundant local supplies, aggressive efforts targeting conversions and a noteworthy increase in new construction, which accounted for 2,900 customers in 2015 that was up a little over 19% from 2014 results. Regarding investments in our gas system, we closed out 2015 with accelerated infrastructure investments totalling $70 million. AIRP, which replaces aging bare steel and cast iron gas mains throughout our system and the SHARP, which replaces low pressure gas mains along the barrier islands with high pressure mains helped to reinforce and better protect our system. These investments added an incremental $2.3 million of net income for the full year. Another major infrastructure initiative underway is the proposed pipeline to provide natural gas to the former BL England Electric generating station. We received final approval from the New Jersey Board of Public Utilities in December, allowing the project to proceed. While several outside parties have filed appeals to the decision, we remain optimistic that construction will begin on this project later this year. Now we’ll move to the non-utility side of our business, which is comprised of two segments, South Jersey Energy Services and South Jersey Energy Group. For the full year these segments added combined Economic Earnings of $31.5 million as compared to $37.6 million in 2014. For the fourth quarter, the non-utility businesses generated $20 million compared with $7.2 million for the fourth quarter of 2014. South Jersey Energy Services added Economic Earnings of $14.7 million in 2015 as compared to $24.6 million in 2014. For the fourth quarter South Jersey Energy Services contributed $9.3 million as compared with $3 million for the same period of 2014. Plus this area of the business houses our entire energy production portfolio, $17.4 million of one-time charges I noted in my opening comments flowed entirely through our Energy Services business, while the conversation concerning Revel is a familiar one, it is worth noting that we believe the settlement reached in December puts the negative impacts of that issue fully behind us. Further, we’re in discussions to recover the $4.6 million charge incurred in the fourth quarter. The remaining $1.7 million charge relates to December transaction whereby substantially all of the assets held in our joint venture Energenic LLC were distributed between SJI subsidiary, Marina Energy and its partnered DCO Energy. SJI retained all the assets associated with the provision of energy to the well-established Borgata hotel and casino property and two solar facilities. Other landfill and CHP assets were distributed to the partner firm. I’ll let Mike expand on the strategic rationale behind that transaction a little bit later. Turning to our individual project businesses, our Solar business contributed $33.9 million for the full year 2015 as compared with $25.5 million in 2014. For the fourth quarter, this business line contributed $17.3 million in 2015 as compared with $4.1 million for the same period in 2014. Investment tax credits throughout that performance contributing $38.3 million in 2015 as compared with $30.3 million in 2014. Operating performance continues to improve within our Solar fleet, and 2015 production generated approximately 136,000 Solar renewable energy credits as compared with 111,000 in 2014. As has been the case in prior quarters’ results, total production is not yet fully recognized in net income due to the three to six month lag in the certification of certain renewable energy certificates. Performance also reflects the fact that we have hedged a considerable amount of our SRECs when SREC prices were much lower than they are today. Looking ahead, we expect operating performance of our Solar business to continue improving as SREC prices have strengthened significantly during the last year. We’ll benefit from this as we hedge future production from our new and existing Solar facilities, at the much higher SREC prices available in the market today. Looking at CHP, for the full year our portfolio reflected a loss of $13.7 million as compared with Economic Earnings of $1.8 million in 2014. For the quarter, contributions from CHP reflected a loss of $5.1 million in 2015 as compared to a loss of $0.5 million in the fourth quarter of 2014. As I previously indicated, these results directly reflect the charge associated with our energy facility at the former Revel property. Excluding the charge, CHP was a positive contributor to Economic Earnings for the year. Our landfill projects produced a loss of $4.5 million in 2015 as compared with a loss of $3.3 million in 2014. For the quarter landfills posted a loss of $1.3 million versus a $700,000 loss in the fourth quarter of 2014, due in large part to the inability of the landfill operator at our largest facility to provide gas in November and December. Performance of the landfills has been an issue for a while and that was one of the drivers behind the restructuring of our Energy production business. As we move forward, SJI’s portfolio now includes just four active landfill projects, which all support a single power purchase agreement for renewable energy at the Borgata property. Within the Wholesale Commodity and Fuel Management segment of our business, 2015 was a very profitable year. South Jersey Energy Group contributed $16.8 million in 2015 compared with $13 million in the previous year, an increase of nearly 30%. For the quarter, South Jersey Energy Group added $10.7 million as compared with $4.2 million in the fourth quarter of 2014. I want to emphasize that this performance was particularly impressive because it was achieved without the benefit of the polar vortex that boosted 2014 results. Rather, these results were attributable to the contributions from our three active field management contracts and our ability to optimize storage and transportation assets within our portfolio. We see this performance as being repeatable in 2016. Finally, our year-end equity to cap ratio was 42% as compared to 43% in 2014. This ratio reflects the significant investments we made in our Utility and in our Solar Project Development business over the last year. To support our balance sheet, we’ve used our dividend reinvestment plan to issue equity totalling $63.2 million in 2015. Further, we currently maintain a cumulative deferred tax benefits totalling nearly $400 million related to bonus depreciation and investment tax credits that we expect to realize over the next 10 years, as we work towards strengthening our balance sheet. At this time, I’ll turn the call over to Mike. Mike Renna Thanks, Steve. Good morning, everyone. It goes without saying that 2015 was a particularly challenging one for SJI. But it is our performance in light of those challenges, strengthened by a new vision that has put us on a path for long-term sustainable growth. Repositioning executed in 2015, will serve as the bridge to our 2020 plan, defined by four clear and achievable goals. The first is to grow earnings to at least $150 million, it’s important to emphasize that 150 million represents earnings from our core operations. In other words, earnings without the benefit of investment tax credits. Effectively, we are doubling SJI’s earnings from operations in five years. Next, is to improve the quality of our earnings. As we move through the second half of the decade toward 2020, we expect nearly 80% of earnings to be coming from regulated businesses. The third tenant of our plan is to strengthen our balance sheet. As our investment profile changes and aligns with increased opportunity in our regulated businesses, we will realize a marked and considerable de-levering of our balance sheet. Finally, we will accomplish all of this with a continued focus on reducing risk across our portfolio to ensure that we provide not only high-quality, but also consistent and reliable earnings. As I mentioned earlier, the challenges face in 2015 were certainly difficult and unfortunate, provided a platform for change and growth. Specifically, the bondholders’ settlement and eventual write-off of our energy assets associated with the former Revel property allowed us to relief SJI of a significant and costly financial and resource drain. Last six months have brought forth a renewed organizational focus on those businesses that are the foundation of our plan. The Energenic transaction completed in December has real and tangible strategic benefits. Our assets are now concentrated on high-performing proven CHP assets and a smaller landfill fleet, a fleet, where the majority of the output is protected by a long-term power purchase agreement with Borgata. Over the long-term this transaction will afford a stronger and more stabled income stream and considerable cost savings. The impacts in our region from higher gas cost during extreme weather in 2014 and to a lesser extent 2015 have only deepened our commitment to critical pipeline projects like BL England and PennEast, both provide much needed gas and electric reliability and cost savings to constrained areas of New Jersey. 2015 bolstered my confidence in our ability to deliver at least 150 million in Economic Earnings by 2020. The foundation is there, customer growth combined with ongoing investment in our utility infrastructure, supported by strong performance from our Commodity Marketing and Fuel Management business lines will drive meaningful and near-term improvements in performance. While broader initiatives like an enhanced commitment to leadership and talent development and new midstream investments like PennEast will allow for exceptional long-term growth. Looking to 2016, due to the many advantages of natural gas, we expect significant customer growth to continue. Additionally, investments through programs like our AIRP and SHARP will provide benefits to both customers and shareholders alike. These impacts combined with investment in new projects like the BL England pipeline and our natural gas liquifier will position the utility to contribute more than 70% of earnings in 2016. On the non-utility side of the business, our retail and wholesale commodity lines at South Jersey Energy Group are solidly positioned for the future. On the retail side, a number of diverse multiyear customer contracts support growth from this business line year-over-year. In 2016, two additional fuel management contracts will begin contributing when the Panda Liberty and Panda Patriot facilities come online. With a total of eight contracts already executed, we remain well-positioned to serve at least 10 gas fired generators by 2020. These initiatives support our expectation that this business segment will contribute roughly 20% to 25% to earnings in 2016. Looking at South Jersey Energy Services, and in particular our Energy Production business, we expect to see Solar development continue to be a technology that demonstrates improved performance and remains highly valued within the market. With that said though, due in large part to the impact of bonus depreciation on the timing of when we can realize the cash benefit of renewable ITCs, we anticipate a sharp decline in Solar investment in 2016. As a result for this year and beyond, we expect services to contribute between 5% and 10% to Economic Earnings. As we look ahead, our future will benefit from the roll in 2015 played as a critical positioning year, because of the versatility and agility of our business, we’ve been able to overcome several short-term challenges without compromising our potential for significant long-term growth. This time, I’ll turn the call back over to the operator for the Q&A portion. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of Chris Ellinghaus. Please proceed. Chris Ellinghaus I just want to ask you a couple of things. Can you give us any color, I gather from your comments on solar ITCs that despite the ITC extension, you are sort of sticking to your plan to wind down solar ITCs as an earnings driver. Can you give us any color over what ’16 looks like and how many years do you see that taking? Mike Renna Sure, I think again 2016 you’ll see a considerable reduction in the level of renewable investment, and then consequently with the ITC number would be significantly less than it is or it has been in recent years. I don’t want to pre-empt our guidance by giving you a finite number, but I think considerable and significant are the two words that come to mind. And I would expect that in 2017 and beyond, you’ll see very limited investment on our part in renewable projects. Look I think the project is still – they produced very attractive returns when you look at them on a discrete basis, but the issue becomes when you can recognize the cash benefits of them. So, when you cut the NPV of these projects in half and start to get the de minimis returns on investment because of the nature of when you can realize the cash flows, it becomes pretty difficult to support meaningful investment. Chris Ellinghaus Okay. Steve Clark At the same time Chris, we have a lot of investment coming in front of us in the regulated businesses, so I think our focus is to have that be the area that we look to deploy our capital. Chris Ellinghaus Right, I don’t disagree with the strategy. I’m just trying to figure out the timing. Bad debt expense in 2015, I get the polar vortex and how that would impact customers. How do you see that sort of going forward, do you see that as something that is going to decline with the more mild weather? What do you think is going to happen? Mike Renna I’ll let Jeff DuBois answer that question. Jeff DuBois Chris yes I mean we definitely see it stabilize, we saw a big uptick because of the polar vortex two winters ago and even last winter, but with the combination of commodity prices dropping so drastically, as well as the weather being down we see our receivables coming down. Chris Ellinghaus Also, Steve, can you give us any color on outside of the charges for 2015, any kind of indication of how much you spent in terms of legal, O&M costs for all of the commotion? Steve Clark No Chris I don’t have a good breakdown on that, I can provide that at another time, I think it’s relatively straight forward. The difference we were talking about there that was really designed to pick up kind of the variance between how it impacted us in ’14 and how it impacted us in ’15. There were obviously several million dollars there and the settlement done there was probably the biggest, so that was a pre-tax settlement of about $7.5 million, so getting that out of the way for us is a big deal. Probably more important than any of that Chris, is that it was the amount of management time and focus that was spent on it. Chris Ellinghaus Right. Steve Clark That will be kind of dedicated that to profitable portions of our business as opposed to dealing with an issue of settlement. Operator Your next question comes from the line of Dan Fidell. Please proceed. Dan Fidell I think that’s me, good morning guys it is Dan Fidell. Mike Renna We thought it was your brother Dan. Dan Fidell Yes my brother is Sam, right. So thanks for the call and just a couple of follow-up questions from me. First, can you just from a timing standpoint give us how you see the BL England process from here on playing out? Where do we stand in terms of the appeals process and maybe a little bit more specifically when do you think you might be able to start construction? Jeff DuBois Hi Dan this is Jeff. We’ve gotten all of the approvals that we need from both the Board of Public Utilities and the Pinelands Commission. There have been a couple of challenges by some environmental groups. We see those challenges probably taking anywhere as in the range of nine to 12 months in total. So we believe that there is still an opportunity to start construction this year at the very least we’ll probably start ordering supplies and equipment for that project hopefully by the fourth quarter. Dan Fidell Okay, great. Thank you, very helpful there in terms of the timing. I guess maybe just switching topics quickly to Energenic. Just kind of interested in sort of a two part question here in terms of how you guys kind of decided on the division of assets? And then I guess secondarily now that we are past kind of that restructuring process, what it means for your partnership in terms of future growth opportunities going forward? Mike Renna Sure, Dan. It is Mike. Dan Fidell Hi Mike. Mike Renna Let me — and I’ll start with this, this was a — we like to actually we kind of joke about it a little bit. This was a very amicable divorce if you will. The partnership was strong throughout. I think that we expected and hoped to be able to evaluate future development opportunities together with DCO. I think that right now, the market is pretty dry as it relates to opportunities for CHP which is where our interest would lie in terms of development opportunities. So, if things change, and the market picks back up and there are opportunities with credit worthy strong off takers and attractive returns on investment then we would certainly jump at the opportunity to do something with DCO again, so I think everything here is fine and solid. As far as the allocation of assets, it really came down to — for us to kind of as part of this repositioning was getting back to our core and our core are the CHP assets that serve Borgata. They are proven, profitable, they’re reliable and they’re complimentary. So when we acquired the cogeneration facility that serves Borgata, it was complimentary to that Marina thermal facility. The four landfills as well are all backed by PPA contract where their output is delivered to Borgata. So, we really focused on those assets that were related to our relationship with the Borgata. Dan Fidell Got it. That certainly makes sense there. I guess that kind of leads into my last question which is basically on the landfill side with kind of — it seems like the separation of a number of the landfill assets and you mentioned the four that you kept. Is it, I guess should we basically imply from this that the losses you have on the landfill side in the past that should narrow or get back to breakeven just on the landfill assets that you have retained? Mike Renna That is a core assumption that drove this decision for us and the selection of the assets that we were interested in acquiring, so, yes. Again, we are — I’m not going to certainly run from the fact that we’ve had some operational challenges whether it be gas availability or equipment issues at multiple landfill sites, but we believe these to be the four that offer the most potential going forward and again are also benefiting from the fact that there is a PPA above market actually that backs these contracts. Operator [Operator Instructions] I would now like to turn the call back over to Mike Renna. Please proceed. Mike Renna Thanks. Before we wrap-up, as always, please feel free to contact Marissa Travaline, our Director of Investor Relations or Ann Anthony, our Treasurer if any follow-up questions arise. Marissa can be reached at 609-561-9000 extension 227 or by email at mtravaline@sjindustries.com. Ann can be reached at extension 4143 or by email at aanthony@sjindustries.com. Again, thank you for joining us today and for your continued interest and investment in SJI. Operator Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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