Image source: The Motley Fool.
South Jersey Industries Inc (SJI)
Q2Â 2019 Earnings Call
Aug 8, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Q2 2019 South Jersey Industries Earnings Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]
I would now like to turn to your host for this conference call, Mr. Dan Fidell. You may begin sir.
Daniel Mark Fidell -- Vice President of Investor Relations
Thank you, Kevin. Good morning, everyone, and welcome to SJI's second quarter earnings conference call and webcast. I'm joined today by Mike Renna, 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.sjindustries.com. The release and the associated 10-Q filed this morning provide an in-depth review of earnings on both a GAAP and non-GAAP basis using our non-GAAP measure of economic earnings. Reconciliations of economic earnings for 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 SJI. 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 Forms 10-K and 10-Q on file with the SEC.
And with that said, I'm pleased to introduce our CEO, Mike Renna, who will discuss our current earnings performance, guidance and outlook. SJI's Chief Financial Officer of Cielo Hernandez will then review the financial performance of 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.
Michael Renna -- President and Chief Executive Officer
Thanks, Dan. And thanks to all of you for joining us today. I am 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 are 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 Elizabethtown and Elkton remains a largely seamless process. Our regulatory initiatives are being executed as planned and the repositioning and monetization of our non-core, non-regulated 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 Elizabethtown and Elkton is going very well. It 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 Elizabethtown was approved by the BPU 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 Company's ARP program including annual true-ups.
In April, Elizabethtown filed a petition with the BPU requesting a revenue increase of approximately $65 million to recover $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 in line with precedent from prior cases.
Finally, on the financial front, the sale of our non-core, non-regulated assets continue at a steady pace. Over the last year, we have sold our solar assets and 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 non-core businesses during the third quarter.
Throughout this transformation year, we focused on building a foundation of strong regulated performance. We are 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 $1.05 to $1.15 per share.
Our priorities for the balance of 2019 remain unchanged. We are focused on continuing to effectively integrate our Elizabethtown and Elkton acquisitions, including the winding down of our TSA with Southern; achieving significant cost savings from our business transformation initiatives; and effectively executing our pending regulatory proceedings.
We are also reaffirming our 2020 economic earnings per share guidance of $1.53 to $1.67, driven by strong customer growth and infrastructure investment at our utilities; improved contributions 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 that aspirational goals of New Jersey's Energy Master Plan requires a sustained level of innovation and agility. We look forward to working with Governor Murphy, the BPU and all key stakeholders to leverage the reliability and affordability of natural gas to deliver a balanced solution that promotes both the economic and environmental goals in the state.
And with that, I'll turn it over to Cielo to review our operational performance.
Cielo Hernandez -- Senior Vice President and Chief Financial Officer
Good morning, everyone. Thank you, Mike. As Dan mentioned, the earnings release and slide deck provides detailed information regarding GAAP earnings. I recommend that you review that information.
For this call, we will focus our discussion on our non-GAAP measure of economic earnings. Management believes this measure provides valuable insight into our business performance.
SJI's second quarter economic earnings per share was a loss of $0.15 per share compared with $0.07 per share in 2018. The variance reflects the addition of E-town and Elkton operations and associated financing impact, non-core asset sales and lower results from wholesale operations. This reduction is partially offset by increased profitability from South Jersey Gas.
Our gas utilities contributed a loss in earnings of $0.02 per share compared with positive $0.02 per share in 2018. The variance largely reflects the addition of E-town and Elkton operations acquired in July 2018, offset by the roll-in of investments for infrastructure replacement and customer growth.
Net customer growth across our utilities was 1.4% over the last 12 months, a growth rate that remains above the national average.
Midstream earnings were consistent at $0.01 per share reflecting AFUDC related to PennEast pipeline project.
Turning to our non-utility operations, energy growth contributed in loss of economic earnings per share of $0.02 compared to breakeven results last year. The decline reflects limited asset operations opportunities driven by tighter spreads, mild weather and new pipeline operating rules. Second quarter 2019 results were also impacted by headwinds associated with several legal contracts, which begins to roll off in 2020.
Energy services contributed a loss in economic earnings of $0.01 per share compared with positive $0.04 per share last year.
Our other segment contributed a loss in economic earnings of $0.09 per share compared with breakeven last year, reflecting acquisition costs and financing for E-Town and Elkton.
Turning now to capital spending, our year-to-date spend totaled more than $220 million and we remain on track for around $530 million in capital spending in 2019. We remain committed to improving the strength of our balance sheet and credit metrics.
As of June 30, 2019, equity to total capitalization was 33.4%, up significantly compared with 28.9% at December 31, 2018. This reflects the issuance of our equity forward in January and more than $300 million in debt repayment for non-core asset sales. As previously communicated, our growth plan includes our mandatory convertible equity units of $287.5 million due in 2021.
Including conversion, our adjusted equity to total capitalization ratio, a non-GAAP measure, was 39.6% at June 30, 2019 and 35.3% at December 31st, 2018.
That concludes my review of our financial performance and balance sheet. I will now turn it back to Mike for his concluding remarks.
Michael Renna -- President and Chief Executive Officer
Thank you, Cielo. As I conclude my remarks, I want to thank our approximately 1,100 dedicated employees for their outstanding work, for all that they do each day to execute the strong growth path that we've outlined for you.
But before we open it up for questions, I do want to address questions that some of you may have regarding PennEast. We certainly agree with our partners that the duration of the permitting process is the key component to watch. The New Jersey Department of Environmental Protection has up to a year to consider our application. And while they could 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 at PennEast. 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 PennEast were to face additional delays beyond 2020, if regulatory outcomes of business transformation cost savings were below our expectations, or wholesale margins tightened significantly from already low levels.
It's important to remember that should PennEast face an in-service delay, the ultimate value and benefit of the project for SJI would remain unchanged, but the timing of the realization of the benefits will be pushed more into 2021 than 2020.
Operator, that concludes our prepared remarks and we are now ready to open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Chris Ellinghaus with Williams Capital.
Chris Ellinghaus -- Williams Capital -- Analyst
Hello, everybody. How are you? Good morning.
Michael Renna -- President and Chief Executive Officer
Good morning, Chris.
Chris Ellinghaus -- Williams Capital -- Analyst
Mike, as 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 PennEast 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, what your timing reflects?
Michael Renna -- President and Chief Executive Officer
Yeah, sure. Upper end of the range would be that DEP 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 than we have -- than we've built into our guidance. And, certainly, as you just mentioned, if that takes the full 12 months or extends a little bit beyond those 12 months, it would push commercial operations back from our anticipated late 2020 date.
Chris Ellinghaus -- Williams Capital -- Analyst
Can you also give us a little color what kind of hurdles did you see in sort of the survey work being delayed by a couple of months?
Michael Renna -- President and Chief Executive Officer
We really didn't face any hurdles as far as completing the surveys. We felt that the prudent way to do was to let the process play itself out in the District Court. And when they reaffirmed the FERC decision, we accelerated the completion of our permits and I think we're sitting poised to submit that application very shortly.
Chris Ellinghaus -- Williams Capital -- Analyst
Okay. Can you give us any color -- you were talking about the -- you're in the discovery process on Elizabethtown's case. Can you give us any color on what you're seeing in the tenure or types of requests that you're getting that might be surprising or any kind of color on the docket?
Michael Renna -- President and Chief Executive Officer
Yeah, I'm going to ask Steve Kochi to answer that.
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
Hi, Chris. So, we are toward the end of that discovery phase at this point. Not seeing anything out of the ordinary, 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, we'll commence discussions with the parties this fall and hopefully get to a resolution within the time frame that we have in prior cases.
Chris Ellinghaus -- Williams Capital -- Analyst
Okay. One last thing about non-core asset sales. Mike, can you give us any color on how that process is proceeding? And that also seems to be dragging on a little bit. What's going on in the market for those assets?
Michael Renna -- President and Chief Executive Officer
It's taken a little longer than we had anticipated. I can tell you that there is nothing commercially that I'm concerned with. It's just that some of these sales have -- or 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 approvals.
Chris Ellinghaus -- Williams Capital -- Analyst
Okay. And the remaining solar -- I'll call it, remarketing of the sort of [Indecipherable] piece, is that -- you're including that in the third quarter sort of time frame as well?
Michael Renna -- President and Chief Executive Officer
We are. Yeah.
Chris Ellinghaus -- Williams Capital -- Analyst
Okay, great. Thanks, guys.
Michael Renna -- President and Chief Executive Officer
Thanks, Chris.
Operator
Our next question comes from Christopher Turnure from J.P. Morgan.
Michael Renna -- President and Chief Executive Officer
Hi, Chris
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
Hi, Chris.
Christopher Turnure -- J.P. Morgan -- Analyst
Good morning, guys. I wanted to follow-up on the PennEast comments. Certainly, respect that there is a range of outcomes in 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?
Michael Renna -- President and Chief Executive Officer
Yeah. The $12 million would have been based on a 2020 commercial operations date. But, again, we set the range with the intent of guiding toward the midpoint, and that midpoint reflects as conservative a set of assumptions as we could put in there. So, we are still confident with the range. We're not guiding toward the lower end of the range or anything at this point in time because we believe that there are still enough offsetting positives in our 2020 plan that we're comfortable maintaining our guidance.
Christopher Turnure -- J.P. Morgan -- Analyst
Okay. So, I guess, kind of stemming from that, we shouldn't stick as hard and fast to each segment's guidance in kind of a midpoint year-over-year as might have been implied in the walk in your slides. If things do not proceed quickly with PennEast, perhaps midstream is off, but there are certainly other areas where you feel comfortable making up the difference?
Michael Renna -- President and Chief Executive Officer
Yes, that's what I meant to say.
Christopher Turnure -- J.P. Morgan -- Analyst
Okay, perfect. And then, my second question is on equity financing. 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 you're acknowledging at this point in time. Is there anything kind of that might benefit you by pulling that forward, given just in general equity markets remain somewhat healthy, utility valuations remain somewhat healthy and kind of getting that slightly better cost of capital than might otherwise be the case, if you waited?
Michael Renna -- President and Chief Executive Officer
Certainly, we've considered all of those factors. Chris, I think where we are right now is that that equity is tied to a specific project that we anticipate getting approval for. And so, at least 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, while there is certainly an attractiveness to potential here in the equity markets early, I don't want to get out over my skis and do it prematurely. I'd rather let the process play itself out as far as that LNG project goes and make sure that we have that -- we have the need for the equity.
Christopher Turnure -- J.P. Morgan -- Analyst
Okay. And just on that, what are the key milestones that you're looking for there.
Michael Renna -- President and Chief Executive Officer
We have to submit what is effectively a request for some system upgrades of the BPU because of -- we'll be increasing the pressures and I think the diameter of the line that would ultimately be feeding the plant. And so, we will need BPU approval for that. So, that's really the key milestone at this point in time, is the finishing of that engineering study, the submission of that request for approval from the BPU. And again, we've said that we anticipate doing that late in the third quarter, if not early fourth quarter. And that's a relatively quick turnaround.
Christopher Turnure -- J.P. Morgan -- Analyst
Okay. That was going to be my next question. Great. Thank you, guys.
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
Thanks, Chris.
Unidentified Participant
Our next question comes from Cahn Win [Phonetic] with Guggenheim.
Shahriar Pourreza -- Guggenheim Partners -- Analyst
Hey, guys, it's actually Shahriar for Khan. How are you doing?
Michael Renna -- President and Chief Executive Officer
Hi, Shahriar.
Shahriar Pourreza -- Guggenheim Partners -- Analyst
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? I don't see a slide on there. But sort of how sort of -- how you're tracking toward your 12% FFO to debt targets? How are sort of conversations going with the agencies? And is there an opportunity to sort of hit your BBB plus ahead of plan?
Cielo Hernandez -- Senior Vice President and Chief Financial Officer
Hey, this is Cielo. Yes, we do -- no changes in the plan. As we disclosed last time, our plan contemplates to go back to BBB within the next five years. We have had good conversations with the agencies and we are looking at different alternatives to continue to strengthen our balance sheet, as we speak. We continue to pay down debt based on our sales of our non-core sales assets.
Shahriar Pourreza -- Guggenheim Partners -- Analyst
Got it. That's helpful. And then, let me -- Mike, let me ask you because you guys are obviously starting to see the benefits of really going more regulated, divesting assets that frankly utility investors don't really value. So, you still have a wholesale gas business, you've got a 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 at something more strategic around that business and completely get more or less 100% regulated? So, how are you thinking about the remaining gas and fuel management business, I guess?
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
I think there is a distinction between the two, although they are obviously very interrelated. I think the fuel management business is very attractive. It plays to our strengths. It's very low risk. It's the longer-term contracts. So, you're not going to deal with the kind of wild swings that you may get in the wholesale business, depending on where prices are. It's much more predictable. And so, it's a business that I think really does kind of fit into our general strategy and where we like to deploy our assets, whether that's human capital or financial capital.
Wholesale, look, it's no secret, it was a challenge. We were out in front of it last October. And kind of saw the tightening of the spreads and the challenges that the market was facing. There is value, Shahriar, to the business for us and it does generate a lot of cash. It does produce a lot of earnings when there is some volatility that we can take advantage of. And those are earnings that we can then redeploy into our utility to continue to grow our core business. So, we're assessing it. And as we have with anything else, if there is an opportunity for us to monetize a business, and again, redeploy that capital to strengthen our strategy and grow our core businesses, then obviously we would be very interested in looking at that.
Unidentified Participant
Got it. Terrific. That was it, guys. Congrats on a pretty good start.
Michael Renna -- President and Chief Executive Officer
Thank you, Shahriar.
Cielo Hernandez -- Senior Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Tate Sullivan with Maxim Group.
Tate Sullivan -- Maxim Group -- Analyst
Hi, thank you. Good morning. And just looking at the press release about the costs in the quarter associated with the planned exit of the transition services agreement, so those are additive to what the baseline expense is in the TSAR. Can you give more context to that comment, please?
Daniel Mark Fidell -- Vice President of Investor Relations
Sure. Tate, this is Dan. Yeah, I think, as you're looking at what we're talking about, the TSA exit, there are certain costs at the ETG level for O&M. TSA 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 to your question, how much is sort of weighing on ETG this quarter and how much will sort of be lift in a normal sort of runway kind of option for ETG. This last period, we had TSA costs along with some O&M, a bit of a higher O&M piece than we would normally expect associated with ETG. So, in total, you're asking for some specifics, I think somewhere in the neighborhood of $2.5 million to $3.5 million for additional costs that you might expect would lift on a normalized basis.
Tate Sullivan -- Maxim Group -- Analyst
Okay, thank you. And then, does that -- is there a variability to closing that transition services agreement? Or is that steadfast for 1Q '20?
Michael Renna -- President and Chief Executive Officer
As far as I'm concerned, it's steadfast. We've [Indecipherable] through it and we've mobilized resources on SJI in Elizabethtown and are getting a lot of support from Southern and we are on track to exit -- fully exit in Q1, early Q1.
Dave Robbins -- President, SJI Utilities
Yeah. Tate, this is Dave Robbins. 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 TSA in early 2020. So, as Mike said , we're on track to be totally out by Q1.
Tate Sullivan -- Maxim Group -- Analyst
Okay, thank you for that detail. And then, you put in the Elizabethtown customer growth rate of around 1%. Can you disclose or talk more about -- is that versus -- was it the the prior year? Are you making progress in the conversion effort in the Elizabethtown territory? Any context there, please, you can?
Dave Robbins -- President, SJI Utilities
We're making excellent progress as far as customer growth numbers and we are significantly ahead this year of forecast. We put our model that's been very successful at South Jersey Gas in place. We've staffed up the sales and marketing functions. And there is a great demand for our product up there. And as we continue to build out the systems, we're getting more and more calls not only for conversions, but for new construction, particularly in the northwest territory of Elizabethtown.
Tate Sullivan -- Maxim Group -- Analyst
Okay. Thank you very much.
Michael Renna -- President and Chief Executive Officer
Thanks, Tate.
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
Thanks, Tate.
Operator
[Operator Instructions] Our next question comes from Dennis Coleman with Bank of America.
Derek Walker -- Bank of America Merrill Lynch -- Analyst
Hi. This is Derek Walker on for Dennis.
Michael Renna -- President and Chief Executive Officer
Hey, Derek.
Derek Walker -- Bank of America Merrill Lynch -- Analyst
Hey, guys. How are you doing? A lot of my question have been answered. But, Mike, you addressed the LNG storage project question, but I believe there is a couple of other redundancy projects kind of in the works. I think there's one related to compression and maybe a transmission line upgrade. And can you just speak a little bit to those projects and the B.L. England alternative project. I think just some of the legal and kind of permitting hurdles that you're kind of working through there?
Michael Renna -- President and Chief Executive Officer
Sure. As I said, we're wrapping up all of the prep work that we need to do in advance of the large-scale LNG project that we've contemplated, will help us reduce any potential impact from a supply interruption. 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 issue in Southern New Jersey. We are evaluating the needs and potential solutions for Elizabethtown as well those are kind of longer term in nature. And then, there is a system redundancy need that we have that would allow us to maintain continuity of service to about 150,000 plus customers in lower Atlantic County and Cape May County that are served off of a single agent's 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 paths, and we intend on -- again, we believe this is a critical project. 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 get -- in all likelihood, it's going to require us to get a Pinelands Commission approval. So 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 seeing a lot of momentum on toward the latter part of the five year plan. It's not something that we expect that we would be able to get done and get built in the next two or three years.
Derek Walker -- Bank of America Merrill Lynch -- Analyst
That's helpful. Thanks, Mike. Appreciate it. That's it from me.
Operator
I am not showing any further questions at this time. I'd like to turn the call back over to Dan.
Daniel Mark Fidell -- Vice President of Investor Relations
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 Fidell or Eric Jacobson 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 SJI .
This concludes our call. Have a good day,
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Daniel Mark Fidell -- Vice President of Investor Relations
Michael Renna -- President and Chief Executive Officer
Cielo Hernandez -- Senior Vice President and Chief Financial Officer
Steven R. Cocchi -- Senior Vice President and Chief Strategy and Development Officer
Dave Robbins -- President, SJI Utilities
Chris Ellinghaus -- Williams Capital -- Analyst
Christopher Turnure -- J.P. Morgan -- Analyst
Unidentified Participant
Shahriar Pourreza -- Guggenheim Partners -- Analyst
Tate Sullivan -- Maxim Group -- Analyst
Derek Walker -- Bank of America Merrill Lynch -- Analyst
