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South Jersey Industries Inc (NYSE:SJI)
Q1 2020 Earnings Call
May 8, 2020, 11:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Daniel Mark Fidell -- Vice President of Investor Relations

Thank you. Good morning, everyone, and welcome to SJI's First Quarter 2020 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 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 to the comparable GAAP measures appear in both documents.

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 our forward-looking statements, and include, among others, statements about the length and severity of the pandemic or other health crises, such as the recent outbreak of COVID-19. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that said, I'm pleased to introduce our CEO, Mike Renna, who will review our current operations. SJI's Chief Financial Officer, Cielo Hernandez, will then review our first quarter financial performance and discuss our financial outlook. 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 J. Renna -- President & Chief Executive Officer

Thanks, Dan, and thanks for joining us today. This is a very challenging time for all of us, our customers, our communities, our country, our world. COVID-19 has affected each of us, and for many, in a very profound way. Let me just say that on behalf of the entire SJI family, our thoughts are with all of you. We hope that you are safe and well, and we pray that this terrible crisis passes soon. Because of the COVID-19 pandemic, our call will be different than normal. In addition to talking about how the virus and subsequent stay-at-home orders have affected our business, we'll provide insight into our organization's response and outlook. Early on, we mobilized our crisis management and business continuity teams. And through extensive planning, the innovative use of technology, and a full commitment to safety, we were able to move all 1,100 employees into either a home-based or remote reporting condition. From customer service, to dispatch, to operations, we have continued to maintain essential service and operate at a very high level. Most importantly, we have helped reduce the spread of the virus and kept our employees, their families, our customers, and our communities safe. To date, we have not seen a material impact on our operations, nor have we experienced any significant margin reductions across our utility segments. We are expecting, similar to other utilities, to see a decrease in commercial load, offset by an increase in residential volumes. It's too early, however, to fully quantify the extent of that offset.

As expected, we have incurred incremental operating costs for emergency supplies, cleaning services, enabling technology, and other specific needs during this crisis. During the first quarter, those costs were approximately $600,000, with two-thirds of this amount recorded as property planned equipment on our balance sheet. We do expect additional pandemic related costs as we move through the crisis. These type of emergency related costs have traditionally been recognized as prudent expenditures by our regulators, and we expect this will again be the case during this current challenge.

To date, we have yet to see a significant impact on our accounts receivable, but we continue to monitor this metric very closely. Similar to emergency related costs, uncollectible balances have also traditionally been included in rate recovery. System modernization programs designed to replace and upgrade aging infrastructure continue to move forward. Some specific construction activity, however, has been suspended in accordance with directives from Governor Murphy. Currently, we are only entering customer homes to perform emergent work. Looking forward, we do expect an uptick in construction activity, as we emerge from this crisis and are mobilizing plans accordingly. We also remain on track with our timeline for our targeted solar reentry in support of the Energy Master Plan. With regard to our regulatory initiatives, the BPU continues to hold regular commission agenda meetings via teleconference. Our South Jersey Gas base rate case, which was filed on March 13, recently began the discovery process. Matters are progressing consistent with our previous rate cases, and we continue to expect a resolution of the case later this year.

We are in good shape from a financial perspective. In April, as you know, we completed critical steps to strengthen our liquidity and ensure the funding of our 2020 capital program. At this time, we have no near-term current maturities of long-term debt, and no near-term cash requirements related to our pension programs. Having taken these proactive steps, we feel confident [Technical Issues] team. Lastly, this is a very fluid situation. Be assured that we are continually monitoring our business operations, and are prepared to adjust as necessary, as we have done throughout this crisis, to keep the gas flowing and our employees and communities safe.

I will be back later with some closing remarks. But at this time, let me turn it over to Cielo to review our first quarter results and guidance.

Cielo Hernandez -- Senior Vice President & Chief Financial Officer

Thanks, Mike. Good morning, everyone. As Mike noted, COVID-19 has had a significant impact around the world, in this country, and our service territory. Despite that, our business performed well in the first quarter, and we experienced no material financial impact from the pandemic. First quarter 2020 economic earnings were $1.16 per diluted share compared with $1.09 per diluted share in the first quarter of 2019. Our utilities contributed earnings of $1.18 per share, compared to $1.09 in 2019. Improved results reflect the EPS rate increase that became effective last November. Customers grow in great increases related to ECG infrastructure amortization program. With regard to the continuing integration of ECG, we were pleased to cross an important milestone with the exit of our TSA with Southern during the latest period.

Our non-utility operations contributed $0.07 per share, compared with $0.09 per share in 2019. This does reflect lower spreads and the lack of market volatility, driven by warmer weather, which resulted in lower margin and reduced asset optimization opportunities. The decline was partially offset by fuel management contracts that became operational over the last 12 months, and lower O&M costs from the sales of CSD assets in February. Our other segment contributed a loss in economic earnings of $0.09 per share, consistent with last year, reflecting interest offset, including ECG and Elkton acquisitions debt. Our capital expenditures were a $114 million in the first quarter, reflecting investments for customer growth and utility infrastructure upgrades. We continue to expect capital spending of more than $600 million in 2020, with up to seemingly 80% for safety and reliability investments at our facility, with that remainder for non-utility solid investment in support of the New Jersey Energy Master Plan. Our financing plans continues to assume a combination of debt and equity financing into four of our growth initiatives. As Mike mentioned, in April, we complete to expect a strength of liquidity and ensure the ongoing funding of our 2020 capital program. As of May 1, we have $1.25 billion in credit facilities and more than $470 million in our revolvers. We also announced a $200 million ATM program in April, which provide us flexibility in addressing our 2020 equities needs.

March 31, 2019, equity to total capitalization was 31.6%, compared with 29.6% at December 31, 2019. The improvement reflects the successful execution of our plan to strengthen our balance sheet using proceeds from non-core asset sales, including conversion of mandatory convertibles units due in April 2021 and equity credit from rating agencies for long-duration debt. Our adjusted equity to total capitalization ratio, a non-GAAP measure, was 39.6% at March 31, 2020, compared with 37.5% at December 31, 2019. Turning now to guidance, we continue to expect 2020 ongoing economic earnings of a $1.60 to $1.60 per diluted share with approximately 75% of earnings from our utility operations, excluding acquisition related financing costs. While we have witnessed in minimum financial impact on the pandemic, which is consistent with our first quarter results, we're continually monitoring all facets of our operations, and we will communicate any future impacts to our finance projection.

That concludes my remarks. I will now turn it back to Mike.

Michael J. Renna -- President & Chief Executive Officer

Thank you, Cielo. During this challenging time, our long-term focus remains steadfast on addressing critical infrastructure investments to modernize our system, new projects to ensure adequate supply in system redundancy, and innovations that will lower consumption and the carbon content of natural gas in support of the state's Energy Master Plan. As New Jersey emerges from this crisis, and as we have during past periods of uncertainty, SJI stands ready to assist the leaders of our state with their recovery plans. During the financial crisis of 2008, SJI partnered with the state to accelerate important infrastructure improvement work, spurring job creation and assisting in reviving our economy. And again, following the devastation of Super Storm Sandy, we partnered with the state to harden vulnerable infrastructure and jump-start the economy along our shore communities.

Today, we stand ready to take similar action, again, on behalf of the citizens of New Jersey. Initiatives have been identified, with initial conversations with our leaders currently taking place. As many of you know, I typically conclude my remarks by thanking our 1,100 employees for their outstanding work, and I have never been prouder of this exceptional team than I am today. They have worked tirelessly throughout this crisis to ensure safe, reliable, and exceptional service, and their courage, commitment, and selflessness inspires me every day. I also want to thank all of our healthcare workers, first responders, and critical employees in our service areas, the doctors, nurses, paramedics, police, firefighters, and so many others, for their over work they are doing every day. With such good people working together for the common good, I'm confident that we will get through this crisis.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have a question or comment from the line of Richie from Bank of America. Your line is open.

Richie -- Bank of America -- Analyst

Hey. Good morning, guys. Congrats on the quarter. Appreciate you taking my question.

Michael J. Renna -- President & Chief Executive Officer

Thanks, Richie. Good morning.

Richie -- Bank of America -- Analyst

I just wanted to see if you can provide additional color on your solar remarks with it remaining on track for the year. Anything that you're seeing in terms of the supply chain front or on the demand from customers that have you more comfortable with the timeline for 2020 with our earnings guidance for this year? And anything that can potentially delay that as you try to execute against those targets?

Michael J. Renna -- President & Chief Executive Officer

Richie, are you talking specifically just solar or more general?

Richie -- Bank of America -- Analyst

Yes, specifically on the solar front.

Michael J. Renna -- President & Chief Executive Officer

We continue to see a pretty healthy queue of projects both in New Jersey and in the Mid-Atlantic region. Things are moving forward nicely on our own properties, which as we mentioned earlier, was a top priority. We are putting together plans to address some opportunities at the landfills that we currently have the engines on to take the methane and turn it into electricity. And again, we see some nice opportunities throughout New Jersey. So nothing at this point in time is suggesting that there would be any kind of meaningful delay in terms of ready for intended use or commercial operations for these projects. Those that were specifically designated as 2020 projects are still on track for the most part, and those that were 2021 are still proceeding to be 2021 type project. That's kind of a macro overview. As far as the supply chain goes, I'd ask Steve to comment on that. He's a little closer to those kind of issues than I am.

Steven R. Cocchi -- Senior Vice President & Chief Strategy and Development Officer

Sure. Good morning, Richie. No issues on the supply chain side. We've been in close contact with the folks that we've been dealing with on projects that are in the development stage. Supply chain has not an issue, nor has the ability to progress with permitting and construction activities. Everything at this point is moving consistent with how it would have pre-COVID-19.

Richie -- Bank of America -- Analyst

Got it, thanks. That's very helpful. And then just, I guess, on the regulatory front, I know you're still waiting on approval for the LNG redundancy project. Just curious with the timeline and how that kind of lines up with the timing of your equity to fund that project, are you waiting on the approval there? Or how should we be thinking about that?

Michael J. Renna -- President & Chief Executive Officer

I'll jump in on the broader question around timing of equity, and then I'll let either Dave or Steve jump in in terms of timing on the approvals. Keep in mind, first, I will say that the approval is not for the project itself. The approval is for the improvements that are necessary. We've got to expand the system in order to be able to bring those kind of volumes to the area that we've designated for the liquefaction facility, and those approvals were submitted to the BPU. But again, like I said, I'll ask Dave or Steve to jump in in a minute and kind of walk you through where they are with respect to the BPU review.

As far as the way we're looking at equity, yes, I mean that additional equity when we looking back at 2018, when we first recognized that there was going to be a need for us to go out and secure additional equity, it was with this specific project in mind. And obviously, since that time, things have been reprioritized within the utility. But from a broader sort of view of it, really what any additional equity was for was for any project or projects that would have fallen out of our normal expected traditional utility spend. So at the time, it was this project. Certainly, we expect this project to move forward. And to the degree that that's a $300 million incremental spend above and beyond what we would have normally traditionally expected to spend in the utility, we will support that with equity so that we protect our balance sheet, both at the SJI level, but more specifically, we want to make sure we protect our capitalization at the utility.

To the degree that there are other projects that have been identified since 2018 and there have been. Again, our intent would be to make sure that we support those additional projects, that additional capex with equity. So we're sort of looking at it as we have a plan, five-year spend to the degree that things get accelerated, to the degree that we as an example, we talked about smart meters. That wasn't something we were thinking about back in 2018. It's something that we are aggressively pursuing right now internally in terms of developing a plan around smart meters. We would support that type of capital investment with equity. So again, I mean, I think we should always be thinking about incremental capex, and any equity we would raise would be for incremental capex at the utilities.

Dave or Steve, do you just want to jump in really quick and give a sense of where we are with the improvements?

Steven R. Cocchi -- Senior Vice President & Chief Strategy and Development Officer

Sure. So the filing that was made with the BPU for the upgrades necessary to move forward with the plant are still under review. As a general matter, things are still moving at the Board of Public Utilities. They're holding their public meetings virtually. Data requests and things of that nature, and all of the matters that we have are moving forward. So I would still expect that the LNG request would be moving forward sometime later this year. It is still under review though, and we're in constant communication with BPU staff as that progresses.

Richie -- Bank of America -- Analyst

Got it. That is very helpful. I appreciate all the color. That's all I had.

Michael J. Renna -- President & Chief Executive Officer

Thanks, Richie.

Richie -- Bank of America -- Analyst

Thank you again.

Operator

Thank you. [Operator Instructions] We have a question or comment from the line of Chris Ellinghaus from Siebert Williams. Your line is open. Mr. Ellinghaus, you may need to unmute your phone. Hold for just a second.

Daniel Mark Fidell -- Vice President of Investor Relations

Chris, you there?

Operator

Hold for just a second. See if I can get him on the other way. I think his line may have disconnected, sir.

Daniel Mark Fidell -- Vice President of Investor Relations

Okay. Well, we'll follow up with Chris offline. I think Chris was the last question. Is that correct?

Operator

So far in the queue, yes, correct, sir.

Daniel Mark Fidell -- Vice President of Investor Relations

Okay. Well, I think we'll follow up and get his questions. Thank you all for joining us this morning. We know it's a very busy time, so we certainly appreciate your interest. As a reminder, a recording of this call today will be available on our website. And as always, please feel free to contact me, Dan Fidell, with analyst and investor questions, or Marissa Travaline for media inquiries. Our contact information can be found on the earnings release and our earnings presentation materials. Again, thanks for joining us today, and for your continued interest, as I mentioned, and investment in SJI. And that concludes our call. Thanks.

Operator

[Operator Closing Remarks].

Duration: 24 minutes

Call participants:

Daniel Mark Fidell -- Vice President of Investor Relations

Michael J. Renna -- President & Chief Executive Officer

Cielo Hernandez -- Senior Vice President & Chief Financial Officer

Steven R. Cocchi -- Senior Vice President & Chief Strategy and Development Officer

Richie -- Bank of America -- Analyst

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