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South Jersey Industries Inc (NYSE:SJI)
Q2 2020 Earnings Call
Aug 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the SJI's Second Quarter 2020 Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Mr. Dan Fidell, Vice President of Investor Relations. Sir, you may begin.

Dan Fidell -- Vice President of Investor Relations

Thank you. Good morning, everyone, and welcome to SJI's Second 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 crisis, 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 business operations and pandemic response. SJI's Chief Strategy Officer and Interim Chief Financial Officer, Steve Cocchi, will then review our second quarter financial performance and financial outlook. Mike will then review our outlook on key priorities for the remainder of the year and offer some closing 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 and Chief Executive Officer

Thanks, Dan, and thanks for joining us today. Let me begin by saying, on behalf of all of us at SJI, our thoughts remain with you and your families as the pandemic continues. We hope you are all staying safe and well this summer, and we continue to hope that this crisis passes soon. As I discussed last quarter, our priority during this challenging time remains the safety of our employees and assuring critical gas delivery to the more than 700,000 customers who depend on us each day. With that said, I am pleased and thankful to report that our businesses continue to operate very effectively during the pandemic with a minimal financial impact, thanks in large part to the dedication of our exceptional employees.

Through extensive planning and the innovative use of technology, our workforce and business operations continue to operate safely and at a very high level. We remain largely in a work-remote posture at this time. Our margins have remained steady across our utility segments, reflecting both strong customer growth and continued high demand for natural gas and the decoupling and weather normalization riders in our rates. As expected, we have incurred incremental operating costs for emergency supplies, cleaning services, enabling technology as well as incremental bad debt cost during this crisis.

Of note, in July, our regulators unanimously approved an order authorizing the state utilities to establish a regulatory asset, allowing the deferral of these incremental expenses for future recovery. Our modernization programs, replacing and upgrading critical infrastructure continue to move forward. Construction activity that ceased in March in accordance with directives from the state, resumed in June, and we remain on track to achieve our capital spending projections. Regarding our regulatory initiatives, the BPU continues to hold regular commission agenda meetings via teleconference. At South Jersey Gas, our base rate case filing as well as our engineering and route proposal for a critical redundancy project remain on track for resolution later this year.

On the financial side, as you'll hear from Steve in a moment, we have completed multiple steps in 2020 to strengthen our liquidity, eliminate near-term debt maturities and ensure the ongoing funding of our capital program. Most recently, in June, we completed a $200 million At-The-Market program, which resolves our planned equity needs for 2020. Having taken these proactive steps, we feel confident in our ability to manage through the impacts of COVID-19.

Lastly, this pandemic is obviously 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 community safe.

Let me now turn it over to Steve to review our second quarter results and guidance.

Steven R. Cocchi -- Senior Vice President, Interim Chief Financial Officer and Chief Strategy and Development Officer

Thanks, Mike. Good morning, everyone. As Mike noted, COVID-19 has had a significant impact around the world, in this country and in our service territories. Despite that, our business performed well in the second quarter and year-to-date, and we've experienced no material financial impact from the pandemic. As Dan noted earlier, both the earnings release and the slide deck we've made available will provide you with detailed information regarding GAAP earnings, and I would encourage you to review that information as well. For the purposes of this call, as we normally do, we'll focus our discussion on our non-GAAP measure of economic earnings, as management believes this measure provides valuable insight into the performance of our business.

Second quarter 2020 economic earnings were a loss of $0.01 per diluted share compared with a loss of $0.13 per diluted share in the second quarter of 2019, reflecting improved profitability from both our utility and nonutility businesses. Our utilities contributed second quarter earnings of $0.03 per share compared to a loss of $0.02 per share in 2019. These improved results reflect the ETG rate case that became effective last November, positive customer growth and the base rate roll-ins of SJG's infrastructure modernization programs. Our nonutility operations contributed $0.05 per share compared to a loss of $0.02 per share in 2019.

Improved results were driven by increased profitability from wholesale operations, reflecting additional fuel management contracts that became operational over the last 12 months, improved wholesale optimization opportunities and a refund related to a Transco rate case. Our other segment contributed a loss in economic earnings of $0.09 per share, consistent with last year, reflecting interest on debt. For 2020, year-to-date, economic earnings were $1.14 per diluted share compared with $0.95 per diluted share for the comparable period a year ago, again reflecting improved profitability from both our utility and nonutility businesses and driven largely by the same factors as the second quarter.

Our capital expenditures year-to-date were approximately $235 million, primarily reflecting investments for utility infrastructure upgrades, system maintenance and customer growth. We continue to expect capital spending of more than $600 million in 2020, with approximately 80% for safety and reliability investments at our utilities and the remainder for nonutility solar and other clean energy investments. As Mike mentioned, throughout 2020, we've completed steps to strengthen liquidity and ensure the ongoing funding of our 2020 capital program. Most recently, in June, we completed a $200 million At-The-Market program, which resolves our planned equity funding need for 2020.

In July, we've refinanced a $200 million 18-month term loan in two tranches, with maturities of seven and 10 years, respectively. And late last week, we closed on our sale of Elkton Gas to Chesapeake Utilities for approximately $15 million in cash. The proceeds of which will fuel further debt reduction. As of July 30, we have $1.25 billion in credit facilities and $560 million of available capacity on our revolvers and feel confident in our ability to manage through the impacts of COVID-19. Our balance sheet continues to strengthen in 2020, in line with our expectations. Equity to total capitalization was approximately 35% at June 30, 2020, compared with approximately 30% at December 31, 2019, reflecting debt and equity financing and repayment of debt using proceeds from asset sales.

Including conversion of mandatory convertible equity units due 2021 and equity credit from rating agencies for long duration debt, our adjusted equity to total capitalization ratio, a non-GAAP measure, was approximately 43% at June 30, 2020, compared with approximately 38% at December 31, 2019. Turning now to guidance. Our economic earnings for the first half of 2020 were in line with our expectations, and we continue to expect 2020 ongoing economic earnings of $1.50 to $1.60 per diluted share with approximately 75% of earnings from our utility operations, excluding interest costs. While we've thus far witnessed a minimal financial impact from the pandemic, we're continually monitoring all facets of our operations and will communicate any future impacts to our financial projections.

That concludes my remarks, and I'll now turn it back to Mike.

Michael J. Renna -- President and Chief Executive Officer

Thanks, Steve. Before we conclude, I want to review our strategic priorities for the remainder of the year. Above all else, we remain committed to the safety of our employees, our families and our communities. We are functioning very effectively from a largely remote platform, and we'll continue to make decisions informed by directives from our leaders and health professionals at the highest levels. As a proud New Jersey company, we stand ready to support economic recovery efforts and deliver shovel-ready jobs to get our state back to work. Safety, reliability and sustainability are at the core of our mission.

Prioritizing critical infrastructure investments to modernize our system and reduce fugitive methane emissions, ensuring adequate supply and system redundancy, and making new clean energy investments that lower consumption and the carbon content of natural gas in support of the states and the region's energy goals. Despite this pandemic, we remain on track to execute our $600 million capital plan, including roughly $100 million of targeted renewable investments in support of the state's clean energy goals. We expect to install solar at three of our corporate facilities this year. We closed on three solar projects in New Jersey in the second quarter, and we expect to make announcements very soon on additional investments that drive us toward our goal.

We also remain on track to file two important regulatory initiatives with the BPU before the end of the year, focused on further reducing consumption and emissions, and increasing the safety and reliability for our customers. The first filing relates to energy efficiency. In June, the BPU issued an order inviting the state's utilities to file expanded energy efficiency and demand response programs by September 25, 2020, with a program effective date of July 1, 2021, for a three-year term. The order authorizes us to recover our program cost through a surcharge including recovery of capital investments at the capital structure established in South Jersey Gas company's and Elizabethtown Gas' most recent base rate cases. The second filing relates to an extension of South Jersey Gas' accelerated infrastructure replacement program, which is set to expire in 2021.

This program remains critical to ensuring the safety and reliability of our system. It is an important driver in reducing fugitive methane emissions and has provided hundreds of good paying jobs in New Jersey for more than a decade. Let me conclude my remarks by once again thanking our 1,100 employees for your commitment to each other and to our customers. Your tireless work ethic throughout this crisis is why we continue to deliver on our mission: safe, reliable, economic and clean energy. My continued admiration and deepest thanks to you all.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Gabe Moreen from Mizuho. Your line is open.

Gabe Moreen -- Mizuho -- Analyst

Good morning, guys. If I can start out maybe by asking about the incremental COVID expenses, can you talk just about how much of that was in uncollectibles? And then also just is that stuff coming out of last winter that had not been paid? Or was it stuff you'd seen recently or in anticipation of going into the next winter heating season? Just curious how that all breaks down.

Steven R. Cocchi -- Senior Vice President, Interim Chief Financial Officer and Chief Strategy and Development Officer

Sure. Good morning, Gabe. it's Steve Cocchi. The significant portion of the incremental COVID expense that we've deferred is related to bad debt. Our incremental O&M has been relatively minor to date, and we would expect that to continue. The way that the dollars are being calculated is really based on historical averages and the incremental impact over and above historical averages that we've seen since March. So some of that could be receivables that do go back into some prior months, but it's really calculated as a comparison of that bad debt that we're experiencing from March through June thus far in the deferral versus prior year averages.

Gabe Moreen -- Mizuho -- Analyst

Maybe then if I could switch to the energy efficiency filing. Is there any sense of how large that could be at the SJG and ETG levels over that three-year time frame?

Steven R. Cocchi -- Senior Vice President, Interim Chief Financial Officer and Chief Strategy and Development Officer

We're putting together a program proposal now. We would expect that we would like to propose something in all likelihood that will be more robust than what we have proposed historically. We've got existing programs at SJG that are, I believe, about $12 million a year in terms of EE expenditures. ETG is much smaller, so we would seek to get ETG's program investment up to a significantly higher level and perhaps even increase the size of SJG's program. It's going to be driven by the design of the programs, the type of offerings that we want to make and the market demand for those offerings, all of which we have our team focused on right now. So we'll be able to give a little more detail and color around that as we approach the filing in September.

Gabe Moreen -- Mizuho -- Analyst

And then last question for me is just in terms of the $100 million on solar spend. Certainly, a lot of language around looking at RNG and other opportunities. Can you, a, talk about sort of that $100 million run rate going forward? And how much of that might be things other than solar? And I know you probably have more to say on this in the future. So feel free to point on something.

Michael J. Renna -- President and Chief Executive Officer

Gabe, it's Mike. So what we have said is that we are committed to supporting both the state and now, really, the broader region and their clean energy goals. And so there are a variety of different investment opportunities that do support those goals in a cleaner energy economy. I think our priority has always been to invest in our utility or utilities first. So things like renewable natural gas, things like smart meters, ultimately, perhaps hydrogen-based solutions like power-to-gas, many of those, particularly power-to-gas are probably several years away, but things like renewable natural gas and smart meters are much more near term. And we believe that the biggest impact that we can make is by decarbonizing our utility.

Investments outside of our utility will be, again, focused on the region's goals and renewable energy type of projects, solar being one of them. But there are other investments that would fit and align with that strategy. So nothing at this point in time that we're prepared to announce or anything like that. But we are open to alternative solutions beyond just solar. And I do also want to emphasize a couple of other things that we were very specific about early on where all investments were going to be targeted, and we're going to have to clear a pretty high bar internally for us to commit investment dollars.

This was not the same type of strategy we had several years ago, where we were really aggressively building out a portfolio of renewable projects. These were going to be highly selective, very targeted projects that were going to be aligned with that decarbonization strategy. So none of that has really changed. In terms of a run rate, we've always said between about $150 million to $200 million over a two to three-year period, and we're sort of that's nothing's changed there either.

Gabe Moreen -- Mizuho -- Analyst

Thanks, Mike. Appreciate it.

Michael J. Renna -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And our next question comes from Richard Ciciarelli from Bank of America. Your line is open.

Harry -- Bank of America -- Analyst

Hey guys. This is actually Harry [Phonetic] on for Richie. On the solar subject, on slide 11, it looks like you guys had a minimal capex in the first half associated with the solar but are still committed to $100 million. So how confident are you in that $100 million, given it's essentially going to all be in the back half? And those three facilities you outlined earlier, do those make up a large portion of this $100 million?

Steven R. Cocchi -- Senior Vice President, Interim Chief Financial Officer and Chief Strategy and Development Officer

Richie, this is Steve. So the three facilities that are referenced specifically are our corporate facilities and the capex associated with those is really not all that significant. It's really more part of our strategy to deploy solar strategically, and we wanted to start with some of the more relevant opportunities upfront, including our own buildings, and we're looking at some opportunities around our former landfill gas to electric sites, as we've talked about before. In terms of the outlook for the remainder of the year, we have a very robust queue of opportunities that we're looking at right now. We maintain confidence that we're going to reach the target that we've talked about in our guidance for the year. At this point, a number of opportunities and developments that are actively being pursued.

Harry -- Bank of America -- Analyst

Okay. Got it. That's helpful. I'm kind of looking out to 4Q and peak heating season, how are you thinking about usage versus COVID? The gas LDCs have kind of been insulated so far just given the timing of the pandemic. And how any initiatives you all are taking to offset the kind of the extended impact of COVID if it goes into 4Q? Anything any initiatives you're kind of taking on to offset?

Dave Robbins -- Senior Vice President

I'll take this one. It's Dave Robbins. So Rich, we really haven't seen a significant decrease in our volumes. Actually, our residential and small commercial margins are actually ahead of forecast. The large volume is down a little bit, but the large volume only consists about 6% of our total margin. As far as being proactive, as you know, we're under a voluntary moratorium on shut offs right now. We have, in collaboration with the other New Jersey utilities, agreed to extend that to Labor Day. So we'll evaluate that decision at that time.

But I think as long as we're in lockstep with our regulators, with the state, with the other utilities, we'll ease back into the use of shut offs and be a little more aggressive in our collection efforts. We are, however, presently at both utilities, directing customers to the assistance programs that are available and being very proactive that way. So even going into the heating season, I think that the trends we're seeing will continue.

Harry -- Bank of America -- Analyst

Got it. Appreciate it. And if I could sneak in one more quick one. On the LNG redundancy project, I think we're supposed to get an outcome on that in the next month or two. Any updates there or specific date we should be watching?

Dave Robbins -- Senior Vice President

Yes. We've had preliminary discovery on the LNG tank filing, not a ton of movement right now. However, we do have a meeting scheduled with staff for September to discuss the filing. I think that with the state, particularly in BPU having some furloughs to deal with, that project has not risen to the top kind of like the way our rate case has. So I expect a little more momentum on that filing in the next few weeks, but not a ton of progress to report on that as of right now.

Harry -- Bank of America -- Analyst

Awesome. Thanks. President and team guys. Thanks.

Dave Robbins -- Senior Vice President

Thank you.

Michael J. Renna -- President and Chief Executive Officer

Yeah.

Operator

Our next question comes from Richard Sunderland from JPMorgan. Your line is open.

Richard Sunderland -- JPMorgan -- Analyst

Hi, thanks for taking my questions today. Just wanted to start off with the solar investments as well, just the contemplated alternatives or projects of similar kind of clean energy bent. I'm curious if the expected earnings contributions from those types of investments would be consistent with the 2020 and 2021 expectations that you've alluded to before on the solar side?

Michael J. Renna -- President and Chief Executive Officer

Yes. It's Mike. Yes, they are as I said, it's not just solar that we've applied this high bar to. So it has to meet certain hurdles internally, much of which is obviously the economics of the underlying investments. So we would expect any investment that we make in renewable energy to earn the kind of to earn a return, ultimately, that is above what we would realize in our utilities, certainly because there's a different risk profile in the nonutilities and the risk in the utility. So rest assured that any investment that we make is going to be accretive to earnings.

Richard Sunderland -- JPMorgan -- Analyst

Got it. And then just PennEast, you referenced some of the FERC action there. Just curious what milestones to look for next for Phase 1?

Michael J. Renna -- President and Chief Executive Officer

Well, certainly, receiving the EA was a significant milestone. The next milestone will be getting the final cert from FERC, which we're expecting to happen in the coming months. And at that point in time, we would have all of, I think I believe, we'll have all of the necessary permits and approvals that we would need to begin construction. The other thing that's going on, on a parallel path is we do we have a petition in front of the Supreme Court right now. And they've asked the Solicitor General to appoint, so we're waiting for that as well. But again, I think the merits of our case are very strong, and we believe that there will be a positive outcome there as well. So...

Melissa Orsen -- Senior Vice President

And it's Melissa. I just want to add one more thing that with the environmental assessment that we received, there is a 30-day comment period that has already started. So we're on track for the time line that's been laid out..

Richard Sunderland -- JPMorgan -- Analyst

Got it. And then just one final one, if I may. The wholesale marketing performance. Just curious if you could provide a little bit more color around that and maybe frame it against the plan that's been in place for a little bit while now about improving results there and the exit of some legacy contracts?

Michael J. Renna -- President and Chief Executive Officer

Yes. Well, there's been quite a few initiatives that we've taken in wholesale is as we've talked about now for a couple of years, really since 2018. There's been a compression in the spreads between the production area and the market area, which has had a direct impact on the value of our book, and you're seeing that in the difference in earnings between 2018 and then 2019 and now certainly 2020, and we have not had any type of meaningful winner for the last two winters, either that could create additional volatility. So what we've really done is we've repositioned our book to shed a lot of what we consider to be are less productive, less valuable assets. And so we're not incurring those demand charges anymore. We've got a lower cost base.

A lot of what we've done is take the as a result, just take the volume and again, to your point, too, a lot of those legacy contracts, some of which date back to the 2010, 2011 time frame, those have expired and runoff, and we certainly didn't renew any of those. So the combination of repositioning the assets we have in our portfolio and then the runoff of the legacy contracts has really lowered our cost base to the point where I think we've taken a lot of the volatility out of our wholesale business. So really, what you see now is there is still some expectations that when we when there are spikes in the market that are weather-driven, there's an opportunity for us to take advantage of those.

But there's again, because there's less assets in our book and less volatility in our book, there's also less upside. But we've significantly limited the downside. So I think what you'll see going forward is a much more predictable level of performance out of our wholesale business. And one other thing, too, is that the contribution from our fuel management contracts continues to be an increasingly bigger percentage of overall earnings in wholesale than it was certainly as recently as 2018.

Richard Sunderland -- JPMorgan -- Analyst

Got it. Appreciate the color there. Thanks.

Michael J. Renna -- President and Chief Executive Officer

Thank you.

Operator

And I'm showing no further questions from our phone lines. I'd like to turn the conference back over to Dan Fidell for any closing remarks.

Dan Fidell -- Vice President of Investor Relations

Well, great. Great questions. I want to thank you all for joining us this morning. As a reminder, a recording of our call today is going to be available on our website. As always, please feel free to contact me, Dan Fidell, for analyst and investor questions or Marissa Travaline for media inquiries. Our contact information may be found on the earnings release and the earnings presentation materials. Again, thanks for joining us today and for your continued interest and investment in SJI. I certainly hope you all stay safe and well, and look forward to speaking with you again soon. That concludes our call for today. Thanks.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Dan Fidell -- Vice President of Investor Relations

Michael J. Renna -- President and Chief Executive Officer

Steven R. Cocchi -- Senior Vice President, Interim Chief Financial Officer and Chief Strategy and Development Officer

Dave Robbins -- Senior Vice President

Melissa Orsen -- Senior Vice President

Gabe Moreen -- Mizuho -- Analyst

Harry -- Bank of America -- Analyst

Richard Sunderland -- JPMorgan -- Analyst

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