South Jersey Industries, inc (SJI) Q2 2021 Earnings Call Transcript

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South Jersey Industries, inc (SJI)
Q2 2021 Earnings Call
Aug 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the South Jersey Industries Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dan Fidell. Please go ahead.

Daniel Mark Fidell -- Vice President of Investor Relations

Thank you. Good morning, and welcome to SJI's Second Quarter 2021 Earnings Conference Call and webcast. I'm joined today by Mike Renna, our President and Chief Executive Officer; Steve Cocchi, our Chief Financial Officer, as well as 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. Let me remind you that throughout today's call, we will be making references to future expectations, plans and opportunities for SJI. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. In addition, the earnings release and the 10-Q provide an in-depth review of earnings on both the 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. At this time, I'll now turn the call over to our CEO, Mike Renna, who will review our accomplishments and strategic priorities through the remainder of the year. Our CFO, Steve Cocchi, will then review our second quarter and year-to-date operational performance and financial outlook. Mike will conclude by offering some closing remarks. After that, we'd be happy to take your questions. And with that introduction, let me now turn it over to Mike.

Michael J. Renna -- President and Chief Executive Officer

Thanks, Dan. Good morning, and thank you for joining us today. I am pleased to report that SJI, notwithstanding the challenges of COVID-19, delivered solid performance in the second quarter and through the first half of 2021. Year-to-date, we saw economic earnings increase by roughly $25 million, up nearly 24% over the same period in 2020, reflecting strong performance in both our utility and nonutility businesses. Consistent with our strategy, our utilities, South Jersey Gas and Elizabethtown Gas represent the majority of our earnings. Margin growth remains strong, reflecting above average customer growth, positive rate case outcomes, infrastructure modernization programs and effective O&M management. Natural gas remains in strong demand across New Jersey, with our utilities adding more than 11,000 new customers in the last 12 months alone. And while we are seeing increased new construction across the state, the bulk of our growth continues to come from customers converting from heating oil and propane to clean burning low-cost natural gas. Our infrastructure and modernization investments critical to ensuring safe and reliable service remain on track and have the added benefit of significantly reducing methane emissions. Nonutility operations also experienced meaningful second quarter and year-to-date improvement, largely the result of new clean energy investments and restructuring of our wholesale marketing portfolio.

Both our Energy Management and Energy Production segments delivered strong results. Performance in Energy Management reflects solid results from both our traditional wholesale marketing and our fuel management activities, while Energy Production reflects strong performance from our renewable investments, particularly our Staten Island fuel cell as well as initial contributions from our equity interest in our RNG development partner, REV LNG. Throughout 2021, we've made significant progress in our efforts to reposition SJI at the forefront of a decarbonized energy future. In March, we executed several financing transactions designed to strengthen our balance sheet, improve our credit ratings and significantly fund our capital plan. In April, the BPU approved a substantial expansion of energy efficiency programs at both our utilities. These innovative programs are a cost-effective way to reduce greenhouse gas emissions by lowering usage. The program also allows for decoupling mechanism on Elizabethtown Gas, similar to the one we have at South Jersey Gas. Also in April, we announced an industry-leading commitment to decarbonization, setting an aggressive goal to reduce our operational emissions of consumption 70% by 2030 and 100% by 2040. We also announced commitments to deploy at least 25% of annual capital spend toward sustainability investments moving forward. These targets are [Indecipherable] those established under the Murphy administration's Energy Master Plan.

We were excited to see Atlantic Shores awarded a project to develop 1,500 megawatts of clean, renewable wind energy for our state. Our partnership with Atlantic Shores on a green hydrogen pilot project will be essential to unlocking additional decarbonization energy sources for New Jersey and diversifying our renewable energy mix. And finally, in May, we hosted our virtual Investor Day, which afforded us the opportunity to lay out our long-term vision and the priorities and strategies that support our mission, delivering safe, reliable, affordable clean energy, entity that supports the economic prosperity and environmental goals of New Jersey. As we look to the balance of the year, we remain focused on delivering on our commitment to clean energy and decarbonization and on successful resolution of our pending regulatory initiatives. On the clean energy front, in June, we announced the acquisition of a 5-megawatt fuel cell project in the Bronx. This fuel cell, which will be our 30 catamaran is similar to the two Staten Island fuel cells that were brought online in 2020. It's eligible under New York's VDER program, which fixes 75% of revenue. It's supported by an O&M agreement that guarantees 95% availability and long-term offtake agreements with creditworthy anchor customers. Like our previous fuel cell investments, SJI received 92% of the ITCs, cash flows and net income. Importantly, this project supports a substantial portion of our ITC goals for 2021. On the regulatory front, as you know, we have requested $742 million in phase three infrastructure modernization investment at South Jersey Gas. This critically important program targets coated steel and vintage Aldyl-A plastic pipe, supporting the Murphy administration's safety and reliability, job creation and environmental goals. Settlement discussions are progressing toward a final resolution. At this time, I'll turn it over to Steve to review our financial performance and outlook, after which I look forward to offering some closing remarks. Steve?

Steven R. Cocchi -- Senior Vice President, Chief Financial Officer

Thanks, Mike, and good morning, everyone. As Mike noted, our business has performed very well through the first half of 2021. And 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. 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 that this measure provides valuable insight into the performance of our business. Second quarter economic earnings were $2 million compared with a loss of $900,000 for the comparable period a year ago. Improved results reflect increased profitability from both our utility and nonutility operations, partially offset by the impact of financing activities. Our utilities contributed second quarter earnings of $3.3 million compared to $3 million last year. Improved results primarily reflect rate relief at South Jersey Gas, strong customer growth and base rate roll-ins related to infrastructure modernization investments under our authorized plans. Our nonutility operations contributed second quarter economic earnings of $8.1 million compared to $5 million last year. These improved results were driven by increased profitability at both Energy Management and Energy Production. Energy management contributed second quarter economic earnings of $7 million compared to $6.3 million last year, primarily reflecting improved asset optimization opportunities as well as fuel management contracts that became operational over the last 12 months.

Energy production contributed to second quarter economic earnings loss of $200,000 compared to a loss of $2.4 million last year, primarily reflecting contributions from our fuel cell and solar investments over the past year. And our midstream segment contributed second quarter earnings of $1.2 million compared to $900,000 last year, reflecting AFUDC related to our PennEast pipeline investment. Our other segment contributed a loss in economic earnings of $9.3 million compared to a loss of $8.8 million last year, reflecting an increase in outstanding debt, partially offset by debt repayments and refinancing activity. For the six months year-to-date, economic earnings were $130.9 million compared with $106 million last year, reflecting improved utility and nonutility profitability. The improved utility results largely reflect SJG's base rate release, which became effective on October 1, 2020, as well as positive customer growth and the roll-in of infrastructure modernization programs. Improved nonutility results largely reflect the same factors as previously discussed benefited second quarter results. Our capital expenditures and clean energy investments for the year-to-date were approximately $270 million, with more than 80% of this amount allocated for regulated utility investments in support of utility infrastructure upgrades, system maintenance and customer growth. Our balance sheet debt and credit metrics have all improved over the past year and support our growth plans. We remain committed to a capital structure that supports our regulated focused capital spending plan while maintaining a balanced equity to total capitalization, ample liquidity and a solid investment-grade credit rating.

Our GAAP equity to total capitalization improved to approximately 37% as of June 30 compared with approximately 32% at December 31, 2020, reflecting debt and equity financing and repayment of debt using proceeds from asset sales. Our non-GAAP equity to total cap, which adjusts for mandatory convertible units and other long-duration debt improved to approximately 45% at June 30 compared with approximately 40% at December 31, 2020. We continue to have ample liquidity at both SJI and our utilities, with $1.18 billion in total cash, credit capacity and available through our equity forward and approximately $1.14 billion available as of June 30. In addition, with the proactive refinancing efforts we've undertaken over the past year as well as our repayment of debt from our transactions and the remarketing of our prior mandatory convertible units, SJI has no significant debt maturities due in the near term. Turning now to guidance. Based on solid operational performance through the first half of the year, we are reaffirming our expectation for 2021 economic earnings of $1.55 to $1.65 per diluted share. Our long-term economic earnings-per-share growth target remains 5% to 8%, with significant step-ups expected in 2023 and 2025, driven by timing associated with utility rate cases and clean energy investments. We're also affirming our 5-year capital expenditures outlook through 2025 of approximately $3.5 billion and our expected 2021 investment of $740 million to $780 million, with $490 million to $510 million for utility investment and $250 million to $270 million for nonutility investment, primarily focused on decarbonization and renewables. That concludes my remarks, and I will now turn it back over to Mike.

Michael J. Renna -- President and Chief Executive Officer

Thanks for the update, Steve. Q2 2021 represents the sixth consecutive period of steadily improving financial results. Results have been achieved despite a global pandemic turmoil on trading markets, political upheaval and shifting priorities in energy policy. Looking back, the past few years has been one of unprecedented change for our industry. The world is moving toward a clean energy future. SJI has invested in it. Our strategy is centered around it, and our team is executing on it every day. We are excited by the progress we've made so far and remain highly confident in our ability to execute on our plan to safely and reliably deliver the clean decarbonized energy of the future to a fully modernized 21st century system. We also know that it's incumbent upon us to continue to execute effectively and consistently to reward your confidence and investment in us. Before opening up to Q&A, let me conclude my remarks by once again thanking our 1,100 employees for all their continued hard work and dedication to our mission. Operator, that concludes our prepared remarks. We are now ready to open the line for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] And the first question will be from Richard Sunderland with JPMorgan. Please go ahead.

Richard Wallace Sunderland -- JPMorgan -- Analyst

Hi, good morning. Thanks for taking my questions today.

Daniel Mark Fidell -- Vice President of Investor Relations

Good morning, Rich.

Richard Wallace Sunderland -- JPMorgan -- Analyst

Good morning. Maybe just starting with the IIP, could you speak a little bit to just your timing expectations at this point? Or any other color you can provide against the backdrop of a -- you're still pretty busy BPU schedule overall in the state?

Daniel Mark Fidell -- Vice President of Investor Relations

I'm happy to take that. So as you noted in the question, it has been a busy time for the BPU, but I'm happy to say that they do recognize that this is a critically important project for the safety and reliability for our system. So I think we're nearing the end of our negotiations. So we were hoping for a resolution sooner than later, but we're still on track.

Richard Wallace Sunderland -- JPMorgan -- Analyst

Got it. Understood. And then maybe switching gears to the RNG side. Just curious about the eight farms under development right now and where that puts you toward the 2023 step-up in the business as the contributions ramp, could you maybe just outline a little bit more about these farms versus the overall development activities in the context of bridging to that 2023 contribution from the business?

Michael J. Renna -- President and Chief Executive Officer

Sure, Rich. It's Mike. The eight farms that are currently working through the development process are expected to be online in 2022 and producing brown gas. And we would -- and they currently remain on schedule. There are some supply chain issues that I think everybody is dealing with right now regardless of what sector you're in. But we don't anticipate them to have a meaningful impact on our schedule. So we are on track for a 2020 commercial -- 2022 commercial operations date. During the course of 2022, we'll begin to bring the other remaining farms through the predevelopment process and would expect to have the remaining farms, the vast majority of the remaining farms in development in 2022 for a 2023 in-service date. So again, the first kind of tranche, those eight farms, plus there are two other farms that are being developed by our partner REV. We expect all 10 to be online in 2022. And the vast majority of the remaining portfolio to be in construction in 2022 with an in-service date of 2023.

Richard Wallace Sunderland -- JPMorgan -- Analyst

Understood, Mike. And maybe just a quick follow-up there. The supply chain issues, can you just speak a little bit more to that? And if these are just kind of temporary impacts to the current development projects or something on your radar for the 2022 activities as well?

Michael J. Renna -- President and Chief Executive Officer

I think, Rich, it's in part the increased demand for anaerobic digesters. And I mean RNG is -- it's pretty hot right now. So there are a lot of I think projects in the development queue across the country. Most of the manufacturing is done in Europe. So it was a matter for us of getting in and securing those long lead items, which we've done. So I think that's how we've mitigated the potential supply chain issues, is getting in early and locking in those delivery dates.

Operator

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dan Fidell for any closing remarks.

Daniel Mark Fidell -- Vice President of Investor Relations

Okay. Well, thank you all for joining us today. As a reminder, a recording of our call today will be available on our website shortly. As always, please feel free to contact me, Dan Fidell for any follow-up questions. And again, thanks for joining us today and for your continued interest and investment in SJI. This concludes our call.

Operator

[Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Daniel Mark Fidell -- Vice President of Investor Relations

Michael J. Renna -- President and Chief Executive Officer

Steven R. Cocchi -- Senior Vice President, Chief Financial Officer

Richard Wallace Sunderland -- JPMorgan -- Analyst

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