South Jersey Industries, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 South Jersey Industries Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require additional assistance, you may press star then 0 to reach an operator. I would like to hand the conference over to Dan Fiedel, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to SJI's fourth quarter 2020 earnings conference call and webcast. I'm joined today by Mike Renna, our President and Chief Executive Officer. Steve Kochi, 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. The release and the associated 10-K 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 gap 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 any forward-looking statements. 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 2020 operational performance and strategic priorities as we begin 2021. Our CFO, Steve Kochi, will then review our 2020 financial performance. Mike will then 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.

Thanks, Dan, and good morning, everyone. Thank you for joining us today, and as always, I hope you and your families are staying safe and well. I am pleased to report a $60 million increase in economic earnings and a 50% year-over-year improvement in economic earnings per share. 2020 saw us meet or exceed all key strategic and operational metrics despite unprecedented challenges, and we delivered on our mission, providing safe, reliable, and affordable natural gas to more than 700,000 customers across New Jersey. We were there at a time when our customers and communities needed us the most. 2020 also saw us deliver on key strategic priorities driving our long-term growth. We reached a favorable resolution of South Jersey Gas Company's base rate case, a reflection of our prudent investment and strong regulatory relationships, achieved our targeted clean energy investment goals, demonstrating alignment and commitment to state and regional decarbonization efforts, proactively strengthened our balance sheet, ensuring we had sufficient liquidity to address the unknowns of COVID, and funding of our capital plans, and proposed important regulatory initiatives in support of safety and reliability, energy efficiency, decarbonization, and job creation. Consistent with our goals, our utilities, South Jersey Gas and Elizabethtown Gas, represent the majority of earnings in 2020. Margins increased significantly, reflecting above average customer growth, positive base rate case outcomes, critical infrastructure modernization programs and trackers, and effective O&M management. Natural gas remains in strong demand across our territories and across New Jersey, with more than 12,000 new customers adding service in the last 12 months alone. While we are seeing increased new construction across the state, the bulk of our customer growth continues to come from conversions, with roughly two-thirds converting from alternative fuels, such as heating oil and propane, to cleaner burning and lower-cost natural gas. Regulatory relationships remain constructive and strong, resulting in amicable settlements in record time with desired results at both our utilities. Infrastructure modernization programs, critical to assuring safe and reliable service to our customers, have the added benefit of significantly reducing methane emissions. Over the last 12 months, we've invested more than $135 million to replace aging cast iron and bare steel main across our system. And on October 1st, 2020, we adjusted rates at both our utilities to begin recovering these important investments. Our non-utility operations also experienced significant improvement in 2020 due primarily to new clean energy investments and a right-sizing and repositioning of our legacy businesses. Specifically, our wholesale businesses delivered solid year-over-year improvement driven by strong performance in our fuel management activities, the roll-off of legacy contracts, a reshaped portfolio, and asset optimization opportunities. Our energy services business delivered on our commitment to align and advance the clean energy goals of our state and region. Our fuel cell investments are expected to produce 7.5 megawatts of low-carbon electric generation in Staten Island. and along with four small-scale solar investments, delivered 21 cents per share of investment tax credits in 2020. As we begin 2021, our priorities are focused on executing on our commitment to clean energy and decarbonization and achieving resolution in our pending regulatory initiatives. With regard to decarbonization, as you saw from our earnings release, we are excited to announce our equity investment in REV-LNG. a company specializing in the development, production, and transportation of renewable natural gas, liquefied natural gas, and compressed natural gas, along with the development rights to a portfolio of anaerobic digester projects to produce RNG. Over the last few years, REV has become one of the country's leading developers of dairy RNG projects through capturing, cleaning, and converting biomethane to RNG. RNG recovered from dairy farms has a negative carbon intensity rating, meaning it takes more carbon out of the environment than it produces and is less carbon intensive than conventional natural gas. These investments, along with our planned investments in RNG that will directly serve our utilities, will accelerate SDI's path toward decarbonization. This strategic investment is adjacent to our core utility business. It supports our commitment to decarbonization and to delivering the clean energy of the future. It positions SJI at the front of an emerging energy market with significant growth and upside, and with unlevered returns in the teens, strong growth in the core transportation vertical, and the potential afforded through dairy farm development, this investment will be accretive to earnings and credit metric positive. As you know, we currently have several important proposals pending before the BPU, with resolution expected before the end of the second quarter. We have requested $267 million in energy efficiency investments at our utilities over the next three years, as well as a decoupling mechanism for Elizabethtown Gas, similar to the one we have in place at South Jersey Gas. We have also requested $742 million in Phase III infrastructure modernization investment at South Jersey Gas, targeting coated steel and vintage Adelaide plastic pipes. Both programs support the Murphy administration's goals surrounding safety and reliability, energy efficiency, decarbonization, and job creation. At this time, I'll now turn it over to Steve to review our 2020 financial performance, after which I look forward to offering some closing remarks.

Steve? Thanks, Mike. Good morning, everyone. As Mike noted, despite the continuing pandemic, our business performed very well in 2020, and we expect 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. 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. For 2020, Economic earnings were $1.68 per diluted share, compared with $1.12 per diluted share for the comparable period a year ago. 2020 results exceeded our previously communicated expectations for economic earnings to be at the upper end of $1.50 to $1.60 per diluted share, driven by a combination of improved utility and non-utility performance, as well as several positive but non-recurring items that totaled 13 cents per share. These items included certain tax adjustments, SJG rate design adjustments, and pipeline supplier refunds. Our utilities contributed 2020 earnings of $1.62 per diluted share compared to $1.33 per diluted share in 2019. Improved results primarily reflect rate relief at both South Jersey Gas and Elizabethtown Gas, positive customer growth, and base rate roll-ins related to infrastructure modernization programs. Our non-utility operations contributed 2020 earnings of 47 cents per share, compared to 15 cents per share in 2019. Improved results were driven by increased profitability of both Energy Group and Energy Services. Energy Group contributed 2020 earnings of 24 cents per diluted share, compared to 10 cents per diluted share in 2019, primarily reflecting fuel management contracts that became operational over the last 12 months. higher volumes, and improved asset optimization opportunities resulting from efforts to reshape our portfolio over the past year. Energy services contributed 2020 earnings of 19 cents per share compared to breakeven results in 2019, primarily reflecting the recognition of investment tax credits related to fuel cell and solar acquisitions that commenced operations during the year. Our other segment contributed a loss in economic earnings of 42 cents per share, compared to a loss of 36 cents per share in 2019, reflecting an increase in outstanding debt, partially offset by debt repayments and refinancing activity. For our fourth quarter 2020, economic earnings were 62 cents per diluted share, compared with 47 cents per diluted share for the comparable period a year ago. reflecting improved utility and non-utility profitability. Improved utility results largely reflect SJG base rate relief, which became effective on October 1, as well as strong customer growth and the rolling of infrastructure modernization programs at both SJG and DTG. Improved non-utility results largely reflect the recognition of investment tax credits related to our fuel cell and solar acquisitions that commenced operations during the year as well as improved asset optimization at our wholesale business. Our capital expenditures in 2020 were approximately $600 million, with approximately 80% of this amount reflecting investments for utility infrastructure upgrades, system maintenance, and customer growth, and approximately 20% reflecting clean energy investments. As Mike discussed, we're pleased to announce our investment in RevLNG today and we expect this important decarbonization-focused investment to be accretive to our cash flow and economic earnings and support continued long-term improvement in our credit metrics. A fact sheet regarding our investment in REV is available on the investor relations section of our website at www.sjindustries.com. Turning now to our balance sheet, We remain committed to a capital structure that supports our regulated driven capital spending plan while maintaining a balanced equity to total capitalization, ample liquidity, and a solid investment grade credit rating. GAAP equity to total capitalization improved to 32.2% at December 31, 2020, compared with 29.6% at December 31, 2019, 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-term duration debt, improved to 39.7% at December 31, 2020, compared with 37.5% at December 31, 2019. Earlier this month, Moody's affirmed South Jersey Gas' A3 rating and raised its outlook to stable from negative. citing among many factors SJG positive rate case resolution in 2020 and steady improvement in financial metrics. We completed multiple steps in 2020 to strengthen liquidity, eliminate near-term debt maturities, and ensure the ongoing funding of our capital program. With approximately $450 million of available borrowing capacity as of December 31, 2020, we remain confident in our ability to manage through the impacts of COVID. With regard to guidance, SJI's recent investment in REV as well as several pending regulatory proposals for expanded accelerated infrastructure modernization and energy efficiency programs are expected to positively impact our financial metrics and advance our decarbonization goals. We're currently incorporating these investments and initiatives into our plans and look forward to sharing our vision for the future with you in conjunction with a planned Virtual Investor Day in May. Details regarding participation in the meeting are expected to be provided in April. That concludes my remarks, and I'll now turn it back over to Mike.

Thanks, Steve. The successful execution of our priorities, combined with a fifth consecutive quarter of solid improvement in our financial results, shows that our business transformation efforts over the past few years is paying off. At the same time, our strategic investments in clean energy demonstrate continued alignment with the goals of our state and region, are highly complementary to our core gas utility business, and have set the table for new and growing stream of positive cash flows for SGI. As we conclude, let me remind you that above all else, SGI remains committed to the safety of our employees, our families, and our communities. We continue to function very effectively from a largely remote platform and will continue to make decisions informed by directives from our leaders and health experts. We, along with all of you, are optimistic for a successful vaccine rollout in the months ahead and a return to a more normal functioning of life and work. In this regard, we remain a proud New Jersey company and a partner with our state, and we stand ready to support our state's vital economic recovery efforts with shovel-ready jobs to get folks back to work. Let me conclude my remarks by saying how proud I am to be a part of the SGI family. From how we came together in the face of the pandemic to how folks have embraced the future, the future where our infrastructure will deliver the clean energy critical to combating climate change. Operator, that concludes our prepared remarks, and we are now ready to open the line for questions.

As a reminder, to ask a question, please press star then one. If your question has been answered and you'd like to move yourself in the queue, press the pound key. Our first question comes from Richard Sunderland with J.P. Morgan. Your line is open.

Hi. Thanks for taking my questions today. I just wanted to start on sort of the 2021 outlook in consideration of, I guess, forthcoming guidance here. Could you speak to some of the moving pieces year over year, I guess, those pending regulatory proceedings and the REV LNG investment in any way to frame the order of magnitude kind of contribution from those items just to get a sense of the growth in the 21 year?

Hey, Rich. I'm sorry. It's Mike. You know, I think, you know, as we said in our release and in our prepared remarks, you know, there are several moving pieces which we would expect to have greater resolution on as we work our way through the first quarter and the early part of the second quarter. And we wanted to make sure that when we had our investor day and put out guidance, which would be for, you know, not only 2021, but certainly we would give an indication of what we expected our growth to be over a, you know, three- to five-year planning horizon. We wanted to wait for resolution of, or at least, you know, strong indications around some of those moving pieces. So you mentioned certainly we have some pretty significant proceedings in front of our regulators right now. We have our infrastructure replacement program, accelerated infrastructure replacement program at South Jersey Gas focused on kind of the next generation of vintage pipe, which would be coated steel and Adelaide plastic. It's a very large and ambitious program, but again, at the end of that, we'll have one of the most modern, if not the most modern systems in our region, so something that's really critical to advancing the state's safety, reliability, and also environmental goals. We've got an energy efficiency proposal in front of them. Again, we would expect to have better insight into those and then, you know, be able to provide investors with a better sense of how they will impact both our earnings and our credit metrics going forward. And then as far as, you know, Rev goes, there's a lot there, and we felt it better to kind of take the time to walk investors through just what a unique an exciting opportunity this is for us. And again, how we envision the kind of, you know, the build out of that opportunity, both in its existing business, you know, which is largely a services business in and around gas assets. So, you know, RNG development, LNG and CNG, but more specifically around what we think is a critical strategic imperative for SJI which is decarbonization, you know, kind of the focus and the cadence of development of dairy farms. So I don't know that I directly answered your question, but I'm trying to give you as much as I can without basically doing the investor day on this call.

Got it. Thanks, Mike. Appreciate the caller. And maybe one more on this front of it. The risk of front-running the investor day is just – I'm curious if you could kind of frame the 2020 clean energy and decarbonization investments from a, you know, CapEx or dollars invested perspective versus, you know, your ultimate aspirations in terms of growth there. And then just as well as any kind of ITC targets you're looking at for 21. Great question.

And again, You know, I want to just take a second and kind of go back to our decision to reenter the clean energy development space, which we announced about a year ago at this time, right? So we had said that, look, given where sentiment was going, particularly in New Jersey, but, you know, really the region, and now I think it's a nationwide thing towards decarbonization and clean energy, we felt it extremely prudent for SJI to participate and to demonstrate our commitment to decarbonization and clean energy and our alignment with the state and Governor Murphy's Energy Master Plan. And we are committed to playing a key role in that. So we put out a number of I think it was roughly $150 million was kind of our target investment over a three-year period. And we were relatively agnostic in terms of what type of clean energy investment that would be. We wanted it to provide strong, unlevered returns. We wanted it to certainly demonstrate, again, alignment and commitment to the goals of the state and the region. But clearly, at the beginning, we thought it would most likely involved some solar. And it did ultimately, but they were four rather small projects. And we're certainly going to do everything we can to green our own facilities and our own buildings. And as we said earlier, too, we think it's kind of a great solution as a replacement at our now shuttered landfill to electric projects. But, you know, the fuel cell, became a great opportunity for us in 2020. We consider, you know, it's clean, low carbon electricity. It uses natural gas as its fuel source. So we were really excited about that, thought it was a great fit, would certainly be open to doing additional fuel cell projects in the future. But again, you know, one of the things we really liked about the one that we did was was that it was part of New York's VETER program, which effectively fixes 75% to 80% of the revenue. So not only is it a great investment from a clean energy perspective, but it's highly de-risked. So, again, I think that we'll always be open to those type of investments. The investment in REV is very different. There is no ITC at this point in time for RNG projects. but it does accomplish something that is really critical for us. And I think for the future of our industry, and that is, it helps to decarbonize, um, the energy flowing through our infrastructure. And that from the very get go has been our primary goal. And we are just really excited about the opportunity to partner with rev. And as we said, you know, be at the forefront of, um, you know, kind of the clean energy decarbonization, um, movement and, As far as ITC and investments go, I think we've not changed our plan. That $150 million, $175 million over a three-year period is still our plan. Those would be where you would see ITC type of investments, and our investments in REV will be done with the same critical lens we do every other investment, which is a Unlevered returns, credit positive, and, you know, again, in a highly de-risked kind of structure.

Great. Thanks. Appreciate the color there.

Thanks, Rich.

Our next question comes from Gabe Maureen with Mizuho. Your line is open.

Hey. Good morning, everyone. Maybe I can just start with wholesale a little bit here. I could have had a great fourth quarter. I was going to ask twofold on this. One is just given all the events over the last couple of weeks and the volatility, if you can speak to how that portfolio has been performing in the first quarter or, you know, what the impacts have been directionally. And then second of all, one of your peers, I guess, entered into a long-term contract for some of the capacity that they have with their marketing business. I was wondering if that's something that you're potentially contemplating as well.

Sure, I'll take this again. It's my game. So how was our portfolio performing in the first quarter? Yeah, I mean, certainly there have been some rather unusual and historic weather events in the last few weeks, particularly kind of in the mid-continent. It has not necessarily affected the Northeast to the extent it did, you know, again, through the Plains. We did see some volatility. I think we had prices, you know, in the market area in the $7 or $8 range, so some nice spreads. But, Gabe, if you remember, several years ago, we reshaped our portfolio and really tried to kind of minimize the volatility in in the portfolio. So it wasn't necessarily a different strategy for us in terms of, you know, because we were always, you know, pretty much fully hedged heading into any winter. We'd leave a little bit open, but that was just to meet, you know, demand and volumes, swings and volumes. But just given some of the pipeline restrictions that happened over the years and some of the changes that they had in the way that you could You could use secondary or parking loan your gas and some of the other things that led to some real opportunities to optimize your assets in the past that were really no longer there. The head of that business, Jason Foles, did a great job of reshaping our portfolio and, again, I think minimizing any type of downside. But in doing that, the tradeoff is you also minimize some of the upside. So we like where we are right now because I think it's far more predictable and uh, than it was maybe a few years ago. Um, I expect us to have a good first quarter. Um, and I expect us to be right around where we projected as far as, um, okay. Remind me your second question. I'm sorry.

Oh, it was just in terms of one of your, one of your peers basically taking some of the path in that business.

Yeah. Um, you know, it's, It's a couple things, right? I mean, I understand what they were looking to accomplish, and I give them credit for going out and getting it done. But I think, you know, a lot of it depends on what kind of – where your assets are located and what type of value a potential acquirer would place on them. You know, I think our portfolio right now with where it is, as I mentioned, you know, we've taken a lot of the volatility out of it through our own internal actions. And so I expect it to be a very steady and, and solid contributor to, to SJI. So I think, and again, I, you know, I don't want to speak for, for Steve or NJR or anything like that, but, but I guess is that, this was a way for them to kind of accomplish the same thing, which was take a lot of the volatility out of their earnings through this AMA.

Thanks, Mike. And then maybe if I could follow up with a two-fold question on the utility. One is just kind of the latest on any COVID regulatory assets you've got and what the latest is on potential recovery there. And then also, I think in The release and presentation, you mentioned alternatives to the LNG project, and you can see it for the analyst, David, just kind of curious what those alternatives would be and CapEx size-wise, you know, how those might compare.

Sure, Gabe. I'm going to ask Gabe Robbins, president of our utilities, to take this one.

Sure. Good morning, Gabe. So as far as COVID, I think we – In our release, we talked about the amount of assets that have been deferred under approved program by the BPU. The way that that's going to work is that 60 days after the governor lifts his executive order, there will be discussions on the filing and the recovery of those costs. In accordance with that, we have deferred these costs as a regulatory asset. The bulk of the number that you see is incremental bad debt, which we certainly, as along with all the other utilities, have incurred, but we've placed it on the balance sheet as a deferred asset. And again, we'll work with the BPU along with the other utilities. Once the executive order is lifted, because right now it's kind of premature to think about the time period of that recovery. I don't think that's been addressed yet as there are other priorities to deal with right now. So, again, we expect to get full recovery. The mechanism and length of that is still kind of TBD. And then I think your other question, Gabe, was the status of our LNG project that we discussed. As you all know, we filed for that a little over 14 months ago. It certainly was slow in moving through the approval process, the discovery process. We are encouraged. There has been some recent movement, and I will say anecdotally, the need for redundancy, and I think we talked earlier about the severe weather impacts on the Southern Plains. I think what that's done is kind of sensitized us to the importance of building redundancy into our system. And as we shared that this is a key redundancy project. So just a little bit on where we are. The discovery is complete on our filing by DPU staff. Last week we completed the public hearing and we are awaiting some comments from rate council. But I expect that, you know, we'll have a resolution on this in the upcoming months. I don't have a definitive date, but there has been some progress recently on our filing. And, you know, we think this is a real critical project for us, you know, going back to the critical need for redundancy. Understood. Thank you very much. Sure.

As a reminder, to ask a question, please press star, then 1. Our next question comes from Chris Ellinghaus with Sievert Williams. Your line is open.

Hey, guys. How are you? Hi, Chris. Mike, not to front-run your meeting, but the REV – They currently are earnings positive, so you're accretive before making additional investments? Is that fair?

Yes. Yep. Their core business that we acquired an equity interest in is – will be accretive. Our percentage will be accretive to earnings, yes.

Okay. Can you – Would it be fair to say that the digesters are of a material scale, capital-wise?

You know, Chris, it's interesting. They're, on an individual basis, they're, you know, they're in the $10 million to $15 million range. So a lot of it's just going to depend on, you know, ultimately our our kind of development horizon. But there are certainly economies and efficiencies that are gained by where they're geographically located. So, you tend to think of them as pods. So, you may do four or five in a specific geographic region and then all of that RNG is then, you know, compressed and transported and connected to a specific LDC or interstate pipeline. So we're working through right now with our partners at REV a development schedule and a timeframe and looking at different offtake type of agreements. What I can say, Chris, is that we've always hung our hat on our investments being particularly, you know, in the last few years, being of high quality and utility-like, and that's how we're approaching the development of the dairy farms and the digesters. And I think it's probably a really good way of thinking about it going forward. We'll certainly look to de-risk as much as possible.

Okay. And they do, like, transport services for third parties and stuff as well?

They do. They actually designed and developed LNG bunkering for the maritime industry. They provide LNG and so, you know, kind of virtual pipeline services for for utilities. Um, they do a lot of, uh, compressed natural gas as well. Again, helping utilities meet their, their peak day, um, supplies. And then, um, they, they're now, they're kind of the fastest growing segment is, is their RNG vertical. Um, they, they currently actually are, have development agreements with two other utilities where they're developing, um, or we, I guess I should say, we're developing anaerobic digesters at dairy farms for, again, two large utilities under a fee-based structure that includes a long-term contracted trucking contract as well. So it's a really exciting opportunity for us.

Yeah, it sounds interesting. Does this... Is this going to be your primary sort of clean decarbonization natural gas investment, or do you have some aspirations for things like hydrogen investments as well?

That's a great question. I'm sure you saw our announcement of the partnership with Atlantic Shores to do a pilot hydrogen project there in New Jersey. So, I think, you know, Chris, I think our place in the future, in the energy future, is decarbonization. You know, it felt for a long time like electrification was kind of the only pathway forward. And I think now, when you look at our infrastructure and the hardened nature of our infrastructure, you just see what's happening when You know, you have these periods of extreme cold. You need our infrastructure and you need our energy to be able to get through those periods of time. And I think that it's incumbent on us utilities to find ways to decarbonize, and that's where our focus is. So I think what you'll see is investment through REV, and I think you'll see a lot of – over the years in our utilities and bringing RNG on behind our city gates. So it really will be on a parallel path.

Okay. One last thing. In addition to the storage docket, have you seen any momentum in terms of jobs initiatives for this year?

You know what? I'll ask either Steve or Dave to grab this one.

Good morning, Chris. Certainly, I think the front office initially in conjunction with the BPU started to talk about a stimulus program to, you know, create jobs to help get the economy back on track. You know, I think those discussions have really been sidetracked as they've dealt with COVID directly. So we submitted, along with the other utilities, a list of projects where we could accelerate some investments really in the name of first and foremost for job creation. We have not really heard back on that, all the information, the data was provided. So I think that's kind of sitting there and very well be addressed in the near future. But I think that's one of the reasons why you saw the SJG filing was upsized. Certainly, we look to continue to make those kind of investments. They've been supported, you know, by our regulators. But the main driver, I think, this time for the upsize is job creation. So while it wasn't under a formal, you That's the big driver on why we upsize that filing.

Okay, great. Thanks a lot. I appreciate the call.

There are no further questions. I'd like to turn the call back over to Dan Fidel, Vice President of Master Relations, for closing remarks.

Okay. Thank you, Michelle. I want to thank everyone for joining us today. As a reminder, a recording of our call today will be available on our website. And as always, please feel free to contact me, Dan Fidel, for any follow-up questions. Again, thanks for joining us today and for your continued interest and investment in SJI. This concludes our call. Thanks.

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone have a great day.