South Jersey Industries, Inc.

Good morning and welcome to the South Jersey Industries third quarter 2021 earnings conference call webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Dan Fidel with Investor Relations. Please go ahead.

Thank you. Good morning and welcome to SJI's third quarter 2021 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 investors.sjindustries.com. 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 many 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 released in the 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. At this time, I'll now turn the call over to our CEO, Mike Renna, who will review our operations and strategic priorities. Our CFO, Steve Kochi, will then review our third quarter and year-to-date operational performance and financial outlook. Mike will conclude by offering some closing remarks. After that, be happy to take your questions. With that introduction, let me now turn it over to Mike.

Thanks, Dan. Good morning, and thank you for joining us today. I am pleased to report that SGI, notwithstanding the continuing challenges of COVID, again delivered solid performance in the third quarter and through the first nine months of 2021. And we remain on track to achieve our strategic and financial goals for the year. Through the first nine months, we have seen economic earnings increase by 12%, or approximately $12 million, reflecting solid performance in both our utility and non-utility businesses. Consistent with our strategy, our utilities, South Jersey Gas and Elizabethtown Gas, represent the bulk of our earnings. Utility 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 12,000 new customers over the last 12 months. And while we are seeing increased new construction across the state, most of our growth continues to come from customers converting from heating oil and propane. Our infrastructure modernization and energy efficiency investments, critical to ensuring safe and reliable service to our customers, remain on track. and have the added benefit of significantly reducing methane emissions. On October 1st, in keeping with the cadence approved by the BPU, we began recovery of these investments made over the last 12 months. I am also pleased to report that our regulatory initiatives continue to advance. In August, the BPU approved South Jersey Gas' engineering and route proposal to construct needed system upgrades in support of a planned two BCF liquefied natural gas facilities. As you know, the BPU has called for utilities in New Jersey to evaluate preparedness for potential gas supply interruptions. This investment is critical to ensuring service is not interrupted in the event of a significant outage, either behind our city gate or in one of the two interstate pipelines that serve the South Jersey gas system. Preliminary engineering and design of the project has commenced. Regarding pending initiatives, we have requested $742 million in Phase III infrastructure modernization investments at South Jersey Gas. This next phase of system modernization targets coated steel and vintage Adelaide plastic pipe, supporting the Murphy administration's safety and reliability, job creation, and environmental goals. The retirement of Ray Council in September and the leapfrogging of approval of our LNG redundancy proposal has extended our anticipated timeline a bit. But settlement discussions continue to progress, and we remain optimistic for a positive resolution soon. With regard to pending legislation, the potential for rate-basing RNG and hydrogen investments in New Jersey continues to enjoy strong bipartisan support. It aligns with Governor Murphy's clean energy goals and is expected to be a priority item during the upcoming lame duck period. As previously communicated, we believe this legislation will encourage innovation and accelerate New Jersey's decarbonization efforts. Turning now to our non-utility operations, both our energy management and energy production segments delivered solid quarterly and year-to-date results. Energy management results reflect strong performance in both wholesale marketing and fuel management. while energy production reflects positive results from fuel cell and solar investments over the past 12 months, particularly our Staten Island fuel cell, as well as contributions from our 35% equity interest in our RNG development partner, REV. I am pleased with our progress on our clean energy and decarbonization goals. Our five megawatt fuel cell project in the Bronx that was announced in June is under development and moving forward. Similar to our two Staten Island fuel cells that were brought online in 2020, this fuel cell, which will be our third at Catamaran, is eligible under New York's VITA program, which fixes 75% of revenue and is supported by an O&M agreement that guarantees 95% availability. SGI will receive 92% of the investment tax credits, cash flows, and net income from this project. Our decarbonization investments through our partner REV remain on track as well. Our 35% ownership of REB is now contributing nicely to our bottom line. And our development of renewable natural gas for future injection into SGI's system and other utility systems across the country continues to move forward. Engineering and design work at eight dairy farms is wrapping up with construction on deck and in service on track for the second half of 2022. We have added a farm development status slide in our third quarter presentation to provide you with additional detail regarding these investments. 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? Thanks, Mike, and good morning, everyone. As Mike noted, our business has performed very well the latest period and through the first nine months of 2021. 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 that this measure provides valuable insight into the performance of our business. For the third quarter, SJI posted a loss in economic earnings of $18.8 million. compared with a loss of $6 million for the comparable period a year ago. The latest period reflects improved results from utility operations, which was achieved despite the ongoing challenges of the pandemic and the inherent seasonality of our business. These improved results from our utility business were offset by decreased profitability for non-utility operations, largely related to year-over-year timing of the recognition of ITCs from renewable investments. Our utilities contributed a narrower third quarter loss in earnings of $17.2 million compared to a loss of $18.4 million in third quarter last year. Improved results primarily reflect rate relief at South Jersey Gas, strong customer growth, and base rate roll-ins related to infrastructure modernization and energy efficiency investments under our authorized plans. Our non-utility operations contributed third-quarter economic earnings of $8.1 million compared to $21.6 million last year. Energy management contributed third-quarter economic earnings of $4.4 million compared to $6.6 million last year, reflecting solid profits from asset optimization activities, albeit less robust than last year, and improved profitability from our retail consulting activities. Energy production contributed third-quarter economic earnings of $3.9 million, compared with $13.8 million last year. As previously mentioned, the decrease largely reflects timing associated with the recognition of ITCs from renewable energy investments, which was partially offset by positive contributions from fuel cell and solar investments made over the past 12 months. as well as contributions from decarbonization investment through our 35% equity ownership in REV. Midstream contributed a loss in third quarter earnings of $300,000 compared to earnings of $1.2 million last year, reflecting the absence of AFUDC related to the cessation of development activity for the Penn East Pipeline project. Our other segment contributed a loss in economic earnings of $9.6 million, compared to a loss of $9.2 million last year, reflecting higher interest and bank fees partially offset by lower outstanding debt. For the nine months year to date, economic earnings were $112.1 million compared with $100 million last year. Improved utility results and consistent non-utility results largely reflect the same factors as previously discussed that impacted third quarter results. Our capital expenditures and clean energy investments for the year to date were approximately $434 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. And as always, 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 gap equity to total capitalization improved to 35% as of September 30, compared with 32.2% on 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 43.4% at September 30, compared with 39.7% at December 31, 2020. We continue to have ample liquidity at both SJI and our utilities, with approximately $1.3 billion in total cash credit capacity and available through our equity forward, and approximately $1.1 billion available as of September 30. In addition, with the proactive refinancing efforts we've undertaken over the past year, as well as 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 nine months 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 five-year capital expenditures outlook through 2025 of approximately $3.5 billion. As you know, Penn East CapEx in our five-year plan was relatively small, approximately $100 million, and we've identified a variety of utility and clean energy investments that match our current strategic growth requisites to take its place. That concludes my remarks, and I'll now turn it back to Mike.

Thanks for the update, Steve. We are excited by the progress we've made in 2021 and remain highly confident in our ability to execute on our plan to safely and reliably deliver the clean, decarbonized energy of the future through a fully modernized 21st century system. But before opening up for Q&A, let me address a question that may be on your minds. With regard to the recent rise in gas commodity prices, let me remind you that SGI has a prescriptive hedging plan in place approved by the BPU and designed to minimize the kind of pricing volatility our sector has witnessed in recent months. Based on this program, any impact to customer bills would largely be resolved in our next BGSS discussions with our regulators with new rates effective next October. As I conclude my remarks, let me once again thank our 1,100 employees for all their exceptional work and dedication to our mission. I also want to offer a special note of congratulations and thanks to Dave Robbins, who will be retiring from SJI at the end of this year after more than 25 years of service. I know many of you have gotten to know and engaged with Dave over the years. He has served our company admirably and with great distinction for many years, including most recently with the responsibility of leading our utilities. Dave, from all of us at SGI, our thanks for a job very well done and all the best for your next chapter. Operator, that concludes our prepared remarks, and we are now ready to open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will come from Julian DeMolen Smith from Bank of America. Please go ahead.

Hey, it's Cody Clark on for Julian. Good morning, Mike and Steve. Morning. Morning. Steve, you mentioned it briefly in your prepared remarks, but assuming Penn East is not moving forward, can you provide a little bit more color on the investment opportunities that would backfill the lost earnings from the project? Should we think about it as weighted more towards regulated or unregulated investments and any specific areas that you could point to would be helpful?

Sure, and thanks for the question. And first of all, just to remind you, at our investor day earlier this year, we had significantly backed down the earnings contribution in our long-term plan from Penn East. just based on what we were seeing at the time. And our earnings guidance had only included a phase one portion of the project. So from an earnings perspective, it was really a relatively minimal contributor in terms of the plan that we put out. In terms of replacement opportunity, you know, really we've got opportunity on both sides of the business. regulated and non-regulated. You know, ultimately where the replacement earnings will come from is going to be a mix of both. We try to be, you know, opportunistic and disciplined with our projects on the non-regulated side, but we've got a lot of opportunity, as you know, with the development of the RNG farms and our investment in in REV LNG, and there is absolutely no shortage of safety and reliability investments for us to make at the utilities. So, hard for me to say exactly what the split will be, but lots of opportunity and no question in our minds that we'll be able to replace those earnings in CapEx.

Understood. That's helpful. And just thinking about the remainder of 21, you reiterated the guidance range on strong performance year-to-date. So what are the drivers through the balance of the year that we should be thinking about, and where would that put you within the range? And then also, if you have any initial thoughts on 22, and especially looking at the R&G projects coming online towards the back half of that year and potentially some pickup in Rev LNG ownership, you know, how are you thinking about 22 at this point?

So, for the remainder of the year, I think the key drivers will really be the regulated earnings business. We had our infrastructure program at ETG roll in in October, so that will contribute to our fourth quarter earnings nicely, as well as our typical drivers of customer growth, which has remained robust. So that's where you're going to see really the primary drivers this year, as well as we've seen some really terrific performance out of our existing fuel cell in Staten Island and are always looking to optimize our assets and opportunities at the wholesale business, which has performed also very well this year, and we expect that to continue through the balance of the year. For 2022, at this point, as you know, we will typically put out our annual guidance with our year-end call. So in the February timeframe next year is what I would expect in terms of 2022 guidance. What I can tell you is that what we laid out in our investor day earlier this year, we remain confident in. There's a lot of opportunity at both regulated and non-regulated businesses. We've talked about our investments in RNG will begin producing significant revenues with those projects going into service. The expectation is later in 2022. So, you know, if you could just stay patient, we will put out our guidance at the beginning of next year, but we're not seeing anything at this point that would change our view as we laid it out in our investor day earlier this year.

okay got it thanks for taking my questions i'll hop back into you sure next question will be from richard sunderland from jp morgan please go ahead hi good morning thank you for the time today um just want to start on the lng redundancy side could you refresh us with the current project cost construction start and in-service expectations

Sure, Rich. Good morning. It's Mike. The cost is in the $300 to $330 million range. That would include both the construction of the liquefaction facility as well as the storage facility and all the improvements that we'd be making in our utility that, as Steve mentioned on the call or I mentioned on the call, are related to the engineering and design for the improvements that are necessary to be able to supply the liquefaction facility. So again, $300 to $330 million, we would expect and are projecting in-service date of 2025.

Mike, I can just add that we're now in the engineering and design phase once we receive the PPUs order in August.

Got it. And then are there any remaining kind of hurdles procedurally or what have you here beyond just the pre-construction phase you're in right now?

Well, the BPU approval for the improvements was obviously one. And then we have environmental permits that we need to secure. Again, we feel very confident about those, and things are progressing nicely. So beyond that, no, once we have all the permits in hand, we would begin construction.

Great. And then switching gears to the R&G side, you mentioned a little bit about the local efforts in the state. Could you speak a little bit more to what you're watching for on that front and then maybe just federal efforts as well and kind of what's in focus for you right now? Yeah, sure. Be happy to.

I'll start with the federal. There is, as part of the Build Back Better plan, there's a lot of incentives for decarbonization, everything from the extension of investment tax credits for traditional renewable investments, but also now the inclusion of tax incentives for RNG and hydrogen. So that's working its way through reconciliation, and we'll see ultimately what emerges. But we're obviously encouraged by the fact that it is included in the bill, not only because I think it's certainly going to jumpstart the industry or development, but I think it's also a reinforcement that decarbonization is on equal footing with electrification. We're certainly encouraged on that front. Similarly, on the state level, as you know, it's been – it was a – every seat in New Jersey was up for election on Tuesday. So they were in recess and will be until they go into lame duck. The work was – was being done, you know, these past few months on lining up sponsors and educating different legislators on the importance of the bill and how it, again, will help the governor and the administration achieve their clean energy goals. We continue to see strong support, bipartisan support, and would expect this to be a priority during lame duck.

Great. Thank you for the color here.

Thanks, Rich.

The next question will come from Shaharir Peraza from Guggenheim. Please go ahead. Shaharir, perhaps you're on your end.

Hi, guys.

Thank you. All good.

Hi, guys. It's James Ward on for Shar. How are you?

Good.

How are you? How are you doing? Doing well. um the uh well the first issue i wanted to cover was the post-election one which you you just touched on very well and thank you for the color there uh the uh the next element was uh just wanted to confirm the combined annual growth rate that you're seeing between south jersey gas and elizabethtown is kind of that one to one and a half percent annual compound growth rate is that still the case, and do you expect to continue to see that through the forecast period as we model you out? For customer growth? Yeah, sure.

Go ahead. Hey, it's Melissa. How are you? Yeah, we're on track.

Perfect. Awesome. And then going back to the tax credits and specifically looking at the federal as it continues to develop, I know that the 40% to 45% equity target, the non-GAAP target you've got there, involving the mandatory convertibles, is staying as it is. You've reiterated your 12% to 13% FFO to debt over the 21 to 25 period, but is there the potential, do you see, for any of the tax credits being proposed in any way, shape, or form to potentially bolster

uh your ffo to debt is there any unexpected upside potential that could materialize there i i will certainly ask steve to add any additional color i would not expect it to again i think the way we're viewing it is you know we've committed to making uh you know an average of about 50 million in traditional renewable investments over the per year over the over the five-year period um I would think that we'll want to balance the quality of our earnings over that period as well. I don't think we'd want to have too much of our earnings in the form of investment tax credits, so I think you could see if there is legislation ultimately that does provide for investment tax credits or production tax credits for RNG. We may reduce the amount of traditional renewable investments, so I don't think that would be incremental to the point where it would have a significant impact on our metrics or our earnings.

Gotcha. Okay. So it wouldn't be a driving factor for changing the business mix. That's very helpful to know. And last one is back on the legislation that's developing around RNG. You mentioned in the past the way that the legislation is being written. be rate-basedable definitely in New Jersey, but possibly outside of the state as well, thinking to like our past in Oregon. How should we think about your latest thoughts here on how that could develop or is developing in its early stages?

Yeah, it is early stages. I think that there's certainly going to be some modifications to what you know, what is currently drafted. It's premature to talk about exactly or to even try to, you know, guess what that might look like. I think what would be a realistic approach would be perhaps a near-term prioritization of New Jersey-based projects. Again, with the recovery in mind, right, getting people back to work, so making the priority, developing RNG, within the state, and then perhaps the ability further down the road to be able to rate base RNG out of state. I think that would be probably the extent of any kind of adjustment that you would see. Again, the bill has really garnered very strong support from both sides of the aisle, and we're really encouraged by the feedback that we're getting.

That's terrific. Thanks for the color, guys. Really appreciate it. Sure.

And once again, if you have a question, please press star, then 1. The next question will be from Michael Gogler from Janney. Please go ahead.

Good morning, everyone.

Morning, Mike. Morning, Mike.

Listen, going through your deck, just wanted to touch on one item, and that was the credit ratings, you know, right now, BBB. You guys have been executing pretty well against plan. Everything seems to be moving in the right direction. I'm wondering how you're thinking about that. Are you looking for, you know, to push your ratings higher? Are there any reviews in the near term that could be positive in that regard?

Hey, Mike, it's Steve. So, as you know, we executed on a fairly significant equity raise earlier this year, and we were in very close discussions with the rating agencies, both around and following that process, and those conversations were very positive, and what we did there was very well received, as was reflected in some of their reactions that they published after the fact. At this point, what we've said in our plan is we are targeting to continuously improve our FFO to debt metric, which is what S&P looks at over the plan period. We've got a lot of growth opportunity and a lot of CapEx in front of us that we need to finance. But we also have what we think is going to be a strong improvement in our cash flows and cash from operations as we bring on these operating RNG farms next year, as well as continue to pursue our regulatory strategy of tracking, you know, approximately 50% or so of our CapEx, recovering that on an annual basis, and then our kind of two- to three-year plan. rate case cycle. So what we laid out earlier this year remains how we're looking at this. It is important to us to maintain a solid credit rating. And, you know, with all the factors that I just discussed, we see an ability to do that in the plan.

All right. That's all I have, gentlemen. Thank you.

Thanks, Mike. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the call back over to Dan Fidel, VP, Investor Relations, for any closing remarks.

Well, thank you all for joining us today. Great questions. As a reminder, a recording of our call today will be available on our website. As always, please feel free to contact me, Dan Fidel, 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. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.