SJI
#Thanks, <UNK>, and good morning, everyone.
To begin, our full-year 2015 economic earnings results totaled $99 million as compared with $104 million in 2014.
Economic earnings per share for 2015 were $1.44 as compared with $1.57 for the prior year.
For the fourth quarter of 2015, economic earnings totaled $43.2 million as compared with $31.2 million in the prior year period.
Economic EPS for the fourth quarter of 2015 was $0.62 compared with $0.47 for the same period in 2014.
The major driver of the year-over-year decline was a write-down of our investment in the energy facility at the former Revel Casino property in 2015 and related costs we incurred.
This nonrecurring event reduced economic earnings on a comparative basis year-over-year by $15.7 million.
Of that total, $11.1 million was attributable to the write-off of our equity investment in the project and a reduction in operating income compared to the prior-year period.
In the fourth quarter of 2015, we also took an additional charge after-tax of $4.6 million resulting from a payment to a former bondholders to settle all claims associated with the project.
We are currently pursuing recovery of that payment from our financial and legal advisors as well as our insurance carriers.
We will recognize that recovery in the future period in which it occurs.
We also restructured our energy project business at the beginning of 2015 disturbing the assets held within Energenic, our energy project development joint veture among the partners.
Later in the call we will provide more detail around this transaction which resulted in a one-time after-tax charge of $1.7 million.
The charge was entirely due to recapture investment tax credits associated with several of the projects we divested.
Excluding these nonrecurring items, SJI's economic earnings and economic earnings per share for 2015 would have improved by $17.4 million and $0.25 per share respectively.
With that said, we did see some very strong operating performance within our business lines that reinforces our potential for significant earnings growth over the next five years.
I will detail that information now as we review the performance of each of our business lines.
Looking at the Utility, South Jersey Gas's earnings for the year remained stable at $66.6 million as compared with $66.5 million in 2014.
Fourth-quarter Utility net income was $22.2 million as compared to $24 million for the same period in 2014.
Earnings growth attributable to significant infrastructure investment and strong customer growth was offset by higher charges related to uncollectible accounts and post-retirement benefits as well as investments made to improve customer service.
As we discussed on the last call, the extreme cold experienced in the past few winters produced significantly higher customer bills.
Also during 2015, we revised upwards our reserve percentages for aged receivables based upon recent experience.
These events resulted in increased receivables, increased aging of those receivables and ultimately increased reserves and write-offs for those receivables.
The after-tax charges for uncollectible receivables totaled $8.8 million for the full year of 2015 and $3.8 million for the fourth quarter.
This compares to after-tax charges of $5.6 million and $3.4 million for the same periods in 2014.
We continue to educate customers on ways to reduce usage, access programs for assistance and take advantage of the various bill repayment options we offer.
As I mentioned earlier, customer growth and infrastructure investments remain key drivers of current performance and will continue to benefit utility earnings in the future.
During 2015, we added more than 6200 customers bringing our current customer count to 373,100.
During the same time period, customer growth added $2.2 million in incremental net margin as compared with the prior year period.
High for our industry, this 1.7% customer growth rate is supported by low natural gas prices from abundant local supplies, aggressive marketing efforts targeting conversions and a noteworthy increase in new construction which accounted for 2900 customers in 2015.
That was up a little over 19% from 2014 results.
Regarding investments in our gas system, we closed out 2015 with accelerated infrastructure investments totaling $70 million.
The AIRP, which replaces aging bare steel and cast iron gas mains throughout our systems and the SHARP, which replaces low-pressure gas mains along the barrier islands with high-pressure mains helped to reinforce and better protect our system.
These investments added an incremental $2.3 million of net income for the full year.
Another major initiative underway is a proposed pipeline to provide natural gas to the former BL England electric generating station.
We received final approval from the New Jersey Board of Public Utilities in December allowing the project to proceed.
While several outside parties have filed appeals to the decision, we remain optimistic that construction will begin on this project later this year.
Now we will move to the non-utility side of our business which is comprised of two segments, South Jersey Energy Services and South Jersey Energy Group.
For the full-year these segments added combined economic earnings of $31.5 million as compared to $37.6 million in 2014.
For the fourth quarter, the non-utility businesses generated $20 million compared with $7.2 million in the fourth quarter of 2014.
South Jersey Energy Services added economic earnings of $14.7 million in 2015 as compared to $24.6 million in 2014.
For the fourth quarter, South Jersey Energy Services contributed $9.3 million as compared with $3 million for the same period in 2014.
Plus this area of the business houses our entire energy production portfolio, $17.4 million of one-time charges I noted in my opening comments flowed entirely through our Energy Services Business.
While the conversation concerning Revel is a familiar one, it is worth noting that we believe the settlement reached in December puts the negative impacts of that issue fully behind us.
Further, we are in discussions to recover the $4.6 million charge incurred in the fourth quarter.
The remaining $1.7 million charge relates to the December transaction whereby substantially all of the assets housed in our joint venture, Energenic LLC, were distributed between the SJI subsidiary, Marina Energy and its partner, DCO Energy.
SJI retained all the assets associated with the provision of energy to the well-established Borgata Morgado hotel and casino property and two solar facilities.
Other landfill and CHP assets were distributed to the partner firm.
I will let <UNK> expand on the strategic rationale behind that transaction a little bit later.
Turning to our individual project businesses, our Solar business contributed $33.9 million for the full-year 2015 as compared with $25.5 million in 2014.
For the fourth quarter, this business line contributed $17.3 million in 2015 as compared with $4.1 million for the same period in 2014.
Investment tax credits drove that performance contributing $38.3 million in 2015 as compared with $30.3 million in 2014.
Operating performance continues to improve within our solar fleet and 2015 production generated approximately 136,000 solar renewable energy credits as compared with 111,000 in 2014.
As has been the case in prior quarters' results, total production is not yet fully recognized in net income due to the three- to six-month lag in the certification of certain renewable energy certificates.
Performance also reflects the fact that we have hedged a considerable amount of our SRECs when SREC prices were much lower than they are today.
Looking ahead, we expect operating performance of our solar business to continue improving as SREC prices have strengthened significantly during the last year.
We will benefit from this as we hedge future production from our new and existing solar facilities at the much higher SREC prices available in the market today.
Looking at CHP, for the full year, our portfolio reflected a loss of $13.7 million as compared with economic earnings of $1.8 million in 2014.
For the quarter, contributions from CHP reflected a loss of $5.1 million in 2015 as compared to a loss of $0.5 million in the fourth quarter of 2014.
As I previously indicated, these results directly reflect the charge associated with our energy facility of the former Revel property.
Excluding the charge, CHP was a positive contributor to economic earnings for the year.
Our landfill projects produced a loss of $4.5 million in 2015 as compared with a loss of $3.3 million in 2014.
For the quarter, landfills posted a loss of $1.3 million versus a $700,000 loss in the fourth quarter of 2014 due in large part to the inability of the landfill operator at our largest facility to provide gas in November and December.
Performance at the landfills has been an issue for awhile and that was one of the drivers behind the restructuring of our Energy Production business.
As we move forward, SJI's portfolio now includes just foujr active landfill projects which all support a single power purchase agreement for renewable energy at the Borgata property.
Within the wholesale commodity and pure management segment of our business, 2015 was a very profitable year.
South Jersey Energy Group contributed $16.8 million in 2015 compared with $13 million in the previous year, an increase of nearly 30%.
For the quarter, South Jersey Energy Group added $10.7 million as compared with $4.2 million in the fourth quarter of 2014.
I want to emphasize that this performance was particularly impressive because it was achieved without the benefit of the polar vortex that boosted 2014 results.
Rather, these results were attributable to the contributions from our three active fuel management contracts and our ability to optimize storage and transportation assets within our portfolio.
We see this performance as being repeatable in 2016.
Finally, our year-end equity to cap ratio was 42% as compared to 43% in 2014.
This ratio reflects the significant investments we made in our utility and in our solar project development business over the last year.
To support our balance sheet, we have used our dividend reinvestment plan to issue equity totaling $63.2 million in 2015.
Further, we currently maintain accumulated deferred tax benefits totaling nearly $400 million related to bonus depreciation and investment tax credits that we expect to realize over the next 10 years as we work towards strengthening our balance sheet.
At this time I will turn the call over to <UNK>.
Thanks, <UNK>.
Good morning, everyone.
It goes without saying that 2015 was a particularly challenging one for SJI but it is our performance in light of those challenges, strengthened by a new vision that has put us on a path for long-term sustainable growth.
Repositioning executed in 2015 serve as the bridge to our 2020 plan defined by four clear and achievable goals.
The first is to grow earnings to at least $150 million.
It is important to emphasize that $150 million represents earnings from our core operations.
In other words, earnings without the benefit of investment tax credits.
Effectively we are doubling SJI's earnings from operations in five years.
Next is to improve the quality of our earnings.
As we move through the second half of the decade toward 2020, we expect nearly 80% of earnings to be coming from regulated businesses.
The third tenant of our plan is to strengthen our balance sheet.
As our investment profile changes and aligns with increased opportunity in our regulated businesses, we will realize a marked and considerable deleveraging of our balance sheet.
Finally, we will accomplish all of this with a continued focus on reducing risk across our portfolio to ensure that we provide not only high quality but also consistent and reliable earnings.
As I mentioned earlier, the challenges faced in 2015 were certainly difficult and unfortunate, provided a platform for change and growth.
Specifically, the bondholders' settlement and eventual write-off of our energy assets associated with the former Revel property allowed us to relieve SJI of a significant and costly financial and resource drain.
The last six months have brought forth a renewed organizational focus on those businesses that are the foundation of our plan.
The Energenic transaction completed in December has real and tangible strategic benefits.
Our assets are now concentrated on high-performing proven CHP assets and a smaller landfill fleet, a fleet where the majority of the output is protected by a long-term power purchase agreement with Borgata.
Over the long-term, this transaction will afford a stronger and more stable income stream and considerable cost savings.
The impacts in our region from higher gas costs during extreme weather in 2014 and to a lesser extent 2015 have only deepened our commitment to critical pipeline projects like BL England and PennEast, all provide much-needed gas and electric reliability and cost savings to constrained areas of New Jersey.
2015 bolstered my confidence in our ability to deliver at least $150 million in economic earnings by 2020.
The foundation is there.
Customer growth combined with ongoing investment in our utility infrastructure supported by strong performance from our commodity marketing and fuel management business lines will drive meaningful near-term improvements in performance.
While broader initiatives like an enhanced commitment to leadership and talent development and new midstream investments like PennEast will allow for exceptional long-term growth.
Looking at 2016, due to the many advantages of natural gas, we expect significant customer growth to continue.
Additionally, investments through programs like our AIRP and SHARP will provide benefits to both customers and shareholders alike.
These impacts combined with investment in new projects like the BL England pipeline and our natural gas liquifier will position the utility to contribute more than 70% of earnings in 2016.
On the non-utility side of the business, our retail and wholesale commodity lines at South Jersey energy group are solidly positioned for the future.
On the retail side, a number of diverse multiyear customer contracts support growth from this business line year-over-year.
In 2016, two additional fuel management contracts will begin contributing when the Panda Liberty and Panda Patriot facilities come online.
With a total of eight contracts already executed, we remain well-positioned to serve at least 10 gas-fired generators by 2020.
These initiatives support our expectation that this business segment will contribute roughly 20% to 25% to earnings in 2016.
Looking at South Jersey Energy Services and in particular our Energy Production business, we would expect to see solar development continue to be a technology that demonstrates improved performance and remains highly valued within the market.
With that said though, due in large part to the impact of bonus depreciation on the timing of when we can realize the cash benefit of renewable ITCs, we anticipate a sharp decline solar investment in 2016.
As a result for this year and beyond, we expect services to contribute between 5% and 10% to economic earnings.
As we look ahead, our future will benefit from the role that 2015 played as a critical positioning year.
Because of the versatility and agility of our business, we have been able to overcome several short-term challenges without compromising our potential for significant long-term growth.
At this time I will turn the call back over to the operator for the Q&A portion.
Sure.
I think again 2016, you will see a considerable reduction in the level of renewable investment and then consequently the ITC number will be significantly less than it is or has been in recent years.
I don't want to preempt our guidance by giving you a finite number.
But I think considerable and significant are the two words that come to mind.
And I would expect that in 2017 and beyond you will see very limited investment on our part in renewable projects.
Look, I think the projects still ---+ they produce very attractive returns when you look at them on a discrete basis.
But the issue becomes when you can recognize the cash benefits of them.
So when you cut the NPV of these projects in half and start to get to de minimus returns on investment because of the nature of when you can realize the cash flows, it becomes pretty difficult to support meaningful investment.
At the same time, <UNK>, we have a lot of investment coming in front of us in the regulated businesses.
So I think our focus is to have that be the area that we look to deploy our capital.
I will let <UNK> <UNK> answer that question.
We definitely see it stabilized.
We saw a big uptick because of the polar vortex two winters ago and even last winter.
But with the combination of commodity prices dropping so drastically as well as the weather being down, we see our receivables coming down.
<UNK>, I don't have a good breakdown on it.
I can provide that at another time.
I think it is relatively straightforward.
The difference we were talking about there though was really designed to pick up kind of the variance between how it impacted us in 2014 and how it impacted us in 2015.
There were obviously several million dollars there and the settlement number was probably the biggest.
That was a pretax settlement of $7.5 million.
So getting that out of the way for us is a big deal.
Probably more important than any of that, <UNK>, is that it was the amount of management time and focus that was spent on it and that will be ---+ kind of dedicate that to profitable portions of our business as opposed to dealing with an issue of settlement.
We have gotten all the approvals that we need from both the Board of Public Utilities and the Pinelands Commission.
There have been a couple of challenges by some environmental groups.
We see those challenges probably taking anywhere in a range of nine to 12 months in total.
So we believe taht there is still an opportunity to start construction this year.
At the very least we will probably start ordering supplies and equipment for that project hopefully by the fourth quarter.
We will start with this.
We kind of joked about it a little bit.
This was a very amicable divorce if you will.
The partnership was strong throughout.
I think that we expect and hope to be able to evaluate future development opportunities together with DCO.
I think that right now the market is pretty dry as it relates to opportunities for CHP which is where our interests would lie in terms of development opportunities.
So if things change and the market picks back up and there are opportunities with creditworthy strong offtakers and attractive returns on investment then we would certainly jump at the opportunity to do something with DCO again.
So I think everything there is fine and solid.
As far as the allocation of assets, it really came down for us as to kind of ---+as part of this repositioning was getting back to our core and our core are the CHP assets that serve Borgata.
They are proven, there are profitable, there are reliable and they are complementary.
So when we acquired the cogeneration facility that serves Borgata, it was complementary to that Marina Thermal facility.
Before landfills as well are all backed by PPA contract where their output is delivered to Borgata.
So we really focused on those assets that were related to our relationship with Borgata.
That is a core assumption that drove this decision for us and the selection of the assets that we were interested in acquiring.
So, yes.
Again, I am not going to certainly run from the fact that we have had some operational challenges whether it be from gas availability or equipment issues at multiple landfill sites.
But we believe these to be the four that offer the most potential going forward and again are also benefiting from the fact that there is a PPA above market actually that backs these contracts.
Thanks.
Before we wrap up as always please feel free to contact Marissa Travaline, our Director of Investor Relations, or <UNK> <UNK>, our Treasurer, if any follow-up questions arise.
Marissa can be reached at 609-561-9000, extension 227 or by email at mtravaline@sjindustries.com.
<UNK> can be reached at extension 4143 or by email at aanthony@sjindustries.com.
Again thank you for joining us today and for your continued interest and investment in SJI.
