South Jersey Industries, Inc. (SJI) on Q1 2021 Results - Earnings Call Transcript
Mike Renna: Good morning, and welcome to SJI's 2021 Investor Day. I'm Mike Renna, President and CEO of SJI, and we're pleased to have you join us today. The SJI management team, many of whom you've just seen in our introductory video, will be joining me today to share our plans to deliver strong long-term growth and value for our shareholders. While COVID has certainly presented an unprecedented series of challenges, one thing the past 14 months has taught us, to be a bit more patient and not to take every cameo – every child cameo and dog bark quite so seriously.
Melissa Orsen: Good morning, everyone. I'm Melissa Orsen. I've been with SJI since joining in 2017 as General Counsel, overseeing legal and government affairs. Previously, I was CEO to the New Jersey Economic Development Authority and before that, served as Chief of Staff to the former Lieutenant Governor and Secretary of State of New Jersey. I'm currently President of South Jersey Gas and deeply involved in our sustainability strategy, which will be the focus of my discussion with you today. Mike touched upon SJI's broader sustainability and ESG agenda as well as the fundamental beliefs we hold as a company about the future of the U.S. energy economy. Our mission and values align strongly with sustainability and a clean energy future for New Jersey and our region. As the President of SJI's largest gas utility, let me assure you that safety, service to the community and the promotion of diversity and inclusion initiatives are at the core of our values. We are also heavily committed to investing in initiatives that reduce the carbon content of natural gas and lower energy costs for customers. Throughout today's presentation, you will receive a lot of valuable information regarding SJI's financials, of equal importance, how we maintain sustainability issues essential to our long-term value proposition. Long before many of our peers began to focus on sustainability, our company was being guided by ESG core principles: environmental stewardship, corporate responsibility, sound governance and caring for the communities we're honored to serve have been fundamental values for our company for decades, and this commitment remains unwavering in the plan we're announcing today and well beyond.
Dave Robbins: Good morning, everyone. I'm Dave Robbins, and I serve as SJI's President of our utilities. It's a pleasure to be with you today. Today, I will spend time talking about the value created at each of our utilities. Our utilities are and will continue to be the foundation of SJI. SJI is the largest stand-alone natural gas provider in New Jersey, serving more than 700,000 residential, commercial and industrial customers via 10,000 miles of distribution and transmission system through our two utilities, South Jersey Gas and Elizabethtown Gas. Our combined rate base is a sizable $3.4 billion as of the end of 2020. And from a high level, our utilities are fortunate to encompass two highly desirable operating and investment attributes, namely above-average customer growth and a continued collaborative and supportive partnership with our regulators that has been well established and evidenced over many years. As you've heard me repeat time and again over the years, safety and customer experience are nonnegotiable core values. We remain aware of the great responsibility we have to provide safe and reliable service to the 700,000 customers we are honored to serve. This tone is set at the highest management levels. And the consistent recognition we've received from J.D. Power for many years is a source of pride among our more than 1,100 talented and dedicated employees who endeavor each day to be the best at what they do. South Jersey Gas is the larger of our two utilities with a $2.3 billion rate base and proudly serving approximately 400,000 customers in the southern part of New Jersey through more than 6,600 miles of gas transportation and distribution infrastructure. SJG serves a diverse mix of customers from urban, suburban, rural and coastal communities. The customer base is more than 90% residential customers. SJG's growth is driven by the addition of new customers, infrastructure modernization and energy efficiency investments, periodic cost recovery through base rate cases and other important regulatory-approved safety, redundancy and clean energy initiatives. SJG's exceptional service territory has grown at an impressive rate of 1.5% annually over the past five years or about 8,000 new customers annually primarily driven by customers converting to natural gas from alternative fuels such as heating oil and propane. Over the next five years, we expect this level of activity to remain robust, given a variety of factors. Among these, strong demand for natural gas, lower cost of gas relative to alternative fuels, cleaner burning than alternate fuels and a sizable identified opportunity of more than 60,000 potential customers. As you can see, customer growth has been slightly lower than historic levels more recently due to the pandemic as construction projects were delayed and conversion customers put off work in their homes. More recently, however, as pandemic recovery and reopening has accelerated, we have seen conversion levels normalize and are encouraged by trends in new construction we've seen recently in our area. We have an across-the-board commitment to operational excellence. SJG's operational performance has been strong for many years and notched solid improvement across all key categories over the past five years. We're very proud of our employee safety metrics. And our system resilience and response metrics are positively correlated with having now achieved full replacement of all cast iron and bare steel from SJG system. As mentioned, we have a highly constructive partnership with our regulators that fosters an environment of safety, reliability and energy efficiency for our customers. In October 2020, we achieved a supportive resolution in our base rate case that allowed for the recovery of prudently incurred operating costs, affirmed our authorized ROE of 9.6% and raised our equity layer to 54% Our regulators understand the need to stabilize SJG's margins from the impact of weather or conservation risk, assure safe and reliable service, reduce fugitive methane emissions and improve energy efficiency. Accordingly, the BPU has authorized important decoupling, infrastructure modernization and energy efficiency programs. These programs are supported by riders that allow for timely cost recovery. Over the next five years, having replaced all the cast iron and bare steel from its system, SJG expects to begin replacing more than 800 miles of vintage steel and vintage plastic main. SJG has two important regulatory proposals pending before the BPU. The first is a proposal for an extension and upsizing of SJG's infrastructure modernization programs, which are set to end later this year. We have proposed a new five-year $742 million program to replace the more than 800 miles of infrastructure that I previously mentioned. We remain in constructive dialogue with the BPU and expect the resolution of this proposal over the summer. The second is an engineering and route proposal for approval to construct needed system upgrades in support of a planned two Bcf liquefied natural gas facility in support of critically needed redundancy on SJG's system in the event of supply interruption. Discussions with the BPU surrounding this important project continue to progress, and we expect resolution of this proposal before year-end. Both of our utilities are exploring opportunities to decarbonize their systems to align with the clean energy goals of our state. We are currently exploring a number of opportunities to develop RNG production for injection into SJG's system, including the potential repurposing of previously owned and operated landfill gas to power sites. We also announced a partnership this past December with Atlantic Shores Offshore Wind for a pilot to explore green hydrogen development for potential natural gas blending into our system and other utility systems in New Jersey. Both of these projects represent exciting new clean energy investment opportunities for SJG. And as Melissa noted earlier, legislation that would allow for the rate basing of these investments would be a true win-win for both customers and shareholders alike. SJG's capital plan for the next five years is roughly $1.7 billion with about 50% of investments in support of infrastructure modernization and new business which earns a timely return. I would note that SJG's energy efficiency investments of $133 million over the next three years, while not classified as rate base capex, will earn separate recovery in a timely manner. Hence, the absolute percentage of SJG's total investments that benefit from timely recovery is actually 60%. As you can see, SJG's sizable $1.7 billion capital plan drives very healthy rate base growth of approximately 10% over the next five years. Before concluding the SJG section, I want to take a moment to summarize some key takeaways. SJG's $1.7 billion capital plan drives roughly 10% rate base growth over the next five years with roughly 50% of the spend recovered in a timely manner. SJG has excellent visibility for strong 1.5% customer growth moving forward driven by a continuation of robust conversion activity as well as new construction. And our partnership with our regulators is well established with constructive rate case outcomes and approvals of important rate mechanisms supporting safety, reliability and energy efficiency. Turning now to Elizabethtown Gas. ETG is the smaller of our two utilities with a $1.1 billion rate base and serving approximately 300,000 customers in the northern part of New Jersey through more than 3,200 miles of gas transportation and distribution infrastructure. ETG serves two distinctive customer bases: an urban, densely populated base in the Eastern service territory; and a more rural base in the West. Similar to SJG, ETG's customer base is more than 90% residential with a low concentration of risk associated with large customers. ETG's growth is also driven by the addition of new customers, infrastructure modernization and energy efficiency investments, periodic cost recovery through base rate cases and other important regulatory-approved projects. Both of our utilities have been fortunate to be recognized by J.D. Power for high customer satisfaction rankings for many years. In 2020, ETG received the first place ranking in its region for the sixth consecutive year with SJG achieving fourth place and just one point from third place. These rankings are an immense source of pride for our talented and dedicated employees. There remains a strong demand for natural gas in both of ETG's geographic service territories. Prior to our acquisition in 2018, ETG's historic customer growth rate was approximately 0.9%. Since our acquisition, we have been able to raise ETG's growth rate to 1.4% or roughly 4,000 new customers annually, driven by a combination of an innovative approach from our sales and marketing teams and a collaborative effort across the entire organization. Over the next five years, we expect to achieve approximately 1.5% annualized growth, driven by a continuation of new construction and conversion customers with a sizable identified opportunity of more than 35,000 potential customers. ETG's operational performance has likewise improved across all categories since our acquisition in the mid-2018. ETG's recently approved infrastructure modernization program is accelerating the replacement of cast iron and bare steel pipe, which in turn will continue to have a favorable impact on system resilience metrics. We have a highly constructive partnership with our regulators with regard to ETG just as we do with SJG. Since our acquisition of ETG in 2018, the BPU has approved a constructive rate case resolution in 2019 that allows for the recovery of prudently incurred operating costs, affirmed its authorized ROE of 9.6% and raised its equity layer from 46% to 51.5%, also approved a five-year $300 million infrastructure modernization program and recently approved energy efficiency program and decoupling. Similar to SJG, these important programs are supported by riders that allow for timely cost recovery. Over the next five years, ETG will be laser-focused on replacing nearly all the remaining cast iron and bare steel that remains in its system, totaling more than 300 miles. Beyond the next five years, ETG's system has more than 600 additional miles of vintage steel and vintage plastic pipe in need of replacement that will become our focus. ETG, like SJG, is similarly exploring opportunities to decarbonize its system to align with the clean energy goals of our state. ETG is currently exploring a variety of RNG development opportunities for gas blending into its system, including landfills, wastewater treatment facilities, food waste and dairy farms. ETG's capital plan for the next five years is roughly $1.0 billion, with about 50% of investments in support of infrastructure modernization and new business, which earns a timely return. Like SJG, ETG's energy efficiency investments of $74 million over the next three years are not included in CapEx, ought to recovered separately in a timely manner. So the percentage of ETG's timely recoveries are similarly 60%. As you can see, ETG's sizable $1 billion capital plan drives very healthy rate base growth of approximately 10% over the next five years. So for ETG, a few key takeaways. ETG's $1 billion capital plan drives roughly 10% rate base growth over the next five years with roughly 50% of the spend recovered in a timely fashion. ETG has excellent visibility for strong 1.5% customer growth moving forward, driven by a balanced mix of new construction and conversions. Our partnership with our regulators is well evidenced since our acquisition of ETG with a constructive rate base outcome and approvals of important rate mechanisms supporting safety, reliability and energy efficiency. As I conclude my remarks, I'll share that much has changed in our industry and at SJI over the past 25 years. And I can state without any reservations that our utilities, which represent the majority of our company's earnings, are positioned as well as I've ever seen them to perform at the highest level and achieve exceptional growth over the next five years. I am truly excited about the energy and experience we can offer our customers in the future and the value we can create for shareholders. I wish you well and thank you for your time and attention today.
Steve Cocchi: Good morning, everyone. My name is Steve Cocchi, and I serve as SJI's Senior Vice President and Chief Financial Officer, and it's my pleasure to be with you all today. In this segment, I will spend time talking about the strategy and value created by our non-utility businesses. As you'll see, SJI's long-term strategic growth plan embeds a disciplined non-utility strategy that is complementary to our utility business, one that aligns with the clean energy goals of our region and focuses on decarbonization investments that generate strong project returns, strong cash flows and predictable earnings. To begin, as Mike noted in his opening remarks, our non-utility businesses are comprised of three distinct segments. Our midstream investment in PennEast supports our strategy of investing in long-term contracted energy infrastructure that will support a more sustainable environment while bringing abundant, responsibly produced and low-cost Marcellus gas to the Mid-Atlantic region, making it more affordable for families and competitive for businesses. Our Energy Production segment supports our strategy to enhance the value of our infrastructure and reduce our carbon footprint through investing in traditional renewables that produce low-carbon electricity and investing in decarbonization opportunities, such as RNG that lower the carbon content of natural gas. And finally, our Energy Management segment supports our desire to leverage our deep industry expertise and relationships to provide essential services to utilities, power generators and industrial customers. Starting with midstream. As you know, PennEast addresses a critical supply need for our region. Since inception, SJI has invested $68 million to advance this important project that provides access to low-cost supply that will benefit customers and local economies. SJI remains committed to the PennEast project as we await decisions from the FERC to proceed with Phase 1 in Pennsylvania and the U.S. Supreme Court to proceed with Phase 2 in New Jersey. The financial projections we're sharing with you today embed only Phase 1 of the project. We have removed Phase 2 from our projections due to the uncertainty around an in-service date. We remain optimistic that Phase 1 of the project constructed entirely within Pennsylvania will proceed later this year, and we look forward to the Supreme Court's decision, which is expected by the end of June after reviewing the Lower Court's decision concerning condemnation authority. Turning now to Energy Production. SJI is extremely well positioned to support investment opportunities that align with the clean energy goals of our region and is focusing on renewable and decarbonization investments that generate strong project returns, strong cash flows and predictable earnings. Today, we are announcing our intention to spend $750 million over the next five years with roughly 2/3 in support of decarbonization investments and roughly 1/3 in support of traditional renewables that align with our state's clean energy goals. With regard to the renewables, we plan to invest approximately $250 million over the next five years, a modest average annual investment of roughly $50 million. Our fuel cell investments are aimed at utilizing innovative energy technology to reduce emissions and strengthen grid reliability in our region. Our roughly $80 million investment in two fuel cell projects in 2020 affirms our commitment to this strategy. With roughly 75% of fuel cell revenues fixed under New York's Value of Distributed Energy Resources or VDER program, these projects produce steady, low-risk cash flows. And unlevered returns are in line with our hurdle rate for non-utility investments. Our solar strategy is similarly aimed at supporting the clean energy goals of our region and reducing SJI's carbon footprint by investing in solar arrays at our corporate facilities, former landfill gas-to-electric sites and other projects across the region. Turning to our decarbonization strategy. We plan to invest approximately $500 million over the next five years on decarbonization, specifically through our ownership and partnership with leading RNG developer, REV LNG. Recall that in late 2020, SJI acquired a 35% interest in REV along with rights to develop anaerobic digesters at a portfolio of dairy farms to produce RNG. The rationale for our partnership with REV is straightforward. REV offers us an immediate opportunity to accelerate on our decarbonization strategy with a proven industry leader. The business is low risk, driven primarily by contracted margins from creditworthy counterparties. The business has a sizable and growing queue of opportunities to develop RNG for injection into utility and interstate pipeline systems. And the projected returns are in excess of our hurdle rate for non-utility businesses. On the equity side, our plan assumes 100% ownership of REV by 2025 upon REV attaining financial milestones. On the farm development side, our plan includes approximately $280 million to develop up to 25 farms and we continue to look for opportunities to add to this portfolio. We're in advanced stages of negotiating various partnership opportunities with industry leaders to develop these farms. The partnership opportunities are anticipated to take one of two forms and will benefit SJI by sharing the CapEx to develop the farms and locking in long-term contracted cash flows. Under one partnership form, SJI will sell RNG production and the associated environmental attributes to an end user under a fixed-price, long-term, take-or-pay contract. Under the second partnership form, SJI will similarly sell RNG production to an end user under a long-term contract but will retain flexibility to monetize the environmental attributes under a structured hedging program. On average, SJI expects to spend $6 million to $8 million to develop each farm for RNG production, resulting in an average EBITDA of $1.5 million and average net income of $750,000 per farm. The number of cows and the carbon intensity score of the farm are the biggest factors driving returns. We're excited to begin development of a portfolio of dairy farms in 2021 and expect eight SJI farms to begin contributing to earnings in 2022. With this visual, I'd like to give you a sense of the process for producing RNG at dairy farms. As illustrated, the RNG project life cycle has many steps from site analysis to gas sales, and the average time frame per farm development is approximately 10 to 14 months. Turning now to our financial forecast for Energy Production. We expect our $750 million capital plan over the next five years will result in approximately 20% growth in economic earnings. As you can see, we expect roughly 10% to 15% of SJI's total earnings contributions in 2021 to come from energy production, largely from traditional renewables, including ITCs. Our five year forecast embeds approximately $55 million in total ITCs principally in the early years of the plan, which are increasingly replaced by cash flows and earnings from decarbonization activities. In sum, our energy production plans are very straightforward, and we believe we are very well positioned to support the accelerating trend toward clean energy and decarbonization. Our capital plan drives significant 20% growth in economic earnings from 2021 to 2025. Our alignment with REV, an experienced industry partner, provides both equity investment income and low-risk contracted margins from farm development. And as Melissa mentioned earlier today, pending legislation in both New Jersey and at the federal level in support of decarbonization investments represent a potential opportunity to achieve upside to our five-year plan. Switching now to Energy Management. This segment of our business is expected to provide steady earnings contributions from a reshaped and derisked wholesale business and modest contributions from our retail services business. Our wholesale operations include stable cash flows from providing fuel supply management services to merchant generators under multiyear contracts, contributing, on average, approximately $1 million to $1.5 million of earnings each. Our five-year plan assumes continuation of our nine existing contracts and the addition of two new contracts. Wholesale operations also include our wholesale marketing book, which has been reshaped and derisked in recent years, reducing future earnings volatility. Included in this business is our management of Elizabethtown's gas supply portfolio under an asset management agreement. Our retail services operations are driven by modest contributions from meter reading, appliance service contracts and energy consulting. Energy consulting is a low-risk commission-based business that capitalizes on our expertise in matching suppliers with end users, gas and electricity, and is expected to post modest growth through core business development and acquisitions over the next five years. Turning now to our financial forecast for Energy Management. We expect approximately 10% growth in economic earnings, primarily driven by renewed and new fuel management contracts as well as organic growth and small acquisitions in energy consulting. As you can see, we expect roughly 10% to 15% of earnings contributions in 2021 to come from energy management activities largely from our wholesale group with an increasing contribution coming from our retail services group, over the five-year planning horizon. To sum up our non-utility businesses, as you've seen, our long-term strategic growth plan embeds what we consider to be a highly disciplined non-utility strategy that is complementary to our utility business. Our Energy Production operations aligned with the clean energy goals of our region with forecasted 30% growth focused on investments that generate strong project returns, strong cash flows and predictable earnings. And our Energy Management operations are expected to generate steady returns with 10% growth forecasted into 2025. Thank you. Now it's my pleasure to review our financial plans for the next five years with you. As Mike stated in his opening remarks, and as my colleagues have reinforced in their presentations, our businesses have exciting and strong growth prospects. Our financial goals and priorities are based on a $3.5 billion capital plan with 80% allocated to our utilities and 60% for sustainability investments. A key focus of ours will remain on ensuring ample liquidity, balance sheet strength and solid credit ratings in order to effectively execute the opportunities we see before us. We are projecting 5% to 8% economic earnings-per-share growth over the next five years with the majority of our earnings coming from our utilities and further supported by our wholesale and clean energy operations. And we're projecting roughly 3% annual dividend growth during the planned period, returning cash to shareholders while balancing our cash flow needs to generate solid returns. Our capital allocation strategy is disciplined, balancing the importance we place on maintaining a strong balance sheet with delivering strong growth. As you've heard throughout today's presentations, we're allocating capital first at our utilities to assure we continue to provide safe and reliable service to our customers. Our non-utility investments in clean energy provide attractive risk-adjusted returns with decarbonization investments expected to achieve returns well above our hurdle rate of 10% to 12% on an unlevered basis with steadily increasing cash flows. Our balance sheet, debt and credit metrics have all improved over the past year and support the growth plan we are laying out today, and we will continue to make future investments with a focus on prioritizing low-risk cash-producing initiatives. And finally, returning cash to shareholders through a rising dividend remains our commitment, just as we've done for the past 22 consecutive years. As you can see, our $3.5 billion capital plan commits a majority of our investment to our utilities with a focus on safety and reliability and sustainability initiatives. SJI's sizable capital plan drives very healthy rate base growth over the next five years with a roughly 10% combined annual growth rate projected at both South Jersey Gas and Elizabethtown Gas and with approximately 1/2 of our capital investments earning a timely return, reducing regulatory lag. Under our plan, SJI's consolidated rate base will grow from approximately $3.7 billion in 2021 to approximately $5.4 billion in 2025. The key assumptions underlying our plan include an expectation for continued strong customer growth, infrastructure modernization, redundancy and clean energy projects, periodic base rate case filings and stable cost of capital metrics. Yesterday, we released our first quarter 2021 earnings results, and I'm pleased to report that we're off to a strong start in 2021 with improved results as compared to a year ago reported at both our utility and non-utility operating segments. Utility segment improvement was primarily driven by new base rates implemented at South Jersey Gas on October 1, 2020, and the roll-in of infrastructure modernization investments under our authorized plans. Non-utility segment improvement reflects both improved energy management results driven by asset optimization opportunities and wholesale services as well as improved energy production results reflecting positive contributions from fuel cells and our 35% equity investment in REV. For 2021, at the midpoint, we are forecasting a $30 million improvement in economic earnings from 2020 results. As outlined in our fourth quarter 2020 earnings release and conference call, 2020 results included a number of positive but nonrecurring gains. Adjusting for these items, our 2020 economic earnings base is $150 million, which, if you recall, is the level management originally forecasted for 2020 back in 2016. SJI was able to achieve this level of earnings despite significant changes in federal tax policy, wholesale market fundamentals, New Jersey Energy Master Plan revisions and other items. Our forecast for 2021 utility segment improvement reflects the full year contribution from SJG's rate case, strong customer growth, and continuation of modernization programs through the year. Our forecast for 2021 non-utility segment also reflects strong performance. Within this segment, energy management is expected to contribute 10% to 15% of economic earnings with 2021 improvement largely driven by the positive impact of wholesale marketing results, as already witnessed in the first quarter. Energy production is expected to contribute 10% to 15% of 2021 economic earnings as well with improvement largely driven by renewables investments as well as contributions from our equity interest in REV. 2021 other, which includes interest on debt, is also expected to post improved results as a result of our recent financing transactions and repayment of debt. Looking forward, SJI is forecasting attractive economic earnings-per-share growth of 5% to 8% over the next five years with an expectation that significant utility and decarbonization investments will continue to support strong growth well through the second half of the decade. With the forecasted improvement we outlined on the prior slide and utilizing 110 million to 112 million in weighted average diluted shares outstanding, SJI's 2021 economic earnings forecast is $1.55 to $1.65 per share. Under the plan we've outlined today, SJI's consolidated economic earnings per share increases strongly to $2 to $2.10 per share in 2025 with more significant step-ups in 2023 and 2025 driven by the timing associated with utility rate cases and clean energy investments. Under our plan, utility operations will continue to generate a majority of consolidated earnings. As Melissa noted during her remarks, important legislation is under discussion at both the New Jersey state and the federal level that would provide incentives for the development of renewable natural gas at our utilities. I would reiterate that these initiatives, if implemented, could result in a potentially significant lift to SJI's regulated earning mix above the 70% to 80% that is currently in our plan. As I mentioned, we're committed to maintaining and growing our dividend on an annual basis just as we've done for decades. We're forecasting roughly 3% dividend growth annually through 2025 in line with our current rate until we achieve our targeted payout ratio of 55% to 65%. As we achieve our target level, we would expect dividend growth more in line with earnings growth subject to approval of our Board. Please note that our dividend is increasingly supported by strong cash flow growth. Under our plan, SJI's consolidated cash flow from operations increases 30% from $205 million to $215 million in 2021 to $600 million to $650 million in 2025. The key assumptions underlying this growth include strong projected cash flows from RNG dairy farm development as well as improved cash flows at our utilities driven by the addition of new customers, timely recovery of infrastructure modernization and energy efficiency investments and periodic rate relief. As you can see, our forecasted improvement in earnings results in steady improvement of our dividend payout ratio, which declines to under 70% by 2025. And our forecasted strong improvement in cash flow generation results in a much lower dividend percentage, declining significantly by 2023 and achieving a low to mid-30% range by 2025. Turning to our balance sheet. In March, SJI executed several financing transactions designed to strengthen our balance sheet improve our credit ratings and significantly fund the capital plan we've outlined for you today. Specifically, SJI sold a total of 11.7 million shares with 1.9 million issued in the first quarter and 9.8 million shares under a forward sale that are expected to be issued over the next 12 months. Gross and expected proceeds from these offerings are expected to total more than $260 million. At the same time, SJI issued and sold 6.7 million mandatory convertible units, generating gross proceeds of $335 million. These offerings accomplished the goals that I previously outlined. Following their execution, S&P affirmed our BBB ratings and raised their outlooks for SJI, SJG and ETG to stable from negative. We're now set up to execute our growth plan from a significantly improved financial position. In the aftermath of these transactions, we continue to have ample liquidity at both SJI and our utilities, with $1.16 billion in total cash, credit capacity and available through our equity forward and approximately $977 million available as of March 31. In addition, with the proactive refinancing efforts we've undertaken over the past year as well as repayment of debt from our equity transactions and the remarketing of notes from our prior mandatory convertible units, SJI has no significant debt maturities due in the near-term. Turning now to our financing plan. As outlined for you today, our plan projects capital uses of approximately $4.5 billion, with the majority allocated for our utility and non-utility clean energy investments. We expect about half of our funding needs to be met by internally generated cash flows, with the remainder met through external financing. Having completed the equity financing transactions I've just described, our remaining financing needs from today through 2025 will largely be met through debt financing, with a modest 5% to 7% through equity financing over the next five years. As we've noted many times, we have tremendous growth opportunities before us and remain focused on defending our balance sheet and credit ratings as we execute our plan. We believe the modest amount of remaining equity in our plan accomplishes this goal. Along these lines, as you can see, our forecast supports an equity capitalization of 40% to 45% during the plan period, with a gradual improvement in our FFO-to-debt metrics from 11% to 12% in 2021 to 12% to 13% in 2025. Before turning it over to Mike for his closing remarks, let me summarize some of the key financial items that I've reviewed today. From an overall financial perspective, I'm very pleased with the improvement we've been able to achieve over the past year that positions us to execute successfully on the significant growth plan we've outlined for you today. Our plan calls for strong 5% to 8% economic earnings-per-share growth with significant step-ups in 2023 and 2025, driven by timing associated with rate cases and clean energy investments. A majority of the growth in our plan will be driven by our utilities in support of safety, reliability and sustainability initiatives. Our plan calls for significant non-utility investments in support of decarbonization and renewables that both align with the clean energy goals of our state and region as well as produce strong cash flows and earnings. Our balance sheet, liquidity and credit ratings have all improved as a result of our actions over the past year, and our financing plan supports our ability to execute our plan, while maintaining and improving on these important financial metrics. Along with my colleagues that you've heard from today, I believe SJI is very well positioned for strong growth in the years ahead. And I'm very excited to execute this plan. As I conclude, I want to thank my team for the hard work that they've put in over the past year. My thanks to all of you for your participation today and for your continuing interest and investment in our company.
Mike Renna: Before we turn to Q&A, I'd like to spend a few minutes summarizing some of today's key takeaways. As I said at the onset, the world is moving toward a clean energy future. SJI has invested in it, and our strategy is centered upon it. South Jersey Gas and Elizabethtown Gas are strong businesses and will remain our largest, both in terms of capital allocation and earnings generation. Both companies enjoy above-average customer growth, a long runway for infrastructure modernization and decarbonization investment opportunities. We expect rate base to grow at a compounded rate of 10% through 2025. In Energy Production, we'll be investing approximately $750 million in renewable natural gas and traditional renewables over the next five years, with low-risk contracted margins fueling returns above our utility and eclipsing our hurdle rate for non-utility businesses. And our Energy Management group is set to provide steady contributions with roughly 10% growth through 2025 from a derisked and predictable platform. As we look to 2025, we expect to grow economic earnings per share 5% to 8%, with significant step-ups in 2023 and 2025, driven by timing associated with utility rate cases and clean energy investments. We expect significant 30% increase in cash flow from operations over the next five years, driven by clean energy investments as well as growth fundamentals at our utilities. We expect dividend growth of roughly 3%, in line with our current rate as we balance the return of cash to our shareholders with the exceptional growth opportunities we have before us. Finally, over the next 15 years, our investments will reduce our operational emissions and consumption, lower the carbon intensity of the gas stream and transition SJI to a 21st century infrastructure company delivering the clean energy of the future. We look forward to delivering on these projections and creating significant long-term value for our investors. I want to thank you for your attendance today, and as always, for your interest and investment in our company. We'll now take a five-minute break and then begin Q&A.
Operator: Ladies and gentlemen, we will now begin the five minute break before Q&A. Please continue to hold. Thank you.
Operator: We will now begin the question-and-answer session. Our first question today comes from Shar Pourreza with Guggenheim Partners. Please go ahead.
Shar Pourreza: Hey, guys. How are you doing?
Mike Renna: Good, Shar. How are you?
Shar Pourreza: Not too bad? So a couple of quick questions here. First, I know obviously, in the prepared remarks, we talked about potential legislation in New Jersey around rate basing RNG. How do we sort of think about that interplay between regulated RNG and base rates versus non-utility opportunities, i.e., if we get legislation, could we see the $500 million allocated to non-utility RNG swing downward? Or could legislation just add to further R&D spending at the base utilities while you still kind of maintain that $500 million target at the non-utility?
Mike Renna: Good question. So I think a lot of that is going to be determined by the final legislation. If it's as broad as what they have in Oregon, where you can rate base RNG outside of the utility? Yes, I think you would see a transfer of some of those investments that right now are contemplating the non-regulated businesses' move into the utility, right? So they would become part of the utility. And then there, a lot of it is going to be determined by geography, whether it's cost-effective to compress and then trucking and inject that RNG. If it's a more narrow legislation that permits rate basing of RNG within the state, then I think, again, from a non-regulated perspective, the money that we've got dedicated to RNG development is – right now, it's all dairy farm, Shar. So that would all be out of state. We don't have a lot of dairy farms in New Jersey. But that would give us an opportunity for food waste, water treatment facilities, landfill gas to be developed and then rate based in New Jersey.
Shar Pourreza: Got it. Thank you for that. And then obviously, we're still waiting for the LNG redundancy opportunity at South Jersey Gas. But curious if there's additional opportunities with ETG service territories as well?
Mike Renna: For LNG, sure. Look, I'll ask Dave to comment. I think globally, Shar, obviously, one of our responsibilities as a utility is to ensure reliability and continuity of service. And as demand continues to grow, as we continue to add customers and capacity continues to be a scarce resource, LNG is a – is certainly a means with which to address that, right? It's either pipelines or its alternative means of supply, one of which could be large-scale liquefaction and storage. Dave, maybe you could jump in really quick and talk about the differences between South Jersey Gas and Elizabethtown Gas with respect to the systems and any potential capacity constraints.
Dave Robbins: Yes. Look, I think right now, we've subscribed to sufficient peaking systems so that we're well protected should we see prolonged cold. What we do have, as Mike mentioned, we have an LNG facility in the Elizabethtown territory. We have begun very preliminary reviews of where on our system could be another opportunity to add that critical redundancy. There's nothing really moving on that right now. Right now, our primary focus is replacing the existing infrastructure we have. But we'll continue to pursue that. In the Western territory of Elizabethtown, it would be more challenging the way the system is configured. So probably the most likely possibility at some point would be something in the Eastern region where it's densely populated and there's more infrastructure to connect to. So again, very preliminary in reviewing that. The one in Vineland is very important to us. And as you mentioned, we've had good dialogue with the regulators. We've had discovery. We've had public hearings. So that's still moving forward, which we're certainly encouraged by.
Shar Pourreza: Got it. And then just lastly for me. Just on the growth rate, it's obviously a pretty healthy number here. To sort of hit the top end, would you kind of need incremental items, like legislation at the state level? I mean you talked a lot about levers. I was just trying to get a sense on what would drive you within that range, especially with so much – more than half of your spending having minimal regulatory lag. So how do we sort of think about the interplay between the bottom and top end given the plan that you presented at this point?
Mike Renna: Shar, you probably just took the next four questions off the board with that one. Look, I think on the higher end, certainly, the RNG legislation that would allow for the rate basing of RNG would be one way that we would get to the higher end of that range. Certainly, if – on a federal level, if biomass is included in future ITC legislation, that would be one way. But I do want to reiterate what Steve said in the presentation. If that were to happen, we would take – we would revisit our strategy with respect to traditional renewable investments. We want to be very sensitive to getting back to a point where ITC has become a disproportionate part of our earnings stream. So I think one way to look at it is we have a lot of planned RNG investment. If there is an ITC attached to it, that would certainly sort us to the upper end of the range, but it would not be a one-for-one incremental over what we have planned with respect to traditional renewable investments. We would back down some of those and really just shift to RNG. Better regulatory outcomes could get us to the, I should say, better than expected. We've had – we've enjoyed some outstanding regulatory outcomes, largely as a result of the strong relationship we have with our regulators. But I think if we were to have better-than-forecasted results on that front, that could lead us to the upper end. And then certainly, again, yes, we shaped our wholesale portfolio in such a way that we really limited the downside. And conversely, we have less upside, but there's certainly always the opportunity for some upside there. Downside, I think, again, it could be same story. The wholesale will fall slightly below expectations. I think that's probably the biggest one. The adverse outcomes with respect to PennEast would be the other one.
Shar Pourreza: Terrific, guys. Congrats. You got this past year. So congrats.
Mike Renna: Thanks.
Operator: Our next question will come from Gabe Moreen with Mizuho. Please go ahead.
Gabe Moreen: Hey, good morning, everyone. Maybe if I could just follow up on the last question. Just in terms of the interplay between, I guess, the IIP ask at SJG as well as the LNG plant. I think in the past, you kind of hinted on the timing of the LNG plant being a little bit, well not variable, but maybe having some flexibility to it. Can you just talk about, I guess, the degree of confidence in the IIP ask at SJG given its size? And also depending on what comes back with that ask, whether there's any flexibility on the timing with the LNG plant?
Mike Renna: Yes. Gabe, I'll ask David to go ahead and jump on this one.
Dave Robbins: Okay. Thanks for the question, Gabe. So regarding the IIP, as we've talked about, it is a little larger than the programs that we've previously asked for at SJG and ETG. We do still have quite a bit of inventory that will need to be replaced. And so when we socialized this with our regulators, we talked about the opportunity of possibly upsizing it given the significant positive attributes of a program like this, right? It's good for the environment. We continue to reduce fugitive methane. The other big thing that got a lot of positive feedback – it's a job creator, right, in a time when we need to put more New Jerseyians back to work. And then, of course, it strengthens the safety and reliability of our system. And as a tracker, it earns a timely return. So this – look, we're confident. We're not going to speculate on the size of the program. You know what we asked for. Typically, you don't get everything you ask for. So I think we expect a good outcome. I'm not here to predict on the size of the program. I don't think that, that would be prudent. But again, we've been in advanced dialogues. We expect something maybe by the end of Q2. But probably more than likely, given what's on the agendas with our regulators, it may slip to Q3. But we're real confident in that program. You did mention the LNG. As I've shared with my comments with Shar, had discovery, had local meetings, continue to have dialogue. Again, I think given just the volume of filings, there's a little more slippage for everyone. But we do expect a favorable resolution, but that may not come until later on in the year. Construction on that LNG program likely not to start toward the end of 2022.
Gabe Moreen: Thank you. Maybe I could shift to the decarbonization investments, in REV specifically. It looks like some of the assumptions are a little bit back-end loaded of the five-year plan. Can you just maybe walk us through a little bit more of the cadence of those two dozen, plus or minus, dairy farm opportunities in terms of the in-service dates? And then also, if I could just understand correctly the kind of, I guess, the earn-out that REV has potentially, which looks to be about $200 million. What sort of earnings thresholds are need to be hit? And when those payments would potentially occur?
Mike Renna: Sure, Gabe. We have not obviously disclosed anything specific with respect to what the triggers are. But they're EBITDA hurdles, and we expect them to be – given the organic growth that REV has in front of it, we would expect to achieve those hurdles and increase our stake in REV twice within the five-year period, reaching full ownership, 100% ownership in 2025. As far as the cadence with farm development, it is a little bit back-end loaded. I think that's largely because, as Steve mentioned, it's about a 10 to 14 month construction window. So we're expecting to initiate construction on several farms this year that would bring them online in 2022. So I think that's probably the way we should be thinking about it. Of the 25-or-so farms, there will be a number where construction will commence this year, a number where it will commence next year and a remaining few that would commence in 2023, all coming online about a year after they begin construction.
Gabe Moreen: Thanks Mike. Yes, and then maybe last question for me would just be around appreciating that future equity needs are – seem pretty minimal. But will kind of ask how you go about issuing that equity at the back? Do you think an at-the-market program is probably your most likely way to go about issuing that equity?
Mike Renna: Steve, do you want to grab this one, Steve?
Steve Cocchi: Gabe, this is Steve. Yes, I think you're thinking about that right. I mean as we pointed out in the deck and in the remarks, the kind of large block issuance of equity was taken care of with – on activities in March. I think going forward, something like an at-the-market makes a lot of sense. And we'll talk more about that as we refine our plans and roll something out.
Gabe Moreen: Thank you.
Operator: Our next question will come from Chris Ellinghaus with Siebert Williams. Please go ahead.
Chris Ellinghaus: Hey, guys, how are you?
Mike Renna: Good. How are you?
Chris Ellinghaus: Good. Steve, can you give us some color on what your thoughts are on the 2021 ITC level?
Steve Cocchi: Yes. Sure, Chris. The 2021 plan has ITC pegged out at around the same level as 2020, I think, is the way you should look at it. And then as we spoke about, gradually declining over the course of the plan and being replaced by more – our decarbonization investments.
Chris Ellinghaus: Okay. And the – I assume that you're calculating your CAGR for economic earnings off of that – $55 million level?
Steve Cocchi: That's right.
Chris Ellinghaus: Okay. The slide – let me see what slide it is. This is the REV Slide 53. Can you just sort of break down – I was just doing some math on the 25 farms and the metrics that you gave us there. And it's not entirely clear to me what all of the buckets for that $500 million are. So can you just give us sort of the broad big buckets for where that $500 million goes to relative to what your portfolio is today? What you're expecting to add kind of the money headed to the REV purchases? Can you just sort of break those different buckets out as best as you can?
Steve Cocchi: Sure. Yes, I think – we do have included in the slide that our forecast includes approximately $280 million for farm development. So that's your number as far as the $500 million goes that will be devoted to farm development. The remainder is a combination of both additional equity buyouts in the business that will take place over the course of the plan period as well as capital to support the growth opportunities at REV. REV, the entity, has a number of opportunities to develop dairy farms on its own outside of those that we're developing under the SJI RNG Devco umbrella. So we would be contributing capital to the system, the development of those farms as well as then the expectations that those farms will have offtake agreements, and we would contribute capital to REV's needs for acquiring additional trucks to transport that RNG from the farms that are developed to the ultimate injection point.
Chris Ellinghaus: Okay. So you're not going to outsource the transportation. You're going to have in-house transportation.
Steve Cocchi: That is the goal. That's still subject to negotiation. But at this point, that's really how REV got their start, and that's their – kind of their core business before getting into RNG and their core competency. So we would expect, as they have been able to achieve historically, that we will continue to be able to get the contracts to truck the gas.
Chris Ellinghaus: Okay. So out of that $280 million bucket, you're assuming there that average sort of CapEx is $7 million. But there's another anticipated development piece to your overall farm portfolio?
Steve Cocchi: Yes. So we – what we've talked about thus far is the addition – the development rights that we acquired originally, with the acquisition at the end of 2020, plus up to a total of 25 farms that we have right of first refusal to develop and would intend to develop and plan to develop in our plan. There are other incremental opportunities that are in the development process or will be in the development process that we are assuming would get you to that $280 million number using the average CapEx that we've outlined.
Chris Ellinghaus: Okay. With the totality of the production CapEx, how are you thinking in terms of the capitalization of that production business, in general?
Steve Cocchi: Well, look, this business, once we have the first kind of tranche of farms in the ground and up and running next year, as you could see from the EBITDA – average EBITDA projections that we put in there, it's going to generate a lot of cash. So the expectation is that we would finance it, if that's what you're asking, Chris. And forgive me if I misinterpreted your question. But we have financed it through a combination of cash from ops that the business is going to produce and some incremental activities in the debt capital markets. And then back to the question that was asked earlier, minimal composition in the plan coming from equity.
Chris Ellinghaus: Okay. One last thing. In the CapEx for the utilities, have you got any AMI built into that? Or what's your thought process on AMI through the 2025 sort of time frame?
Dave Robbins: Chris, this is Dave. So we do have some dollars for AMI in the latter half of the plan. We think an AMI program makes a lot of sense for us. We will begin in a smaller fashion as we cycle out meters that need to be replaced. When we have it up and running, we have to prove we'll be swapping out with smart meters. But I don't think that begins until, we're assuming, 2023. We're still doing our homework on the program, and we really like the program. It's got some great attributes, including some pretty significant environmental attributes, which are positive and aligned with the master plan. So you won't see a ton of dollars in this five-year plan, but I think we'll look to get that program off the ground probably starting in some kind of pilot fashion.
Chris Ellinghaus: Is that one element is what you see as upper end of the earnings growth range or something more substantial in that area?
Dave Robbins: It's certainly an opportunity. I think we need to pay close attention to our priorities, right? Our top priority is making sure we make the infrastructure investment for safety and reliability toward the back end. We'll have few more decarbonization opportunities, particularly with RNG. And AMI will be part of that. Could it be upsized as we move along and get more information? Certainly, it could.
Chris Ellinghaus: Okay, thanks for the details, guys. Appreciate it.
Dave Robbins: Thanks Chris.
Operator: Our next question will come from Kody Clark, Bank of America. Please go ahead.
Kody Clark: Thanks for taking my question and thanks for all the disclosures.
Dave Robbins: Thanks Kody, good morning.
Kody Clark: Good morning. So a lot of my questions have been answered already, but wondering if you can provide some color on the breakdown of the $250 million in solar and fuel cell investment. How much is going toward fuel cell versus solar? You stated in the past that fuel cells have a little bit better return profile than solar. So just wondering how we should be thinking about this.
Mike Renna: Hi, Kody. It's Mike. Great question. Certainly, you're correct. Fuel cells do offer better returns than does solar. And I think what we're targeting are projects and opportunities similar to the one that we closed on in 2020, where you had upwards of 75% of the revenue stack fixed and protected by state credits. So you really derisked the revenue side. And I think just as importantly, we have a guaranteed availability from the manufacturer and operator of the fuel cells that again protects that side of it, right? We've got 95% guaranteed availability with make-whole provisions should they're not – should something happen with the units and they're not available. So we feel like it's significantly derisked investment. And given that it's very utility-like in nature – so that's I think that's why our preference would be on similarly structured fuel cell deals, and we believe there is – there remains a market for those. I'm not expecting to do a lot of them, but one a year would satisfied probably a big chunk of our projected traditional renewables investment. For us, solar is a lot about also delivering on our decarbonization goals within our utility operations. So in addition to repowering our facilities with solar, we're looking at other opportunities, putting solar on our remediated MGP sites and the like, so that we can produce a lot of green electricity and again, further decarbonize our operations. Will we continue to look for attractive solar opportunities in New Jersey and in the region. Sure. We're not going to walk away from a really good opportunity. But our preference would be certainly to continue to identify and develop fuel cell opportunities.
Kody Clark: Got it? Okay. That's super helpful. Thanks so much for the time and congrats.
Dave Robbins: Thanks.
Operator: Our next question will come from Richard Sunderland, JPMorgan. Please go ahead.
Richard Sunderland: Good morning. Thanks for taking my questions here and appreciate the update.
Mike Renna: Hi, Rich.
Richard Sunderland: Maybe starting off with PennEast. Just curious what the EPS contribution you're baking in from PennEast Phase One? And if there are any offset should Phase Two not advance?
Mike Renna: Yes. So again, we approach this, trying to balance the need for the project and our strong support for the project because of the benefits it provides our customers and the region. We're still – our utilities and obviously, SJI as a whole are strongly supportive of PennEast. But we also want to be sensitive to the fact that it's – there's a case pending in front of the Supreme Court. There's a decision and a final approval pending in front of FERC. So we're pushing – we're looking at a fourth quarter 2022 in-service date for Phase One. And then after that, not that I would say that there's great uncertainty around Phase Two. It would be just that the timing of when Phase Two would come online, because we would expect there still to be a long road ahead of us in New Jersey. All that being said, the earnings contribution is minimal. What was once projected to be 10% to 12% of our earnings is now well less than 5%. It's in the 2% to 3% range of our earnings. And that's really two factors: One, it's the smaller scale of Phase One. There's not a Bcf of contracted capacity on Phase One. So it's a smaller project. But more specifically is due to the significant growth in our other businesses that PennEast is a relatively small contributor.
Richard Sunderland: So I think that in the past, you guided to $12 million of net income from the full PennEast. So is the way to think about that kind of starting at 50% of that figure, then working down somewhat, given it's a little bit smaller under Phase One considerations?
Mike Renna: Yes. I think, right, $12 million was the original project. It would be scaled back considerably. And yes, I think, again, you're looking at not a lot of spending and so not a lot of AFUDC related to Phase Two. At least that's how we – in our forecast and our plan, these five years that you've seen some effect the assumption that we're making, again, taking a very, very conservative look. It would – as far as replacing it, it would not take a lot. I mean again, you should really think about it being 2% or 3% of our overall earnings.
Richard Sunderland: Got it. That makes sense. And then circling back to the LNG project, given what, if I recall, was a late 2022 construction start earlier in the commentary, does that give you pretty good runway in terms of any additional slippage to the regulatory approvals? Or just how do you think about kind of the runway before getting that project geared up?
Dave Robbins: Hey Rich, it's Dave. Thanks for your question. So what was submitted is the plans to upgrade our infrastructure to actually serve the tank. And when we get approval for that, we will begin those upgrades. The actual expenditures on the tank will begin, and it's a pretty long runway. It's quite a complex and a large project. But once all those costs are in place, then we would file those costs in the next base rate case after construction is concluded. So you're looking at, between permitting and construction, I mean, it's like a three-year project.
Richard Sunderland: Okay. So just to be clear on that front, in terms of just the upfront approval process for the, call it, the associated infrastructure were to slip another six months, you still have room in the plan to get the associated work done as well as the tank build-out itself?
Dave Robbins: Yes. Well, look, we do expect to get the approvals, and we will start sometime next year. We'll certainly, if there are continued delays to get that approval, it could push the completion date out. Naturally, it would. And then we would – if that were to occur, then we'd have to reexamine when we would file that subsequent rate case. So I think we have a little padding in there because it's such a long lead time. But look, we're just pleased that there's progress. There's been some good dialogue. I think the Board understands the critically important need to create this redundancy. So I'm still optimistic. Would I have loved for it to be approved earlier? Of course, we all would. But it's still moving forward. And if there are some further delays, it could delay by a few months when it's placed in service and then when we file that subsequent rate case. A lot needs to happen in the next three years so there could be a little shifting, nothing that I would consider monumental.
Richard Sunderland: Fair enough. And then turning to the utility outlook around the equity component, which I guess is – my understanding is the step-up for the ETG equity layer, is that the extent of what you're baking into the plan? And is that – I guess you've kind of done one step on the way there. Is that one more step or modest upticks over the course of rate cases in the plan period? Any color would be helpful there.
Dave Robbins: Well, again, this is Dave. You're absolutely right. We took a step forward with the last ETG case. Certainly, it's still below SJG. So is there some opportunity for that to move in another step? Absolutely there is. I'm not sure we're ready to comment on what we think that might be. But certainly, there's a possibility to have another step-up in that equity cap.
Richard Sunderland: Got it. And then just one last one for me. You've been talking at times about higher-level stimulus discussions in New Jersey. Just curious if the IIP is the vehicle to watch here. If you see other opportunities to leverage the job-creating aspect of your business?
Dave Robbins: Well, we were asked by the BPU through the front office to provide projects that if they were placed on an accelerated basis, they could help stimulate New Jersey's economy, create jobs. We – all the utilities supplied those projects. Within our list was the IIP. I haven't – and maybe Mike can comment. I haven't heard a lot on a stimulus package of late, but as we mentioned, we're going to be through our accelerated programs, and we still have quite a few miles of inventory to be replaced. So we went forward – again, after socializing with the BPU and staff that, hey, this may not be a "stimulus program," but it certainly addresses everything that the stimulus request would have done: job creation, safety and reliability improvements, kind of the things that I talked on before. So maybe I'll kick it back to Mike to see if there's been any more discussion on an overall stimulus package requested by the space.
Mike Renna: Thanks, Dave. No, there hasn't been any direct conversation recently about a targeted stimulus type of package. I think the first step was easing of the restrictions. And as you – I'm sure you know that New Jersey has just announced that. And I think that, in and of itself, will allow for increased focus on specific initiatives around economic recovery. What I will say is that there is a full appreciation in any conversation that I have had with – as a part of the reopen and rebuild councils, of the criticality of infrastructure and the ability for infrastructure type of investments to really accelerate both an economic recovery, but more importantly, a jobs reco
