Dan Fidell - Vice President of Investor Relations Michael Renna - President and Chief Executive Officer Kenneth Lynch - Principal Financial Officer Ann Anthony - Treasurer

Thank you, Lauren. Good morning and welcome to SJI third quarter 2018 earnings conference call and webcast.

I am joined here today by Mike Renna, our President and Chief Executive Officer; as well several additional members of our senior management team. Our earnings release and the presentation slides intended to accompany the call were issued yesterday after the close of the market and are also available on our website at www.sjindustries.com.

The release and the associated 10-Q provide an in-depth review of earnings on both the GAAP and non-GAAP basis using our non-GAAP measure of economic earnings. Reconciliations of economic earnings to the comparable GAAP measures appear in both documents.

Let me note just at the beginning here that throughout today's call; we'll be making references to future expectations, plans, and opportunities for SJI. Actual results may differ materially from those indicated by these statements as a result of various important factors including those discussed in the Company's Forms 10-K and 10-Q on file with the SEC.

With that said, I'm pleased to introduce our CEO, Mike Renna, who will discuss our current earnings performance and outlook, SJI's Principal Financial Officer, Ken Lynch, will then review the performance of our individual segments, will be followed then by SJI's Treasurer and Principal Financial Officer for our utilities, Ann Anthony, who will review our balance sheet, cash flow and guidance, we'll then be happy to take your questions. So with that introduction, let me now turn it over to Mike.

Thanks, Dan, and good morning. Our third quarter results were in line with expectations, and we remain on track to deliver solid economic EPS in 2018.

The impressive growth at South Jersey Gas, coupled with opportunities afforded through the acquisitions of Elizabethtown and Elkton Gas, and business transformation activities that include a targeted separation of our non-core non-regulated businesses, have positioned us for economic EPS growth of 68% annually well into the next decade. Excluding the impact of acquisitions and divestitures, SJI reported a loss of economic earnings for the third quarter of $0.11 per share compared with a loss of $0.05 per share last year.

Year-to-date economic earnings are $1.15 per share as compared to $0.73 per share last year. Our year-to-date results reflect stronger performance in South Jersey Gas and South Jersey Energy Group, which has our wholesale and fuel management businesses.

South Jersey Gas results reflect the positive impacts of our recent base rate case, solid customer growth and continued infrastructure investment intended to enhance and improve service and reliability to our customers. Energy Group suggest we capitalize on favorable weather, tax reform and three additional fuels management contracts coming online.

Before I turn it over to Ken and Ann to review our operations for the latest period, I want to share some thoughts with you regarding our recent investment conference. To be blunt, we did not adequately explain the changes in our near-term growth projections and financing assumptions.

Failing to do so took focus off the strength of our long-term plan. Today, I want to assure you that we have a plan that we are confident in, one that creates top-tier earnings and EPS growth well into the latter half of the next decade.

It's important to emphasize that our strategy is fundamentally consistent. We remain committed to the four key tenets of our plan: top-tier earnings growth, high quality earnings, a strong balance sheet and an emphasis on our core business lines.

What has emerged, however, is a new plan, one that overcomes a more conservative, near-term wholesale forecast by creating significant long-term value through growth within our utilities and our midstream investments; less reliance on our non-utilities businesses and a strong balance sheet. This is a plan that I have a high degree of confidence in and one that will create attractive long-term value for investors.

I see the change already happening at SJI. We are becoming a leaner, more agile and innovative company.

And I'm as excited as I am confident in our future. So were we disappointed in the results of our investor conference?

Yes. But we understand that our revised wholesale forecast and lower expectation for 2020 had to be factored in.

I would also submit, respectfully, that our current stock price - the current price of our stock does not yet reflect the multiple that we think we deserve for our continued shift to more regulated earnings. We have a new story.

We think it's a great story, but we realize it's also a story that needs some time to digest and understand. But ultimately, we feel confident that our stock price would strengthen as we continue to execute on our plans.

With that said, I want to clarify several recurring questions we received during and after the conference. With respect to guidance, we are reaffirming 2018 economic earning guidance of $1.57 to $1.65, which, as you know, excluded the impact of acquisitions and divestitures as the timing of regulatory approval was unknown.

Having closed on the Elizabethtown and Elkton acquisition and entered into an agreement to divest of our solar assets, we are reaffirming our original guidance and providing a range of $1.35 to $1.40, adjusted for the projected impact of these activities. Specifically, roughly $0.22 is related to ETG and Elkton financing costs, which exceed operating revenues expected during the third and fourth quarters; and $0.05 related to the divestiture of our solar assets.

We expect to alleviate interest and overhead drag across SJI through non-core asset sales and business transformation synergies. With regard to our return on equity, we expect to earn our authorized ROE over the long term.

What you're seeing in our Investor Day deck in 2022 is a regulatory lag associated with accelerated capital spending that we expect will be reflected in rates by 2023, 2024. In regard to Elizabethtown, we expect planned system upgrades, infrastructure modernization programs and customer growth to provide consistent growth and to be accretive to economic earnings beginning in 2020.

With respect to Energy Group, we continued to implement our strategic shift to a more stable regulated earning. Our forecast reflects updated assumptions related to fuel management, wholesale marketing and the addition of the Elizabethtown asset management agreement.

While we are showing growth in wholesale in our long-term plan is below our prior forecast, and as a percentage of SJI's total earnings, it is expected to drop from roughly 25% to less than 20%. Further, more conservative expectations for wholesale, coupled with a larger and accelerated utility CapEx plan, which includes a large redundancy project that led us to revise our financing plans to include additional equity.

We are in the midst of a change in our business mix. Our plan includes an additional $125 million of equity in 2020, reflecting higher CapEx at our regulated utilities to support the key safety and reliability investments, a major new LNG facility to provide critical redundancy to the region, lost revenues associated with the divestitures and reduction in cash flows from wholesale reflecting the previously discussed shift in assumptions.

Our plan also considers a similar LNG facility behind Elizabethtown in the latter half of the decade, and that will likely call for additional equity. Beyond these incremental investments, we do not expect to issue more equity.

We know that there are a lot of moving pieces to digest and, hopefully, these clarifications are of some added help. We certainly appreciate your interest, and we look forward to executing on the strategy we've laid out for you.

With that, I'll now turn it over to Ken to review the performance of each of our operating segments.

Thanks Mike, and good morning. 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. SJI's third quarter economic earnings were a loss of $0.27 per share compared with a loss of $0.05 per share in 2017.

SJI typically reports a loss in earnings during the third quarter owing to seasonality of the business. As Mike mentioned, excluding the impacts of acquisitions and divestitures, SJI reported a loss of $0.11 per share as compared with a loss of $0.05 per share in 2017.

The quarterly earnings per share performance reflects slightly higher results from Energy Group offset by slightly lower results from South Jersey Gas during a historically slow quarter. SJI's nine months year-to-date economic earnings were $0.99 per share as compared with $0.73 per share in 2017.

As Mike discussed, the year-to-date improvement reflects a combination of strong results at South Jersey Gas and Energy Group and is partially offset by the impacts of acquisitions and divestitures. I'll now briefly review the performance drivers of each of our business segments for the third quarter and year-to-date periods.

For South Jersey Gas, the third quarter loss of $0.11 per share as compared to the loss of $0.07 per share last year was a result of slightly higher operating costs, offset by the modest improvement in utility margin during the seasonally slow quarter. For the year-to-date, South Jersey Gas contributed earnings of $0.71 per share compared with $0.54 per share in 2017.

The improvement reflects the impact of our base rate case settlement, the roll-in of investments for infrastructure replacement and improvement and customer growth. It's important to note that year-to-date earnings growth was achieved despite higher operating costs, including higher O&M, driven by costs aimed at improving efficiency and productivity for the benefit of our customers and higher depreciation driven by additions to net plan.

Customer growth remained robust with more than 6,900 customers added during the 12 months ended September 30. Roughly three quarters of the additions came from customers converting from alternate fuels, such as oil and propane, and the remainder were from new construction, reflecting a continued strengthening in our region's housing market.

On a net basis, customer growth was 1.8% over the last 12 months, well above the national average. We remain on track with regard to our infrastructure replacement and modernization programs.

With regard to our Accelerated Infrastructure Replacement Program, or AIRP, our most recent annual investment is $60.4 million for the period July 2017 to June 2018 was rolled into SJI rates effective October 1. And our current Storm Hardening and Reliability Program was approved in May, an authorized investment of $100 million from 2018 to 2021.

For Elizabethtown and Elkton, this was our first quarter with these operations following the closing of the acquisitions on July 1. Elizabethtown reported a third quarter economic earnings loss of $0.08 per share, excluding a one-time customer bill credit totaling $0.13 per share, which was consistent with the acquisition approval.

Utility margins of roughly $21 million, driven by customer growth and revenue from the 2017 base rate case was offset by normal operating costs as well as costs associated with the Company's current transition service agreement with Southern Company as well as interest expense. Elizabethtown added 2,300 net customers over the last 12 months and now serves more than 291,000 customers, which equates to a 0.8% growth rate.

In future years, we expect an increased rate of growth driven by enhanced focus on conversion opportunities. With regard to infrastructure replacement and modernization, consistent with acquisition approval, on October 29, Elizabethtown filed a $518 million 5-year Infrastructure Replacement Program proposal with the New Jersey Board of Public Utilities.

The design of ETG's Infrastructure Investment Plan, or IIP, includes a request for timely recovery of our investment on a semiannual basis through a separate Rider recovery mechanism. The IIP proposes the retirement of 364 miles of vintage main, including cast-iron, unprotected and bare steel; the installation of 309 miles of polyethylene plastic and other modernization upgrades.

A final decision from the Board of Public Utilities is anticipated in 2019. Midstream contributed third quarter earnings of $0.01 per share compared with $0.02 per share last year, reflecting AFUDC related to our investment in the PennEast pipeline project.

For the year-to-date, midstream contributed earnings per share of $0.02 compared with $0.05 per share last year. The comparison for the year-to-date period is skewed with 2017 results reflecting a catchup of AFUDC related to prior periods that had not been deemed appropriate to record until original receipt of FERC approval.

We continue to work with our PennEast partners as this critical infrastructure project moves through the state permitting process. We are working through the details of gaining access to all land parcels along the route in order to submit final detailed surveys for permits.

PennEast expects to begin construction on the project in late 2019. Turning to our non-regulated operations.

Energy Group contributed third quarter economic earnings of $0.02 per share compared with a loss of $0.01 per share last year, reflecting improvement from both our wholesale marketing activities as well as our fuel management business, which began serving two new contracts over the last 12 months. For the year-to-date, Energy Group contributed economic earnings per share of $0.45 compared with $0.12 per share last year.

The significant increase in earnings largely reflects strong results from our wholesale business of $0.39 per share compared to $0.06 per share last year driven by portfolio optimization during cold weather in Q1 of 2018 compared with extremely warm weather in Q1 of 2017 and the impact of federal tax reform. Fuel management activities contributed $0.07 per share compared to $0.05 per share last year, driven by a larger portfolio of contracts.

Energy Services contributed a third quarter economic earnings loss of $0.01 per share compared to earnings of $0.02 per share last year, primarily due to our June 2018 agreement to sell our solar assets. For the year-to-date, Energy Services contributed roughly breakeven results similar to last year.

In June 2018, we announced the sale of our solar assets to an entity managed by Goldman Sachs Asset Management for approximately $350 million in cash. As of October 30, SJI has received approximately $180 million of the purchase price with the balance to be received over the next several months as individual projects in the portfolio satisfied closing conditions.

We expect nearly all projects in the portfolio will satisfy their closing conditions prior to December 31, 2018. That concludes my review of our segment operations.

I'll now turn it over to Ann discuss our financials and review our guidance.

Thanks, Ken, and good morning, everyone. Turning now to our balance sheet and cash flow.

SJI remains committed to a strong capital structure with ample liquidity and a solid investment grade rating. At September 30, 2018, equity-to-total capitalization was 27.9% compared with 43.7% at December 31, 2017, reflecting acquisition-related financing activity.

As previously communicated at our Investor Conference, we anticipate the full draw of our equity forward approximately $200 million and the use of proceeds from the sale of our solar portfolio approximately $350 million as well as any other non-core asset sales to be used for the repayment of debt. Our plan also embeds conversion of our mandatory convertible equity units due in 2021 approximately $279 million.

We are committed to a capital structure that allows for $2.5 billion plus in regulated-driven capital spending under our five-year plan while maintaining an equity-to-total capitalization of approximately 35% to 40%. For the nine months ended September 30, 2018, net cash from operating activities was roughly $173 million compared to approximately $127 million in the prior year period, primarily reflecting strong operating performance at Energy Group earlier in the year.

Net cash used in investing activities was roughly $1.96 billion compared with roughly $229 million in the prior year period, obviously reflecting our acquisition of Elizabethtown and Elkton Gas, the timing of utility infrastructure upgrades, and investment to support customer growth. Net cash provided by financing activities was roughly $1.76 billion compared to roughly $90 million in the prior year period, again primarily reflecting acquisition-related debt and equity financing.

Turning now to guidance. As Mike mentioned previously, today we are reaffirming 2018 economic earnings per share guidance of $1.57 to $1.65 excluding the impacts of acquisitions and divestitures, and $1.35 to $1.40 per share when including these items.

This range reflects strong results from South Jersey Gas, wholesale marketing and fuel management activities partially offset by results from energy services, as well as the mid-year timing of our acquisitions and financing of Elizabethtown and Elkton as well as the sale of our solar assets. We are also reaffirming our expectation for long-term economic earnings per share growth of 6% to 8% annually.

This concludes our prepared remarks. Operator, we are now ready to open the line for questions.

Well, thank you, everyone, for joining us this morning. As a reminder, a recording of this call will be available on our website.

As always, please feel free to contact either myself, Dan Fidell, or Eric Jacobson for investor questions. Dan can be reached at 609-561-9000 extension 7027 or by e-mail at [email protected].

Eric can be reached at extension 4363 or by email at [email protected]. And for media inquiries, Marissa Travaline, Vice President of Communications, can be reached at extension 4227 or by email at [email protected].

Again, thanks for joining us today and for your continued interest and investment in SJI. This concludes our call.

Have a good day.