New Jersey Resources Corp (NJR) 2010 Q2 法說會逐字稿

Good morning.

My name is Shannon, and I will be your conference operator today.

At this time, I would like to welcome everyone to the New Jersey Resources Second Quarter Earnings Conference Call.

(Operator Instructions) I will now turn the call over to Director of Investor Relations, Mr.

Dennis Puma.

Thank you.

You may begin.

Thank you, Shannon.

Good morning, everyone.

Welcome to New Jersey Resources Second Quarter Fiscal 2010 Conference Call and Webcast.

I am joined today by Larry Downes, our Chairman and CEO; Glenn Lockwood, our Chief Financial Officer; as well as other members of our senior management team.

As you know, certain statements in our news release and in today's call contain estimates and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We wish to caution readers of our news release and listeners to this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR's ability to control or estimate precisely, which could cause results to materially differ from the Company's expectations.

A list of these items can be found, but is not limited to the forward-looking statements section of today's news release, filed on Form 8-K, and our Form 10-Q filed on February 3, 2010.

All of these items can be found at SEC.gov and on our website.

NJR does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.

I would also like to point out that there are slides accompanying today's discussion, which are available on our website.

With that being said, I would like to turn the call over to our Chairman and CEO, Larry Downes.

Larry?

Thanks, Dennis, and good morning, everyone.

As Dennis mentioned, I will be working through a PowerPoint presentation, so hopefully you've been able to access that.

Before discussing our performance, I'd like to remind everyone that I'll be making reference to forward-looking statements this morning.

On slide 2, there's a list of the factors that could affect those statements.

They are listed here, and they are also listed in our 10-K and our 10-Qs, and I'd ask you to please take a moment to review them carefully.

On slide 3 is a disclaimer regarding non-GAAP financial measures, and I today will also be referring to certain non-GAAP financial measures, namely, net financial earnings and financial margin.

And while we believe that these metrics provide a better understanding of our performance, they are not intended, in any way, to replace GAAP.

Item 7 of our end report on Form 10-K provides more detailed discussion and, again, I would encourage you to take some time to review that as well.

Moving to slide 4, let me begin with a brief overview of the current business landscape.

As you are all aware, we are an environment of falling natural gas costs, abundant supplies, and more LNG.

That has benefited our customers substantially, and it's also helped our internal cash flow.

We see the economy in our service territory stabilizing, inflation is not a current risk.

In fact, short-term interest rates remain relatively low, that has also helped our performance.

We are seeing some slow but steady improvement in the housing market and housing inventories are declining.

That could start new construction, but we are also seeing that conversion in commercial markets have remained resilient, and that has enabled us to continue to grow.

And, as you know, we have a new governor in New Jersey, just completing his first 100 days.

The state is facing significant budget issues, but there is a very strong focus on economic growth, and along with a new governor, we have new leadership at the Board of Public Utilities as well -- a new president, Lee Solomon, and some members of senior staff.

Moving to slide 5, with that background, here are some of our six-month highlights.

We did announce our net financial earnings this morning for the six months.

They were $2.20 per share versus $2.48 last year.

Very importantly, we reaffirmed our net financial earning guidance for the year, a range of $2.45 to $2.55 per share.

New Jersey Natural Gas is having an outstanding year.

We are also seeing strong performance from our midstream assets.

In January, as you know, we implemented a 9.7% dividend increase.

Our regulatory relations remain constructive.

Our CIP was extended.

Our AIP program is progressing well, and we made our SAVEGREEN filing to extend a pilot program that we had put in place earlier this year.

I did mention the strength of our midstream assets segment.

You can see the increase in earnings that we've had.

We also announced our first unregulated solar venture, which was quickly over-subscribed.

Moving to slide 6, as you've seen this year, our quarterly results continue to be affected by seasonal factors, which is why we've been emphatic in reiterating our net financial earnings guidance for the year.

For the quarter, net financial earnings were $91.4 million at $2.20 per basic share.

That compared with $104.9 million, or $2.40 per share last year.

New Jersey Natural Gas was basically flat, midstream improved, while NJRES was lower, and we think as we have stressed throughout the fiscal year that we are being affected by seasonal factors and again feel comfortable with reiterating guidance for the year.

Moving to slide 7, as we reiterate the guidance, you can see how that will fit in with our historical financial performance.

We would expect that this year would be the 19th consecutive year of improved financial performance for the Company.

Moving to slide 8, as I said, the guidance is being reiterated, and I wanted to just give you a little more detail on how we expect to get there.

First of all, as I said, New Jersey Natural Gas is having an outstanding year, and you will see New Jersey Natural being a larger percentage of our net financial earnings this year.

The factor that will improve earnings in the second half of fiscal 2010 is our BGSS incentive programs, our accelerated infrastructure program, the continuation of customer growth with particular strength in conversion markets, and lower interest rates and bad debt expense.

We think that our midstream assets will continue to perform well and show improved results, and these factors will offset lower net financial earnings from NJR Energy Services, which have reflected the impact of lower volatility.

We also expect lower operating expenses at NJRES as well.

But, as I said, if achieved, this performance will represent the 19th consecutive year of improved results for the Company.

Moving on to slide 9, our strong financial profile has allowed us to provide shareholders with dividend increases in the last 15 years.

In December we announced, and it was effective in January, a 9.7% increase in our annual dividend rate to an annual rate of $1.36.

That growth rate is well in excess of the peer group average and reflects the overall financial strength of the company not only in terms of our earnings performance but also the strength of our financial profile.

Moving to slide 10, I want to focus on some of our other fundamentals.

We continue to experience steady customer growth.

New construction has slowed, but it's beginning to slowly recover and, at the same time, or commercial and conversion markets have been resilient.

If you look at the pie charts to the right on slide 10, you can see that conversions represent about half of our new customers and, from a margin perspective, residential customers are contributing about 51%.

Commercial is about 31%, and existing customers who are converting to other uses of natural gas, the remaining 5%.

You can also see some of the other statistics about the actual numbers of customers that we've added, and we estimate, over the next few years, that we'll be able to add between 12,000 and 14,000 new customers.

On the regulatory front, our successful conservation incentive program was extended by the Board of Public Utilities in January.

It is now in place through September 30, 2013.

That program, as you know, somewhat unique in its structure, encourages customer conservation but, at the same time, protects New Jersey Natural Gas gross margin from declining usage in weather and I think, very importantly, we have saved customers over $135 million since the inception of the CIP.

Moving to slide 12, we continue to make progress with our accelerated infrastructure program.

You will recall that the AIP was approved by the Board of Public Utilities in April of 2009 and includes incremental capital investment of up to $70.8 million for infrastructure.

We spent about $3.5 million last year, and we expect to spend about $44 million in this fiscal year.

There is an important economic development aspect to the program.

We expect to create or sustain up to 100 new jobs.

Rate recovery of the program is at our weighted average cost of capital of 7.76%, which includes an allowed return on equity component of 10.3%.

And the other benefit, obviously, is the investment of capital into our system enhances the system and our ability to provide customers with safe, reliable service.

Moving to slide 13, on March 29th we filed a program to extend our SAVEGREEN project.

Expansion of the current project, expanding current energy efficiency programs similar to AIP, SAVEGREEN supports economic development and job growth in our state, and it will also offer residential customers a competitively priced lease solar product.

And I'll talk about those economics in just a moment.

The total spending that we expect is $102 million, and we would recover those dollars through New Jersey Natural Gas Company's existing energy efficiency rider.

As we said publicly when we made the announcement, the total earnings contribution of $4.8 million is expected in the first three years.

It is assuming traditional rate-making assumptions and, again, using our existing weighted average cost of capital, 7.76%.

Moving to slide 14, I just want to talk about the solar program just a bit.

You are familiar with the energy efficiency programs that were part of the filing that was approved last year.

But the solar program includes a leasing aspect for a 15-year term and a 10-year recovery period.

The cash flow that is coming, it's from three sources.

First of all, lease payments from customers, and I would point out that those payments from customers are below the existing cost of electricity in our service territory.

There is also a 30% investment tax credit, and we will generate solar renewable energy certificates, SRECs, that will provide a source of cash flow as well.

We are using alliance model that will be working with third-party contractors for the actual installations.

It will mitigate energy efficiency rider increases and any price risks associated with the SRECs would be shared across all of our customers.

So we are excited that the filing is in place right now.

We'll be working with the Board of Public Utilities, and Rate Council but, importantly, we are offering a competitively priced electric product to customers in our service territory.

Moving to slide 15, we are also exploring initiatives for unregulated clean energy investments.

Again, based upon our efforts to support federal and state initiatives to reduce greenhouse gas emissions, there is an economic development aspect to this as well for job creation, reducing energy costs, and business growth.

And we think it provides us with the opportunity for long-term earnings growth.

We are concentrating on a number of projects right now, but our focus is on moderately sized commercial solar projects both rooftop and ground mounted otherwise in solar forms.

Typically, we are looking to 5.5 of megawatt to 5 megawatts.

That would entail investments of between $20 million and $25 million.

We are looking at both retail and wholesale transactions.

We think that the size of the investments that we're looking at will help us reduce our concentration risk.

And it fits in with our overall corporate mission of providing energy services.

So we think this is a good opportunity.

We think it fits well with some of our fundamentals and expect to have some announcements in the coming months about specific projects.

Just touching on the economics -- similar to SAVEGREEN, these projects have three sources of cash flow -- the investment tax credits, the energy sales to the customers, which will save customers money, and SRECs.

The tax credits reduce the capital at risk -- the 30% investment tax credit is in place through 2016, which is important.

There is currently a premium SREC value in New Jersey, closed trading within our borders.

That has led to higher trading prices in neighboring states.

And it's important to recognize that there is a solar alternative compliance payment through 2017, which gives us, I think, some sustainability to the market for these types of investments.

The short payback period of four to six years is something that we find attractive as well, and as we're going through our economics, I think, as you know, is we have stressed over the years our discipline with regard to the commitment of capital.

We are using a market cost of capital to evaluate these investment opportunities and appropriately risk-adjusting the equity component of the investment.

In March, moving to slide 17, we announced a residential solar program, unregulated, through NJR home services.

That is targeting up to 130 homes, no up-front cost to the homeowner.

The investment would be about $4 million.

Again, as I've covered a couple of times this morning, the sources of the cash flow that will give us our return.

The good news is that we have seen a very strong customer response.

In fact, within just a few days after the announcement, we had over 800 inquiries.

So we're going through the process right now and expect to begin construction within the next several weeks.

Moving to slide 18, we are continuing to make progress on our midstream strategy.

The centerpiece of that, as you know, is Steckman Ridge.

It is now operational, and it is contributing to our financial results.

In fact, it contributed $2.3 million so far this year.

And you can see on the map where Steckman is located strategically relative to the Marcellus Shale.

So that project, again, which we announced over three years ago, is now online and doing well and meeting our expectations.

On slide 19, you can see a brief update on NJRES.

As we have made clear, the results of NJRES have been affected by changing markets, additional supplies, more LNG, a bit by the economy.

That has reduced volatility, which has brought down their earnings.

But we still expect that they are going to be between 20% and 25% for the year.

What we're doing in response to that is having a greater focus on producer services.

Our team has just a very deep knowledge of capacity and storage markets, and we look at that as an opportunity to work with producers in the Marcellus Shale and potentially other areas.

In fact, in Marcellus, we have made good progress with some of the major producers out there.

On slide 20, we just talk briefly about some of the areas that we are focusing on in terms of those producer services, embedded demand fees, discounted commodity pricing, asset management, and looking at different fee structures.

But I think as we are really focusing on these types of opportunities, we have made good progress.

We currently have relationships with three of the largest producers in the Marcellus Shale and have over 300,000 decatherms per day currently under contract.

So moving to slide 21, just to summarize, in announcing our second quarter and year-to-date results and specifically reiterating on net financial earnings guidance, we are continuing our record of consistent performance.

As we look forward to the balance of fiscal 2010, we have the fundamentals in place to increase our net financial earnings as we have emphasized repeatedly, customer growth, AIP, and energy efficiency, Steckman Ridge also helping us.

We have the ability to continue to increase our dividend given our strong earnings and our relatively low payout ratio, which is particularly low when compared with our peer group average.

We have a strong financial profile, which facilitates access to capital.

We are working well with our regulators, and when you bring all of that together, we are continuing to build on a track record of growth and consistent results.

So, as I close, as always, I want to thank the almost 900 women and men of New Jersey Resources for their passion, their commitment to excellence in these changing times.

I also want to say thanks to our investors for the confidence that they have placed in us.

And, with that, we will open it up to questions and answers.

Thank you.

(Operator Instructions) Dan Fidell.

Good morning.

Just a couple of questions, I guess, first you had mentioned lower bad debt expense during the quarter.

Can you give us some specifics on where that's trending?

Maybe the specific numbers, quarter-over-quarter?

And then where do you think that improvement is coming from?

Is it slightly better economic conditions?

Is it better collection efforts?

Any kind of color you can give us on the bad debt number?

I'll make a comment, and then I'll ask Glenn to talk about that.

Basically, the impact of lower gas prices is helping us with the bad debt expense.

But I'll ask Glenn to talk to you in specifics.

Dan, it's a little bit of everything you mentioned.

The biggest, though, is, clearly, the lower gas costs and the amount of credits we've been passing back to customers have lowered just the amount of gas revenue, if you will, subject to collection.

Again, a sign of stabilizing economy -- yes, our writeoff activity has improved dramatically, and the collection efforts with regard to any writeoffs has also improved.

So a combination of both.

Year-over-year, my estimate is about $1 million.

It's improved, but later today we expect to file our 10-Q, and I know in the MB&A section of the 10-Q there will be some more specifics about that.

Okay, great, thanks.

And then maybe a second question on the solar contribution -- just a housekeeping question.

In the presentation material is says $4.8 million for the first three years.

Is that -- that is a pretax number, correct?

No, that's after tax, but it is a cumulative number.

It grows to about 4.8 after tax over three years.

Got it, okay.

And how big do you think the market can be?

You'd mentioned over-subscribed pretty significantly here just in the initial days.

Is this -- how big can this be?

5%?

10% or more of total customers or just kind of any general feel?

Well, one of the reasons we're doing it, and we're calling it a pilot program, Dan, is we're trying to get as much inflow as possible.

The problem is, so much of the market is going to be dependent on the physical topography and the positioning of [roofs] that isn't easily available through any market data.

So, for example, we're trying to find out, out of the inquiries we get, what percentage winds up have to go visit the house that you can legitimately even attempt to put an efficient solar system on.

So it's really too early to tell, I think, trying to quantify the ultimate market because of those issues.

Dan, we're going through the process right now, as Glenn mentioned, we put this out as a pilot.

The important aspect here, or a number of them, is, first of all, no up-front payments for customers, and they see savings on their electric bill compared with the incumbent provider immediately.

But we are going through more traditional market analysis customer focus groups right now to try and nail that down.

Great, and then just a final question -- on the AIP.

The economy, obviously, still sluggish, slight signs of improvement, but with job creation, I'm assuming still top of mind, especially in the state, could the AIP be extended?

Do you think there's a chance for a second round of what 2009, 2010 has been?

It would probably be too early to speculate on that.

We are -- we're working through the initial round, if you will, the $70.8 million, but I will also add to that, I think what should not be discounted is the economic development aspects of the SAVEGREEN project, which, if approved, would get another roughly $102 million of potential investment.

Ryan Rosenthal.

According to my math, the AIP program offers a total recurring annual benefit of about $3.6 million, which is roughly $0.08 per share.

Could you give us an update on your expectation for the percentage of these earnings this year and what's the time remaining for accretion in 2011?

I think we've publicly talked about this year we expect to spend, over the year, about $44 million, Ryan.

And then most of the balance between that and $71 million would be next year.

So you would have to run your economics using our weighted average cost of capital on the average spent.

So if we spent $44 million evenly over the year, you have to make sure you are averaging the fact that you, on average, have spent $22 million for a full-year's incremental impact.

That's why you don't see the full impact until after the program is actually over, and you've spent the entire $71 million where you would see the full impact of that math really in fiscal 2012.

It rolls up and then levels off in fiscal 2012.

Okay, so we haven't seen much of the benefit, to date, given that not much of the money has been spent.

Some but not -- clearly, not the majority of it.

And that's why Larry mentioned, part of the reason we are seeing some better comparables in the second half, especially given a construction schedule where a lot more construction will happen over the spring and summer and to the end of the year, you'll see the contributions from AIP start to kick in a little bit more substantially over the last half of the year.

Okay.

Then turning also -- the same with the utility.

Concerning the incentives programs that you have offered, and looking at that year-over-year, I believe last year you earned about $12 million.

It sounds like you're coming in a little bit less than that.

But the majority of the earnings will be in the second half of the year.

Is that just an earnings timing issue?

Yes.

In the press release this morning on page 10 you'll see that, year-to-date, we're about $2.5 million behind last year's level, which was an unprecedented level that wound up being about 12.1 for the year.

The reason we talk about the partial reversal of that is that, yes, we do see the full-year margin from those programs being a little bit less than last year but not nearly as low as the $2.5 million for the six months.

So we see an improvement year-over-year in the last six months versus last year.

Okay, great.

And just one question on the retail and other segment.

I know that that's excluded from your breakdown of the earnings guidance from the different segments, and I know that it has been an economically sensitive business and, also, I understand that Iroquois is no longer included since that's now part of the midstream business.

All that being said, I was curious about your expectation for the retail and other business, going forward, and what the earnings potential for that business is after its challenging period the last couple of years.

Yes, we continue to see the remaining home services activities to be about 1% to 2% of the overall earnings, and we see that being fairly stable.

Yes, it has not grown very quickly, in part, due to the economic issues going on.

We have seen, again, I like to use the word "resiliency," but in the service contract portion of the business, the installation is the one that has been impacted the economy.

(Operator Instructions) Jim Lykins.

Good morning, everybody.

With 20% to 30% of overall earnings to come from energy services, I'm wondering if that's because of some specific hedges you've got in place or if it's more because of an assumption of improving market conditions?

It's based on the value already in the book and, as you can see, for the six months we've got -- I believe it was over $26 million of earnings from that business and a very, what I think most people would agree, would be a very rough economic climate out there for marketing companies.

So it is the value of the business to date and using current market values on our positions for the rest of the year.

As we always talk about externally, we assume what we would call expected normal volatility over any time period.

We do not assume hurricanes and/or other issues that would typically generate unusual spikes in volatility.

So we're using current mark-to-market values and assumed what we believe is to be normal volatility for the rest of the year.

Okay.

And when you say lower operating expenses for energy services, is there any more color you can give us on that?

Yes, most of that is related to compensation expense.

Okay, but you don't want to give us a specific number, right?

I don't think that's appropriate, no, at this point.

Dan Fidell.

Just a follow-on question quickly.

Steckman Ridge did, obviously, very well during the period.

I'm just wondering, in terms of the contributions, should we expect this to be a normalized run rate for Steckman, or can we expect to see maybe a little bit of an uptick in earnings and the percentage of contribution total earnings and 11 in future years?

First year had some, in terms of startup costs, working their way off.

We have combinations of startup costs, normal first year of operations.

I would say operating issues, nothing major.

And I think we talked about almost all of the contracted space in the first year was strictly short-term marketer contracts.

We have publicly talked about two longer-term contracts that start next fiscal year, that even, just by themselves, would create better value in the future than what we've seen this year.

(inaudible) better of -- you know, an increase in contribution from Steckman Ridge, at least in year two versus year one, no doubt about that.

There are no further questions at this time.

I'll now turn the call back over to Mr.

Dennis Puma.

Okay.

Thank you very much.

I guess if there are no other questions, we will see you next question.

Thank you.

Bye-bye.

This concludes today's conference call.

You may now disconnect your line.