New Jersey Resources Corp (NJR) 2010 Q3 法說會逐字稿

Good morning.

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

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

(Operator Instructions.) I would now like to turn the call over to Mr.

Dennis Puma, Director of Investor Relations.

You may begin your conference.

Thank you, Chris.

Good morning, everyone.

Welcome to our—welcome to New Jersey Resources Third Quarter Fiscal 2010 Conference Call and Webcast.

I am joined today by Larry Downes, our Chairman and CEO; Glenn Lockwood, our CFO; 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 to be filed on or about August 5, 2010.

All of these items can be found at SEC.gov.

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 and they 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.

Before I start discussing our performance, I want to remind everyone, as Dennis just did, that I'll be making reference to forward-looking statements.

Slide Two in the presentation that hopefully you have in front of you lists the factors that could affect those statements.

They are listed here.

They are also in our 10-K and our 10-Qs.

And I would ask you to please take some time to review them carefully.

Moving to Slide Three, I will also be referring to certain non-GAAP financial measures, primarily net financial earnings.

And while we believe that this metric provides a better understanding of our performance, they are not intended to replace GAAP.

In Item Seven of our annual report on Form 10-K, which can be found on our website, we give you a more detailed discussion of all of the non-GAAP measures that we use, and again, I would encourage you to review that carefully.

So moving to Slide Four, I want to begin with a review of our third quarter and nine-month highlights.

As you saw this morning undoubtedly, we have reported very strong quarterly results, $0.28 per share of net financial earnings versus $0.03 last year.

All three major businesses showed improved results.

New Jersey Natural Gas in particular is having an excellent year.

Importantly, we have reaffirmed our guidance for net financial earnings again in the range of $2.45 to $2.55.

We made continued progress on our regulatory agenda and we also announced a number of solar projects.

Moving to Slide Five, you have a little bit more detail about our three-month net financial earnings performance.

For the three months, net financial earnings were 11.6 million or $0.28 per share compared with 1.3 million or $0.03 per share last year.

Nine-month net financial earnings were 200--$2.49 per share versus $2.52 per share last year.

You can see the improvement in New Jersey Natural Gas resulting from continued customer growth and lower operating expenses, primarily NGR Energy Services, improvement in the value of the storage book compared with last year.

And our midstream performance also improved because of higher earnings from Steckman Ridge.

Moving to Slide Six, as I said, we again reiterated our guidance in a range of $2.45 to $2.55 per share.

We expect that our utility and midstream infrastructure businesses will contribute up to 80% of net financial earnings while NJR Energy Services should be in the range of 15% to 25%.

Moving to Slide Seven, I want to speak to some of our other fundamentals despite the challenges posed by the economy, our customer growth remained steady.

New construction has slowed, but the commercial and conversion markets have been resilient.

In fiscal 2010, we expect just about an even split between our new construction and conversion markets.

Residential customers will contribute about 635 of our gross margins, but commercial customers will represent about 32%.

And as we indicated on the slide, over the next two years, New Jersey Natural Gas expects to add between 12,000 and 14,000 new customers, which would represent a growth rate of about 1.3%.

Moving to Slide Eight, on the regulatory front we continue to make progress.

As you know, earlier this year we were able to extend our CIP that is now in place until September of 2013.

This has been an important part of our overall rate structure.

It's protected margin from declining usage and weather, but at the same time customers have saved about $158 million as a result of the program.

Our AIP program continues to make progress as well.

We have the opportunity to invest up to $70.8 million and receive rate recovery annually at New Jersey Natural Gas Company's weighted average cost to capital of 7.76%.

AIP has been an important part in our efforts to support to economic development in the state.

We believe that up to 100 jobs have been created or sustained by the program.

And then, finally, we still have our pending SAVEGREEN filing.

We expect a decision in the fall.

That would expand our existing energy efficiency program by about $60 million with recovery to our existing energy efficiency rider, and we've also proposed a competitively priced leased solar project.

Moving to Slide Nine, on our clean energy strategy, we've got a number of key objectives there.

First of all, we're trying to support the state's environmental policy goals by lowering greenhouse gas emissions.

Secondly, we're trying to support economic growth through both job creation and lowering electricity prices for customers.

And then, finally, we're trying to develop a new source of long term earnings growth that is consistent with our core energy mission.

If we move to Slide 10, just a brief update on our solar program.

On the residential side, the first days of the residential solar program was well received.

Within a very short period of time following the announcement in March, we received over 900 inquiries.

We've signed more than 100 leases and we expect that the program will result in investment of about $4 million.

On the commercial side, our focus is on moderately sized commercial solar project opportunities.

They would include both rooftop and ground mounted.

We've given you some information here about the types of projects that we're looking at -- investments as little as $2 million up to $25 million.

We will be looking at both retail and wholesale energy transactions.

We believe the way that we've positioned the strategy will reduce our concentration risk, and as I said earlier, we also believe that it fits with our corporate investment strategy.

Moving to Slide 11, we recently announced two commercial projects.

The first one was a company called Adler Development.

That is a rooftop project that will use over 900,000 square feet atop four buildings.

It involves a 20-year lease.

The investment that we ultimately expect is about $17 million and almost four megawatts of capacity.

It should also generate about 4,200 SRECs annually.

And then, just recently we announced another transaction with CertainTeed Corporation, another rooftop project that will utilize over 300,000 square feet.

It will involve four buildings and also a 20-year lease.

The CertainTeed investment will involve about $5 million and a little bit less than a megawatt of capacity and the expectation is that the solar energy will generate about 1,000 SRECs annually.

So we're making good progress, as you can see in building that business.

Now, as we move to Slide 12, I just want to take a moment to talk about the economics.

We've talked about this in the past, but there are three sources of value that will come from these investments -- the investment tax credits that are generated, the sale of electricity to customers, and the SRECs that are generated as well.

The tax credits, because they are upfront, really reduce the capital we have at risk.

They represent a 30% investment tax credit and those are in place through 2016.

In New Jersey, we have a premium SREC value.

We've given some of the reasons why that is, but I think importantly is you can see that the--through the solar alternative compliance payment structure, that will be in place through at least 2017.

So we do see this as a sustainable business.

The payback period on these investments is relatively short, between four and six years.

And as we look at these investments, we use a market cost of capital to make sure that we are generating an appropriate rate of return on the capital that we are committing to these projects.

Moving to Slide 13, just an update on NJR Energy Services.

I think as everyone knows, the value of capacity in transportation has been affected by changing markets and additional supplies.

That has impacted the margins of NJRES as we have stated throughout the year.

However, we are continuing to focus on a long option strategy that has really been at the foundation of the success that we have achieved at NJRES and even in these difficult conditions you can see, as I said earlier, that we expect that NJRES will be between 15 and 25% of our net financial earnings in fiscal 2010.

Recognizing the changes that have gone on in that market, we have increased our focus on producer services, both on an asset management and a fee based structure.

And we have in place right now over 350,000 decatherms per day under management.

And then, moving to Slide 14, a brief update on our midstream assets.

As I said earlier, the good performance from our midstream assets has been driven by the results from Steckman Ridge this year.

Steckman, as you know, is a storage facility located in the Marcellus Shale in southwestern Pennsylvania.

It's got up to 12 Bcf of storage capability.

Year to date it's contributed $2.9 million to our net financial earnings and we expect that this year it will provide in the range of two to 6% of our net financial earnings.

So to summarize before we go to the Q&A part of our call this morning, as we announce our third quarter and year to date results, and specifically affirming our net financial earnings guidance for the year, we're continuing our record of consistent performance.

As we look forward to the balance of 2010 and 2011, we still believe that we have the fundamentals in place to increase our net financial earnings.

That will be driven by our continuing steady customer growth, some of our regulatory initiatives, the performance of Steckman Ridge, and the investments that we are making in solar projects.

That we think will continue to give us the ability to increase our dividends.

We do that looking at our strong net financial earnings performance and our relatively low payout ratio.

We continue to have a very strong financial profile, which facilitates the--our ability to access the capital that we need.

Working in collaboration with our regulators I think continues to be one of the important elements of New Jersey Natural Gas Company's strategy.

And when you put all of that together, I think we have generated a track record of really growth and consistent results.

So as always, I want to thank the almost 900 women and men of New Jersey Resources for their hard work, their dedication.

They are committed every day at work to meeting the needs of all of our stakeholders, and I am proud of what they've done and grateful for their efforts.

And finally, as always, thanks to our investors for all of the confidence that you have placed in us over the years.

So with that, let's go to the Q&A.

(Operator Instructions.) Your first question comes from the line of Ryan Rosenthal from Sidoti and Company.

Your line is now open.

Good morning, everyone.

Good morning.

Ryan, how are you today?

Great, thanks.

A couple of questions.

First, on the Marcellus shale capacity contract.

You added I believe it was 350,000 BTUs per day.

Could you discuss how quickly you expect to realize the benefit of that contract?

Well, I guess the--.

Hold on a second.

This is Steve Westhoven.

Go ahead.

Hey, Ryan.

The capacity producer services contracts that we have not only encompass the Marcellus Shale but in other regions as well.

And it's really comprised of a number of contracts.

So we'll be incorporating that in our numbers for this year when the contracts start and also next year.

And there's not really--we don't have a firm projection on when that's going to be.

Okay, thanks, Steve.

Just to get a sense perhaps, would you expect just in terms of order of magnitude, 10% of that to come online within the first year, or is it much greater than that over the course of the initial marketing?

Well, it will increase with the line of production as that increases.

So it's--the contracts are various terms and as that business continues to grow and progress we'll be able to determine how much that's going to contribute.

Okay.

And then, turning to utility O&M expense, certainly you guys did a great job reducing that by 1.5 million year over year.

Could you discuss the components that led to the lower cost and also your expectation for the longer term trend for utility expense?

Sure, Ryan.

This is Glenn.

Actually a positive for our operating cost this year has been lower wholesale gas costs, which have generated significant credits and lower gas bills for our customers, which in turn has lowered our bad debt expense pretty dramatically from prior years.

So of the various ins and outs of O&M, that's been the biggest reason why it's actually lower this year versus last year.

As always, we look at inflationary trends looking forward and strive to keep our O&M growth, if it is going to grow, to inflation type levels.

So it's my understanding that this is largely due to lower bad debt expense and going forward perhaps a better rate of inflation is more of a reasonable consideration.

That's how we normally talk about future planning, yes.

Okay.

And then, the strength of the solar projects, then I'll turn it over.

Could you address the 30% invest--Federal investment tax credits and how you'll realize this benefit, whether it will be over the 20-year life of the contracts you've signed or if it's more of a one-time basis earnings boost?

Yes.

(Inaudible) policy is for non-utility investments.

It would be an upfront one-time benefit.

I would just caution you that there's the 30% positive benefit that the tax credit--it's offset by approximately 5% negative deferred tax adjustment.

So the timing with that would be determined when these projects are actually and officially placed in service.

And there's a lot of operational issues that go along with being able to predict when that's going to be.

But in the year of the placement service, that's when we would realize non-utility, the IPC and related deferred tax impact.

Any regulated--any utility investments in solar would be spread out over time.

And that's because of some rate (inaudible) rules.

Okay.

Thanks.

Glenn.

I'll turn it over.

You next question comes from the line of Annie Tsao from AllianceBernstein.

Your line is now open.

Good morning, everyone.

Good morning, Annie.

Hi.

I'm just wondering in terms of your storage capacity in Marcellus, can you kind of walk through what kind of opportunity you see for growth in that area, and what's the outlook?

And for your investment right now, how much do you invest totally?

Because right now you said it's contributing about 2.9 million net financial earnings, which is about you said two to 6% for this year.

But what's your thoughts going forward in the opportunity of growing that area?

Can you just kind of elaborate that?

This is Glenn, again, Annie.

From a midstream asset investment, again, Steve already touched on the main area we're focusing on is trying to grow some producer services, which are not the asset based type investments that you're referring to.

Right now, it's been a fairly weak market for new storage capacity.

So right now, we're comfortable with our existing investment in Speckman Ridge.

There is potentially some additional capital needed in Speckman Ridge, but that's not been decided yet.

And as we talked about all year, in its first year of operation, especially with the short term contract being what I would call from a historical perspective at relatively weak pricing, we do expect to see some growth in that earnings year over year after its first year of operations going into next year.

But right now, we don't have anything to talk about as far as additional investments from a midstream perspective.

Annie, that market, as you know, changed fairly dramatically over the last three years.

So we'll look at things opportunistically.

But as Glenn said, our focus right now is on building the producer services and taking advantage of any potential incremental opportunities that might come along at Steckman.

Thank you.

Your next question comes from the line of Joanne Fairechio from CapStone Investments.

Your line is now open.

Thank you and good morning.

Larry, you mentioned that you're making good progress on your regulatory agenda and that you have the SAVEGREEN filing pending.

I wonder if there is anything else you're looking at on the short term horizon.

And I believe the AIP extends through next year.

Is that something you can extend further?

The AIP--we have to have that spending done I believe it's by the end of 2011, if I'm not mistaken.

We're always looking at different opportunities, none that we would be in a position to talk about publicly right now.

My point was more of the continued track record that we have had in really putting together a regulatory strategy that has benefited not only our financial performance, but just as importantly providing real benefits for our customers.

And we can--as I said in my remarks, I mean, we're--it's not just about the regulatory initiatives themselves.

It's how are those initiatives supporting some of the state's important policy initiatives and the two main areas being environment stewardship and economic development, which would include not only job creation, but as I said, doing what we can to reduce the cost of energy for customers in New Jersey.

Okay, thank you.

Sure.

(Operator Instructions.) Your next question comes from the line of Dan Fidell from Brean Murray Carret.

Your line is now open.

Good morning.

Hey, Dan.

Hey, Dan.

Hey.

Just a couple of questions.

Most of mine have been answered.

I guess it goes to the clean energy side of things.

Certainly you've been busy on the solar side with several projects layered in, too.

I'm just interested in how large I guess in terms of size you think you can grow the solar side of the business, and I guess if you can reiterate as well the threshold ROEs.

I think in the past you've said at least a few hundred Bps above the utility in terms of rate of return that you're looking for.

And then, as a follow on, are you interested in other areas of the clean energy space in terms of new investment?

Not so much the midstream, but other areas on clean energy.

I'll take the last question and ask Glenn to touch on the other ones.

Right now, the focus is on solar.

When we line up the opportunities that we see in the solar market and we try to align them with our fundamentals - focus on consistent performance, our core energy mission, our ability--our strong balance sheet and ability to access capital, we think solar makes the most sense.

Also, given the environment for solar here in New Jersey, we see that as a good opportunity.

We are in the process now of quantifying what the size of that market might be.

And when we come out with our year end numbers and our guidance for 2011, we'll be in a position to be more specific with you at that time.

Yes.

On the hurdle rates, Dan, that we use, the cost of capital is significantly higher than utilities.

We use a 15% return on equity hurdle with very little leverage in the cost of capital.

Okay, great.

That's very helpful.

Thanks.

And maybe just a follow on question on a different topic on share buybacks.

I noticed the average shares, again, going down quarter over quarter, year over year.

Just a quick question in terms of what's still left on the repurchase.

What are your efforts going to be as you see going forward into the fourth quarter and into next year?

Yes, we have about 1.7 million shares left under the authorized--from the Board of Directors.

And again, we're opportunistic with it.

We'll look at the liquidity in the stock and several financial factors before we go in.

But as you can see from what you pointed out, we've been very active this year to date.

I think just to build on that, opportunistic would be the key word.

We use that as--we view the share repurchase program as just another tool in the kit, if you will.

We've seen at least one transaction lately where a company went in and targeted a specific amount, went in there and actually bought the shares.

We view it, again, as part of our overall financial strategy and it's worked well for us over the last I guess it's 14 years now.

Absolutely.

Thanks, again, for your comments, and congrats on a nice quarter.

Great.

Thanks, Dan.

Your next question comes from the line of Roger Liddell from Clear Harbor Asset Management.

Your line is now open.

Thank you and good morning.

Hey, Roger.

How are you today?

Good.

Thanks, Larry.

I wanted to poke around at the distributed generation opportunity.

Can you give us a feel as to whether we should expect something meaningful to come out of that albeit over a period of time?

It seems to me that could be a significant growth opportunity and be driving electric costs down.

Roger, I think we missed a couple of words in the question you're asking.

You're asking me the question in regard to solar, correct?

No, distributed generation.

Oh.

Gas-fired.

Yes.

It's something that we're looking at right now.

Right now, the main focus is on solar.

I think in New Jersey, as you may well, there's--as you may already know, there's a look/see that's going on at the Energy Master Plan.

And I think that the potential opportunities there will become a lot clearer once that process is finished.

I think the state's goal is to try and get some additional clarity on those issues in the next I'd say four to six months.

So I would hold commenting on that until we see where the state comes out as far as the Energy Master Plan.

Okay, that's great.

Thank you, Larry.

Thanks, Roger.

And there are no further questions at this time.

Okay.

Okay.

Thank you very much.

Thank you all.

And we'll see you next quarter.

Thanks.

Bye.

This concludes today's conference call.

You may now disconnect.