New Jersey Resources Corp (NJR) 2010 Q4 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 fiscal 2010 year-end conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Dennis Puma, Director of Investor Relations. Mr. Puma, you may begin.

Thank you, Shannon. Good morning, everyone. Welcome to New Jersey Resources fiscal year-end 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 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, items in the forward-looking statements section of today's news release, filed on Form 8-K and our Form 10-K to be filed on or about November 24, 2010. All 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, 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. Good morning, everyone, and thank you for joining us. Before discussing our performance, I'd like to remind everyone that I will be making reference to forward-looking statements. Dennis just made some comments about that. Slide 2 lists the factors that could affect those statements. They are listed here, but 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.

On slide 3, you will see I will also be referencing certain non-GAAP financial measures, particularly net financial earnings. And while we believe that these metrics provide a better understanding of our performance, they are not intended in any way to replace GAAP. And item 7 of our annual report on Form 10-K, which can be found on our website, provides a more detailed discussion of those non-GAAP measures, and I would strongly encourage you to read that.

So let's go into the presentation now, on slide 4, fiscal 2010 highlights. As you saw from our announcement this morning, it was our 19th consecutive year of net financial earnings growth -- $2.46 per share compared with $2.40 last year. Last week, we announced an increase in the annual dividend rate of 5.9%, which will be effective January 3, 2011.

We had very strong results from New Jersey Natural Gas -- earnings of $70.2 million; we added 6189 new customers, which was 6% higher than last year. And our AIP spending was about $44 million.

We continue to make progress on our regulatory agenda with the extension of our CIP through 2013. Our SAVEGREEN Project was extended as well. And recently, we filed AIP II.

We announced a number of new solar projects. In addition to that, Steckman Ridge was profitable in its first full year of operation, and NJRES earned almost $25 million despite challenging market conditions.

If we move to slide 5, you can see our net financial earnings for fiscal 2010. For the year, we earned $101.8 million or $2.46 per share. That compared with $101 million last year or $2.40 per share.

You can see here the strong results from New Jersey Natural Gas, which reflected customer growth and lowered operating and interest expenses, and Midstream, which was primarily Steckman, although Iroquois continued to perform well, too. And that more than offset lower earnings from NJRES as a result of reduced volatility, something that the entire market experienced, and lower retail, which was lower NJR Home Services and the costs associated with our Clean Energy Ventures startup.

Moving to slide 6, as I noted, this was our 19th consecutive year of improved financial performance. Regarding fiscal 2011, we expect to issue guidance with our first-quarter results in early February that will enable us to be more specific about the pipeline of clean energy investments that we are looking at right now. We will also be able to better assess the impact of the winter on both NJRES and NJNG's BGSS incentives.

Moving to slide 7, as I noted earlier, we increased our dividend by 5.9%, the 16th consecutive year of an increase. The annual rate will be $1.44, and that will be effective January 3, 2011.

On slide 8, you can see our payout ratio, which this year at 55% remains low relative to our peers, and really helps us maintain an appropriate balance between payments to shareowners and reinvestment in the Company to support future growth. I would also note that our balance sheet remains very strong, with an equity ratio in excess of 50%.

On slide 9, going into some of our fundamentals, despite the challenges that have been imposed by the economy, our customer growth rate remained steady. We saw a 6% increase in total new customers in fiscal 2010, which, combined with existing customer conversions, will add about $3.3 million into margin annually. There was about an even split between new construction and conversion customers, and you can see from this slide that residential customers provided about 61% of new margin, commercial customers were about 34% and existing customer conversions made up the balance of about 5%. We are currently estimating total new customer additions to be between 12,000 and 14,000 during fiscal 2011 and fiscal 2012.

Slide 10 gives you an update on our regulatory initiatives. On the regulatory front, we continue to make progress. Importantly, our CIP was extended until September 2013. This has protected NJNG's margin from declining usage in normal weather, but at the same time, customers have saved more than $164 million.

AIP, our existing program is ongoing. We made another filing, and I will talk a little bit more about that in just a moment.

And finally our SAVEGREEN Project was extended in September through 2011. We were able to add new programs, and recovery of those costs will continue through an existing energy efficiency rider.

Slide 11 gives you more detail on our AIP. The original AIP was approved by the BPU in September of 2009. It had a number of objectives. It created up to 100 new jobs. We are recovering the costs of the program spending annually at our weighted average cost of capital of 7.76%. Obviously, the safety and reliability of our system is enhanced by these investments. And the first AIP included investment of $70.8 million. We've expended about $44.3 million through September 2010. And the increase in base rates includes $36.4 million of AIP expenditures included through August of 2010.

We filed for a second AIP program -- that was in October -- investment of $52.2 million on nine additional infrastructure projects. And when you look at the structure of the filing, it is the same as the previous AIP.

Slide 12 reviews our BGSS incentives. They generated in fiscal 2010 total margin of $58 million. The earnings contribution was $5.5 million, which was $0.13 per share. And since inception back in 1992, these programs have saved our customers almost $500 million, so they have been very successful from not only a customer, but also a shareowner point of view.

Moving to slide 13, our clean energy strategy, we had a number of objectives, as you know, in pursuing this line of business. We are trying to support state and federal initiatives to reduce greenhouse gas emissions. There is an important component that affects economic development through job creation, lower energy costs and business growth, and obviously, provides the Company the opportunity for earnings growth.

The pipeline that we are looking at right now is over $200 million in potential investments. But having more specific information about the timing of these investments is the primary reason for our issuing guidance in February. This is, as you know, a new business for New Jersey Resources.

Moving to slide 14, just to give you a brief update, as you know, we have residential and commercial investments. On the residential side, the first program that we announced back in March was very well-received; over 900 inquiries, more than 100 leases signed, and we will spend approximately $4 million on that program.

Last week, we announced that our Board had approved an additional $9.4 million. That will include 342 additional homes. And we currently expect that money will be spent over the course of fiscal 2011.

On the commercial side, as you know, we are focused on moderately-sized commercial solar projects, both roof-top and ground-mount. And we've given you some of the information on the types of investments that we are pursuing.

Moving to slide 15, just to review briefly the economics here, there are three sources of investment value. The Investment Tax Credits, which are recognized immediately. That is about 26% of the total value. But there is also the sale of the electricity, as well as the SRECs. And as you can see from the pie chart on your right, the SRECs generate about 61% of the total value.

The upfront nature of the tax credits reduce the amount of capital at risk. The investment tax credits are in place through 2006. In New Jersey, there is a -- 2016 -- excuse me. There is a premium SREC value in New Jersey, and you can see some of the elements there. But I think importantly is the Solar Alternative Compliance Payment; that is in place through 2017. So when we look at these investments, we are looking at a relatively short payback period, four to six years, and as we evaluate potential investment opportunities, we are using a market cost of capital.

Going to slide 16, just to talk about NJRES, as you know, the dynamics of that particular industry have changed and have affected all market participants. Nonetheless, NJRES was able to earn almost $25 million. You can see some of the issues that have affected the value of capacity and transportation, but we are maintaining a continued focus on our long-option strategy, making sure that our internal discipline regarding risk management is still in place.

We've also increased our focus on Producer Services, which as you know is more of an asset-management fee-based business, and we currently have more than 350,000 decatherms per day under management.

Go to slide 17, our midstream assets had a good year, driven by primarily Steckman Ridge. Iroquois also performed well, but the total contribution to net financial earnings in fiscal 2010 was $3.3 million.

So going to slide 18, just to summarize, in announcing our results this morning, we continued our record of consistent performance. And as we look to the future, we believe that we have the fundamentals in place to achieve long-term net financial earnings growth with the combination of our customer growth, some of our regulatory initiatives, our midstream assets and our solar projects.

We believe that performance gives us the potential opportunity to continue increasing our dividends. We are supported by a strong financial profile. We continue to work collaboratively with our regulators. And as we have shown in the past, we have demonstrated a track record of growth and consistency in our performance.

As always, as I close, before we take your questions, I want to say thank you to the almost 900 women and men of New Jersey Resources. They continue to do a great job in changing circumstances, and I am proud and grateful for what they've done. And finally, I just want to say thank you to our investors for the confidence that they've shown in us.

With that, we will open it up for questions and answers.

(Operator Instructions) Daniel Fidell, Brean Murray, Carret.

Just a couple of follow-up questions on mine. First, on the AIP II, can you give us a little bit of color just in terms of what the outlook for approval of that extension would be? I know the first round went very well, seemed like everyone really liked it. Is that sort of your read on things?

Yes, that is currently our read on things. We've had some preliminary discussions, and we anticipate that those discussions will continue and we're hopeful that we will have a Board [EPU] decision in January timeframe.

Okay, great. In terms of -- just switching topics quickly, on customer growth, if you could just maybe talk a little bit about the trends you saw this last period, where are conversions. And if you can maybe reconcile the gross number from the net number as well, that would be helpful. Thanks.

I'll take the first part and then I will ask Glenn to take your last question. We've seen -- despite some of the challenges in the economy, we've seen our growth rate remaining at about 1.3% on the conversion side. That is a market, as you know, we pursue that aggressively, and we enjoy a significant price advantage over other forms of energy. And we've seen good balance between the residential and the commercial side. All of that is what supports our projection of between 12,000 and 14,000 new customers.

The other element that I touched on briefly -- it's on the slide -- is we are still getting roughly 670 existing customer conversions as well. So that remains a good market as well. But I think when you look at what our growth rate is relative to the industry, we are still doing pretty well.

On the number of customers, the way we count customers is based on active meters. So being somewhat still some seasonal activity, you will have turn-ons and turn-offs that would impact the customer number net. And there are some, based on the economy, some people or businesses shutting down and not having -- being replaced by the end of the year. So it is a combination of some seasonality on the turn-offs and some impact of the economy. The relationship of the gross and net number has been pretty steady for the last several years.

I think an important number, too, is what the expected margin contribution coming from the new customer additions is, roughly $3.3 million.

Good. That's helpful. Last question for me and I'll let someone else ask a question. Just on the energy marketing side, I know that you are not giving at this point the overall guidance. Seems like there is a lot of irons in the fire with these solar projects and AIP extensions, et cetera.

But just can you give us maybe an update of how things have gone just for the quarter to date, just in the sort of October/November timeframe, how things are trending on the marketing side?

To be honest with you, it's probably too early to comment on that specifically in terms of numbers. I can ask Steve Westhoven to talk maybe a little bit about market conditions; but to give numbers at this point, that would be premature.

The market continues to have some volatility due to some of the weather that is happening over October and November. And with the emerging shale plays and the new production coming online, there is a lot of needs in the marketplace, transferring some of these production areas from traditionally what has been the Gulf up to these new production areas.

So we are working hard to ferret out some of those markets and to try to expand our business and take advantage of some of the needs of some of the new market participants.

Great. Thanks, as always, for your comments, guys.

John Hansen, (inaudible).

Two questions. One, I'll just follow up on Dan's on the energy services business. What has to change for that business to start looking better again? What kind of drivers do we look for out in the markets or wherever on that?

I'm sorry -- can you say that one more time?

On the wholesale market, what market drivers do we look for to get that business to be less challenging than what it had been?

You know, I think there are quite a few things that are going to have an impact in the market. The obvious ones of the overall economy and getting some of the macro issues back online in order to drive some growth would be helpful.

But you also have, like I had mentioned before, a dramatic change in the marketplace from where production was once being produced traditionally in the Gulf and some of the western regions now being shifted to some of the market areas that are closer to the northeast. And I think that shift has just made some challenging market dynamics.

So I think a combination of the two is getting the markets settle down a little bit and figure out exactly where all this production is going to come from, as well as getting the return back to maybe some more normal historical economic conditions in the US would be helpful as well.

I might ask about Steckman Ridge. Can you remind me again what the contract status is of that facility?

We haven't publically talked about the exact percentages, but it is fair to say that a portion of it is contracted out over long period of times, and there is some of the states that is on a short-term basis. So we haven't publically given the exact percentages, but it is a combination of both.

Okay, great. Thanks, guys.

(Operator Instructions) There are no further questions at this time. I would now turn the call back over to Mr. Puma.

Okay. Thank you very much, and enjoy your Thanksgiving, and we will be in touch on the next call. Goodbye now.

This concludes today's conference call. You may now disconnect your line.