New Jersey Resources Corp (NJR) 2011 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources first-quarter 2011 earnings call. 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).

I would now like to introduce the Director of Investor Relations, Mr. Puma. You may go ahead, sir.

Thank you, Michelle. Good morning, everyone. Welcome to New Jersey Resources fiscal first-quarter 2000 conference call and webcast. I'm 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 on 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 our 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 in today's news release, filed today on Form 8-K and on our Form 10-Q to be filed on or about February 3, 2011. 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'd like to also 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. Thanks for joining us today. I do have a PowerPoint presentation as Dennis mentioned. So I hope you are able to access that.

And I will begin on slide two by reiterating something that Dennis said regarding forward-looking statements. As I make my presentation this morning, I will be making forward-looking statements and our actual results will be affected by many factors, including those that are on slide two.

And again, I would encourage you to look at our 10-K where the complete list is included and please review them carefully.

Moving to slide three, I will also be referring to certain non-GAAP measures such as net financial earnings which we refer to as NFE, as I present our results. We believe that net financial earnings provides a better measure of performance. However I want to stress that these non-GAAP measures are not intended to be a substitute for GAAP in any way and they are discussed more fully in item 7 of our 10-K and once again I would strongly encourage you to please review that section of the 10-K.

So let me begin by moving to slide four. And as you can see we are off to a very strong start in fiscal 2011. We announced this morning net financial earnings for the quarter of $0.71 per share compared with $0.66 last year. That represented a strong 7.6% increase.

We are also announcing our NFE guidance for fiscal 2011 in the range of $2.50 to $2.65 per share and we expect that 60% to 70% of that will come from New Jersey Natural Gas. We also during the quarter implemented a 5.9% dividend increase, which is effective January 3, 2011. As I said New Jersey Natural Gas is having an excellent year, steady customer growth. The impact of our AIP investments as well as higher BGSS incentive margins are all influencing that performance.

We've made progress on our solar strategy and also we had a positive earnings contribution from both NJRES as well as our midstream access.

Moving to slide five, I just want to spend a few moments talking about our business model, which is based upon the fundamentals and guides our investment decisions. The fundamentals, I think, are pretty straightforward. At our core we are an infrastructure asset management and service company. We maintain a strong financial profile. You can see that as you look at our credit ratings.

We also maintain a very disciplined internal capital allocation process and focus on excelling in a variety of the stakeholder relationships. And it remains our belief that if we execute those fundamentals properly, the result will be consistent earnings and dividend growth.

As we look at our business segments, our largest segment is Natural Gas Distribution where our focus is on safety and reliability, competitive pricing for our customers, steady customer growth, looking for new rate based growth opportunity and our incentive programs. In the Clean Energy and Retail Services sector we have a focus on residential solar programs, commercial solar projects and ground mount solar farms as well as residential and commercial service contracts, installation and repair services.

And then finally in Wholesale Energy Services we are a physical natural gas marketer. We provide producer services, managed storage and transportation assets, and evaluate and look for synergistic midstream investment opportunities.

So that gives you, I think, a very clear sense of the areas that we are focused on.

Moving to slide six, let me come back and review the first-quarter net financial earnings. As I said for the quarter the NFE per share was a strong $0.71 versus $0.66 per share last year, a 7.6% increase. Those results, as you can see from the chart, were driven by the performance of New Jersey Natural Gas Company. You see the improved performance for NJR Energy Services, which reflected lower O&M expenses.

Moving to slide seven, for fiscal 2011, we are providing initial net financial earnings guidance of $2.50 to $2.65 per share. If we are able to achieve this, it would represent the 20th consecutive year of improved financial performance which we believe remains the longest streak in the utility industry.

Moving to slide eight, we give you a little more detail about the components of that guidance. As I speak with you this morning, we currently expect that New Jersey Natural Gas will provide between 60% and 70% of net financial earnings. Clean Energy Ventures will be between 10% and 20%. Our Midstream assets and NJRES each will provide between 5% and 10% and NJR Home Services will provide between 2% and 5%.

But if you look at those numbers carefully, taken together, our infrastructure businesses are expected to contribute up to 90% of our fiscal 2011 net financial earnings.

Moving to slide nine, the continued strength of our performance combined with our strong financial profile enabled us to increase our annual dividend by 5.9% to an annual rate of $1.44 per share. That increase was effective January 3, 2011. It was the 18th increase in the last 16 years.

When you look at our growth rate relative to our peers, it remains higher. And at the same time we have been able to maintain a below peer group average payout ratio which helps support our strong financial profile as well as supporting future net financial earnings growth.

Moving to slide 10, I want to talk a little bit about our customer growth. During the quarter, we added 1,640 customers which was a 6% increase over the same period in fiscal 2010. We expect that these new customers will add about $900,000 in new gross margin each year.

When you look at the components of the new customers, we had about an equal split between new construction and conversions, although looking at the margin you can see that residential customers contributed more than 60% of gross margin.

Now as we look out to the future, we expect to add between 12,000 and 14,000 new customers during fiscal 2011 and fiscal 2012 and annual margin growth from these new customers is expected to be around $3.3 million.

Moving to slide 11, to give you some sense of how Natural Gas is doing versus other competing fuels, certainly you can see the advantage that we have in our marketing efforts of being aided by the strong price advantage that we currently enjoy over competing fuels which is creating economic value for our customers. This price advantage has certainly helped us in attracting new conversion customers.

Moving to slide 12, which discusses our BGSS incentives, I think as many of you recall, these programs have been in place since 1992 and in total have saved customers more than $500 million since inception. During the first fiscal quarters, first fiscal quarter of 2011, [sharing] has realized total margins of $2.7 million compared with $2.4 million last year.

I think the other important point here is that we have been able to work collaboratively with our regulators to create incentive charts and structures that benefit our customers, our share owners and the state of New Jersey.

Moving to slide 13. As you can see, our regulatory agenda remains active. Our Conservation Incentive Program, or CIP, is now in place through September 30, 2013. That has been an important tool in giving us the ability to encourage customer conservation. In fact when you look at the dollars customers have saved since the inception of that program in 2006, they totaled more than $174 million. And at the same time, the structure projects New Jersey Natural Gas gross margin from declining usage in warm weather.

Our accelerated infrastructure program, the initial program calls for investment of $70.8 million. Since its inception in 2009, we have spent about $56 million. That is through December of 2010. And of that amount $36.4 million is now included in base rates.

And I would remind everyone that great recovery of the program spending is at our weighted average cost of capital of 7.6% from our last rate case.

And I think also it's important to focus on the economic development aspects of the AIP. Because we estimate that an additional 700 direct and indirect jobs have been created because of AIP.

In October, we filed with the Board of Public Utilities for an additional $52.2 million. And in a filing that we made in January, that total has increased to $60.2 million, and is going through the regulatory process right now.

Moving to slide 14, I just want to spend a moment talking about our SAVEGREEN Project, which is our umbrella for a variety of programs and incentives for customers. And it's designed to encourage energy efficiency.

SAVEGREEN continues to perform well. It was extended by the BPU in September through 2011. When you look at how the program has grown, you can see that we have almost 700 partners, substantially higher than 2009. And the $10 million in incentives that we have provided has created an estimated $40 million in economic activity.

Recently we included an on-bill repayment program which helps customers fund the energy efficiency upgrades and making it easier for them to pay for them on their bill. But from a regulatory and financial perspective, the costs associated with SAVEGREEN are recovered through a regulatory [rider], again at the weighted cost of capital of 7.76%.

Now going to slide 15, I want to spend some time on our Clean Energy strategy and just make some high level points as to why we think this is an appropriate strategy for New Jersey Resources.

First of all, it is consistent with our core energy strategy. It helps our customers by saving them money on their electric bills. It is supporting the state's economic development and job creation agenda. It is also supporting New Jersey's environmental goals, and from the shareholders' perspective it is an opportunity to invest capital and create shareowner value.

Moving to slide 16, from a financial perspective these investments offer three sources of value, the investment tax credits, the energy sales and the value that comes from the SRECs. And you can see from the pie chart the relative contribution of each one of those sources of value.

The tax credits reduce the amount of capital at risk. The investment tax credit at the federal level was in place through 2016. Obviously you can see the 61% of the value that comes from the SREC market. The existing Solar Alternative Compliance Payment is priced through the year 2017 and when you look at New Jersey, relative to other states, the state's commitment to clean energy has created an attractive SREC market.

When we look at these -- when we look at these investments, they do have relatively short payback periods of four to six years and when we look at the cost of capital associated with them in doing our valuation, we do use a market-based cost of capital.

Moving to slide 17, to get into the details of our residential solar program. As you may recall, the first phase of the residential solar program was offered in March of 2010. It was a very successful pilot. We were very pleased with the response that we got in terms of interest from potential customers and we will invest approximately $4 million.

Last week we announced an expansion of that program with the launch of The Sunlight Advantage that creates an opportunity for an additional 350 or so customers. We anticipate that the investment associated with that will be $9.4 million.

Some of the things that we are doing to expand the program is growing our network of installation contractors, which certainly has economic development and job creation implications. And in the first week since we made the announcement, we received over 200 inquiries from potential customers. So we are pleased with that.

Moving to our commercial solar program, just a reminder we continue to make progress with the implementation of that strategy. And the areas that we are focused on are rooftop and ground-mounted solar installations. In terms of megawatts, range from 0.5 MW to 10 MW project. We are looking at both retail and wholesale energy transactions.

And as we evaluate this and I go back to our business model slide, we are looking at multiple stakeholder value streams including the creation of additional earnings opportunities for the Company. We expect to complete two rooftop projects in February, a total of $8.5 million of invested capital and a plan to invest in fiscal 2011 in the range of $40 million to $60 million.

We have identified a multiyear pipeline of projects. That totals about $250 million and those projects are in various stages of review and development. Our plan right now is to hold an investor conference in March that will address the entire solar strategy, including the pipeline in further detail.

Shifting to our midstream assets, the performance of those assets during the first quarter was steady contributing about $1.7 million to net financial earnings. We expect that that contribution will be between 5% and 10% in fiscal 2011. And just to make a point on Steckman Ridge, which as you know is our joint venture with Spectra Energy, Steckman Ridge now has about 30% of its capacity under long-term contracts.

Moving to slide 20, NJRES Energy Services generated $3.2 million in net financial earnings during the first quarter, despite changing market conditions. And I think as everyone knows, those changes have affected the value of our capacity and storage assets and have reduced the number of optimization opportunities.

But in response to that, we have been looking at new margin opportunities, such as producer services, but we still expect a lower contribution to consolidated net financial earnings in 2011 compared with 2010.

On slide 21, just to bring all of our performance numbers together and what that has meant for our shareowners, if you look at our one-year return through the end of December, a compounded return of 19% versus 18.5% for our peers and 14.8% for the S&P 500. And if you take a little longer view over five years, you'll see a compounded return of 11.9% annually versus 8% for our peers and 2.1% for the S&P 500.

So as we announce our first-quarter results today and establish our guidance for fiscal 2011, we expect to continue our reputation for delivering consistent results. As we look forward to the balance of 2011, we believe we have the fundamentals in place to achieve long-term net financial earnings growth. That is driven by our core customer growth, our regulatory initiatives, our solar project, our bit stream access. That in turn should give us the ability to increase dividends.

Our Company's ability to access capital is supported by our strong financial profile and access to liquidity, which continue to maintain collaborative relationships with all of our key stakeholders including our regulators. And we have established, I think, a very strong track record of growth and consistent financial results.

So as always, as I end and we take Q&A, I want to thank the employees of New Jersey Resources for their dedication. They make everything that we have accomplished possible and I want to say thanks to our investors for the confidence that they continue to show in us.

So with that, we would be happy to take your questions. Thanks.

(Operator Instructions). Jim Lykins from Hilliard, Lyons.

First, a couple of questions about solar. I think Larry said there was about $250 million in the pipeline for solar. I am hoping you can give us some more color on that. Maybe if you can tell us anything about what types of projects these are, anything related to the timing will be very helpful? What can you tell us about the pipeline?

It is $250 million. As I said we are focused on rooftop and ground-mounted systems. But what we are going to do, those are in various stages of evaluation right now and our plan is to really drill down on that in further detail in March.

I would add that we did disclose today that we do expect to invest this year $40 million to $60 million on the commercial side and about $9.4 million on the residential side.

What we are seeing there is very good interest. The market here in New Jersey is strong on both the commercial and the residential side.

Okay, you said $40 million to $60 million on the commercial side and was it $9.4 million on the residential side?

$40 million to $60 million in total.

Okay. And -- well, let me ask this. You are looking to drive about 10% to 20% in solar this year. Would you guys be willing to give us any kind of idea what you think that number might look like next year?

We haven't put anything out in terms of guidance for 2012.

What about the SREC market? It's -- can you give us a feel for what is going on there? Is that actively up and running right now? I know you are looking to drive a pretty big percentage of the solar revenues from that part of the equation.

I am going to ask Rick Gardner or Stan Kosierowski to respond to that.

[Hell, I don't know]. NJNG Services will actually monetize the SRECs. We are seeing a market out there that is a good spot market and a market really to match up with the BGS requirements and sell three-year strips. There is opportunity to sell longer strips as well, but the focus will probably be in that three-year to match the BGS.

Okay, so does that mean that there aren't any revenues coming in right now from SRECs?

We are earning SRECs right now on (multiple speakers)

You are, okay.

Residential properties, and you know, we have a portfolio planned to monetize them throughout the year.

I think it is important to understand that the commitments here in New Jersey with the renewable portfolio is standard in the solar carve out and the [SACP], the alternative compliant to payment plan really is supporting a strong market for SRECs.

So when you say that 61% is going to come from SRECs, you feel pretty good about that number?

Yes.

Well, that's helpful. Alright I will -- that's all for now.

Joanne Fairechio from CapStone Investments.

I have two questions for you. Can you comment on what you see going on in the new housing market, the conversion market, you know, for the utility? And then really as a follow-up to Jim's questions, Larry, I note you can't comment too specifically on future earnings, but using your crystal ball here today, where do you see Clean Energy ventures heading? Can it become a much larger piece of your business and earnings or does it peak out somewhere? Or does it really follow what the state mandates companies to do?

How do you see that sort of playing out without really being too specific?

Let me take the first question. On the new customer growth we've seen, as you heard me say steady growth, we -- last year we added 6,200 new customers, basically split between -- even split between new construction and conversions. We are comfortable with that, the estimate that I put out there in my presentation between 12,000 and 14,000. And that should contribute $3.3 million of new margin annually.

And I think when you look at --, that should equate to growth somewhere in the 1.5% range and I think you'll see that that -- we think that that will stack up pretty well versus our peers. Clearly, the conversion market has been an important part -- has been an important part of our growth rate. And we see that continuing going forward.

But the demand for natural gas in the service territory remains strong for all of the benefits that you are certainly familiar with environmentally and pricewise.

So as I said, we are comfortable putting out roughly 6,000 new customers, 6,000 to 7,000 new customers each year. I cannot comment beyond what we have put out there because we've not put anything out on the Clean Energy side. I would just reiterate some of the fundamentals that I've stated here this morning regarding what we consider to be a strong market, strong overall market for solar here in New Jersey, really, the desire of customers to save money on their electric bills while being more environmentally responsive and the economic opportunities that that creates for us.

So our purpose here this morning is to give you a sense of what we see this year and we are communicating that through the initial guidance. But at the same time, to give you a sense of what we think are strong fundamentals right now in New Jersey.

Mark Barnett from MorningStar.

Good morning. Quick question on the AIP filing. You said it was $60-plus million additional that you had updated in January, was that correct?

Correct. Yes.

Do you have maybe a time line for when you might know on the approval for that number or --?

I am going to ask Mark Sperduto, our VP of Regulatory Affairs, to comment on that.

Right now we are, as Larry mentioned, we are going through the regular process. We have [settlement] discussions upcoming a little bit later this month and the current schedule I anticipate that the Board will make, the [BPU] would make a decision sometime late March early April.

Are you getting a sense that there's still a lot of support? You know, you had mentioned a jobs number which sounded pretty healthy. Do you get the sense that there's still a lot of support for additional spending along these lines?

Yes. Currently we do.

And second question on the services side. What's affecting storage values? Are there some positive drivers out there that you see? Just a general commentary I guess on sort of the Marcellus dynamics since you guys are pretty active out there on the market?

I'm going to ask Steve Westhoven from NJRS to give you a general market update from his perspective.

The storage value has been driven by the spreads in the NYMEX which have come in quite a bit more than where they were historically. The new Marcellus production that's come into place now has really created a lot of turmoil in the market and a lot of uncertainty. And certainly a little bit of volatility as well.

So we look at the current weather that we've seen along with the future change in the market in some of the Marcellus areas and see positive for some parts of our business.

Great. That's all I have today. Thanks.

(Operator Instructions). Dan Fidell from Brean Murray.

Most of my questions were asked and answered. I just have one or two others. I guess first a quick housekeeping question.

On your 2011 guidance, can you -- it didn't show [a return to] material, but do you have an effective tax rate assumption that you can share with us on the 2011 number?

Well, in the quarterly numbers that we sent out were published today, we were very conservative in the number of projects that we counted for the effective tax rate. So I believe you will see in the first quarter the effective tax rate is around 35%, 34%. Something like that. We will, and according to the accounting rules, update that each quarter and apply that new estimate to each quarter's results.

So as we get closer into the year and more construction is actively underway, we will fine tune that to get to the -- by the end of the year, obviously, the actual effective rate.

Thank you. Maybe one other just quick follow-on question. Focus very much on the Clean Energy obviously given the positive SRECs and ITCs, etc. I wonder if you could just give us a quick comment on the appetite you guys currently still have for the midstream? I know longer term you said that it is an area of interest, but just any kind of color you can give us in terms of whether or not you see maybe some opportunities in the next year in that area?

I think the --. This is the word we use to describe that as I said in the business model was looking for synergistic investment opportunities.

Is there anything we should be expecting, I guess? It seems like very much the focus is on the Clean Energy side, but should we not necessarily assume that the midstream is not still a significant focus for you guys?

We communicated that to the guidance with the 5% to 10%.

Thank you very much.

I have no further questions at this time. Mr. Puma, I turn the call back over to you for closing remarks.

All right. Thanks, Michelle. I guess this concludes today's conference call. We thank you all for listening and see you next quarter. Thanks. Bye.

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