New Jersey Resources Corp (NJR) 2011 Q2 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources second-quarter fiscal 2011 results conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Dennis Puma, Director of Investor Relations, you may begin your conference.

Thank you, Tracy. Good morning, everyone. Welcome to New Jersey Resources' second-quarter fiscal 2011 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 estimate or control 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 this morning on Form 8-K and on our Form 10-Q to be filed on or about May 5, 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 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. I just want to start out by reiterating what Dennis has said about the forward-looking statements. I will be referencing forward-looking statements during my presentation today and I think, as everyone knows, our actual results will be affected by many factors, including those which are listed on slide 2 of the presentation.

I would also note that we have added some new ones, so I would again encourage you to please read those carefully.

Also, if you move to slide 3, I will be referring to certain non-GAAP measures, the largest one being net financial earnings or NFE. We believe that net financial earnings provide a better measure of our performance. However, these non-GAAP measures are not intended to be a substitute for GAAP and we discuss them more fully in Item 7 of our 10-K.

So moving to slide 4, let me begin with the highlights of our second fiscal quarter and our year-to-date results. I think as you can see, fiscal 2011 is shaping up as another strong year for the Company. We announced our net financial earnings this morning for the six months ended March 31. They were $2.33 a share compared with $2.20 last year and that represented a 5.9% increase.

Also, we are reaffirming our net financial earnings guidance for the year, that being a range of $2.50 to $2.65 per share. Earlier in the fiscal year, we implemented a 5.9% dividend increase. That was effective January 3, 2011. Our results are being driven by very strong performance from New Jersey Natural Gas, which continues to experience steady customer growth, higher BGSS incentive margins and margin from our AIP investments.

We are also making good progress on our Clean Energy strategy. Two of our Adler projects are now in place and we received a positive earnings contribution from Midstream and NJR Energy Services.

Moving to slide 5, we see some of the details from our six months net financial earnings. As I said, they were a strong $2.33 per share. The results driven primarily by the performance of New Jersey Natural Gas. They were also helped by investment tax credits generated from our solar investments through NJR Clean Energy Ventures and this more than offset the expected lower results at NJR Energy Services.

Moving to slide 6, again, this year, we are estimating net financial earnings of a range of $2.50 to $2.65 per share. That would be our 20th consecutive year of improved financial performance, a record that we are certainly very proud of.

Moving to slide 7, you can see a bit of a breakdown when you look at the guidance where we expect that the actual earnings are going to come from and clearly, the majority of those are going to come from New Jersey Natural Gas. But if you look at our infrastructure businesses taken together, we think that they can contribute up to 90% of our fiscal 2011 net financial earnings.

Moving to slide 8, and just reflecting a bit on our dividend growth track record, again, we increased the dividend again this year to an annual rate of $1.44 per share. It was the 18th increase in the last 16 years. Our dividend growth rate remains higher than the peer group average and at the same time, we are maintaining a below-average payout ratio, which is giving us the opportunity not only to maintain the strong financial profile, but to reinvest in the Company to support future net financial earnings growth.

Let me turn now to some of the key fundamentals of the Company on slide 9. You can see our customer growth rate. We are actually -- we are having pretty steady customer growth this year. In the first six months of the year, we added just short of 3100 new customers. That represented a 23% increase over the same period last year and we expect that these customers will add about $1.6 million of gross margin each year.

Now, if you look at the pie chart on the top, you will see that new construction has slightly outpaced conversions through the first six months of the year, but if you look at the bottom pie chart, you can see that residential customers contributed more than 60% of gross margin.

If you think back to our earnings call in March, the split between new construction and conversions was about 50/50. So we are seeing some recovery in the new construction market. As we look out not only through this year, fiscal 2011, but also fiscal 2012, we expect to add between 12,000 and 14,000 new customers. The annual gross margin from these new customers should be about $3.46 million each year.

Moving to slide 10, natural gas is enjoying a distinct price advantage over competing fuels in our service area and that is certainly helping us on the conversion side. But you can see the differential in terms of price between natural gas and electricity. So we are certainly benefiting from where gas prices have been in recent years.

Going to -- slide 11 is an update on our BGSS incentives and we are having a very strong year. You can see for the six months ended March 31 the incentive margins were $6.2 million. That compared with $5.4 million. I think very importantly when you look at how these programs have benefited not only our shareowners, but our customers who have saved more than $500 million since these programs were initially put in place about 19 years ago, we have been able to continue our work with regulators to do that in collaboration and create structures that are benefiting both our customer shareowners in the state.

I would also point out that, on April 1, we filed with the BPU for an approval of a five-year extension of our current margin sharing incentive programs and if approved that would take us through October 31 of 2016.

On slide 12, just a quick update on our regulatory strategy. Our conservation incentive program continues to perform very well. It is currently in place through the end of September 2013. As you know, we originally put this in place back in 2006 as a way to encourage customer conservation and protect New Jersey Natural Gas Company's gross margin from declining usage and weather. The results have been very strong. Customers have saved over $180 million since we started it.

And just to talk a little bit about our accelerated infrastructure programs, which we refer to as AIP, our AIP I involved an investment of almost $71 million. We have expended $61 million through March. $36.4 million of that is now included in base rates and we are getting rate recovery of program spending at our weighted average cost of capital of 7.76%. And at the end of March, also another $60.2 million was approved by the Board of Public Utilities. So that program has worked well in achieving a number of important objectives, not only for the Company, but also for the state.

Going to slide 13, I want to switch and talk a little bit about our Clean Energy strategy. Just to remind those on the phone of our rationale for being in this business, first, it is an opportunity to create shareowner value. Secondly, it is consistent with our core energy strategy. Third, it can provide savings for our customers. Fourth, it can promote economic development and job creation. And then finally supporting New Jersey's environmental goals and we think when you put all that together, it is a business that makes sense for us to be in.

Now, moving to slide 14, there are three sources of value here. We covered this in detail at our analyst conference back in March, but it is the investor tax credits, energy sales and the SRECs. The tax credits are in place through 2016. They reduce the amount of capital at risk -- the investment -- I'm sorry -- the SREC market supports the investment in New Jersey. The existing solar alternative compliance payment that is priced through 2017 and New Jersey's commitment has so far led to an attractive SREC market.

We like this business. One of the reasons is the relatively short payback period of four to six years and I think it is also important to note that, when we are evaluating potential investment opportunities, we are using a market cost of capital.

Just an update on some of the programs, on slide 15, you can see our residential solar program. The first phase of that was offered in March of 2010. We have created -- we have completed 85 installations and have invested approximately $3.4 million. Our Sunlight Advantage program was an opportunity for an additional 350 customers. Through March, we had signed almost 300 leases. The average size of 7.6 kilowatts, actually a bit higher than our original expectation and we expect, at this point, to commit about $9.3 million.

We are doing this business through a network of installation contractors, which is certainly helping job growth here in the state. That network continues to increase and we have received over 800 inquiries since the announcement of the Sunlight Advantage.

Moving to slide 16, on the commercial side, as you know, we are focused on rooftop and ground-mounted solar installations. We have got some pretty specific parameters as far as size. We are looking at both retail and wholesale energy transactions. Our plan right now in fiscal 2011 is to invest a total of between $40 million and $60 million on the commercial side. We have also been developing a multiyear pipeline of potential projects, which totals now over $250 million. And again, I would emphasize, as we did back in March, that those projects are in various stages of review and development right now.

So looking at some of the specific commercial solar projects that we are looking at on slide 17, two projects which we refer to as our Adler projects, have been completed totaling about 2 megawatts and consisting of about $9.2 million of investment capital. You probably saw that we announced yesterday our first ground-mounted project, Manalapan Village, which involves 13 acres of land in Manalapan, New Jersey, an $18 million project totaling 3.6 megawatts, which is about enough power to provide electricity to 450 homes annually. The power will be sold to the wholesale grid and we currently expect that that project will be completed in the fall.

Moving to our Midstream assets, overall this year, the Midstream assets contributed about $3.9 million to our net financial earnings and we expect that the total for the year will be somewhere between 5% and 10% of fiscal 2011 net financial earnings. I think it is important to note that approximately 30% of Steckman Ridge capacity is now under long-term contract. Steckman Ridge, as you recall, is our joint venture with Spectra Energy.

And then turning to NJRES on slide 19, I think as everyone is certainly aware the value of capacity and storage has been affected by changing markets. We have seen some diminution in our margins, but we do continue to focus on our long option strategy, which has served us very well in the past. And that is supported, of course, by very disciplined risk management processes inside the Company.

We have increased our focus on producer services and currently have over 350,000 dekatherms per day under management. The contribution for the first six months of this year to our net financial earnings from NJRES was $19.2 million. That compared with $26 million last year and as we have previously disclosed, we expect a lower contribution to overall 2011 net financial earnings somewhere in the range right now we think of between 5% and 10%.

So turning to slide 20, just to summarize where we are in making our announcement today and affirming our guidance for fiscal 2011, we expect to continue our reputation for consistency. As we look to the balance of fiscal 2011, we think we have the fundamentals in place to achieve our long-term net financial earnings growth targets, a combination of core customer growth, our regulatory initiatives, our investments in clean energy. That supports our ability to increase dividends while maintaining a strong financial profile to make sure that we have the access to the capital that we need.

We continue to recognize the importance of maintaining collaborative relationships with all of our key stakeholders and we think when we put all that together, it will lend itself to a track record of growth and consistency in terms of our performance.

So as I close and before we take questions, again, I want to thank all of our employees, the almost 900 women and men of New Jersey Resources for their dedication to meeting the needs of our stakeholders. I am proud of what they do. This year, I would just note that we won actually two JD Power awards for New Jersey Natural Gas, one for the residential side and more recently on the business side. So our team is doing a great job and I thank them for all that they do.

And finally, thank you to all of you, all of our investors for the confidence that you have shown in us. So that is the end of my remarks and we would be happy and look forward to taking your questions.

(Operator Instructions). Jim Lykins, Hilliard Lyons.

Good morning, everyone. First, a few questions about solar. With the Adler project, can you give us a sense for when the other two buildings are going to come online?

We have talked about those other two buildings hopefully being completed by the end of the third fiscal quarter.

Okay. And when should we assume you will book the ITC for those two?

Well, as we talked about, ultimately the ITC is booked over the fiscal year and we have to estimate the total credits for the year and then adjust each quarter accordingly. If you go through the press release today and the detailed schedules, you will see the amount of the earnings related to ITC. So we earn the credits ultimately when we complete the project, but we book it in effect throughout the year.

Okay. Well, something I am wondering is if any of these ITCs could have fallen to fiscal 2012 for Adler?

No, those Adler projects, unless for some reason we didn't complete the projects, which, like I just said, we expect to complete them by June, they would be fiscal 2011.

Okay, and what you've booked thus far, those are just the initial two buildings, correct, not the next two?

No. Jim, as I mentioned at the conference, the accounting rules require us to estimate the amount for the whole year, so we have to do a probability analysis of all of our projects in the pipeline and estimate the credits for the year and then apply an effective tax rate to each quarter.

Okay. What about the Manalapan project? Can you give us a sense for when we should anticipate booking that ITC and also if you know how many SRECs you think it will generate?

Well, I will turn it over to Stan in a second about how many SRECs, but we purposely said the fall because that is one of the projects that is going to be on the borderline and that is why we have a range of $50 million to $70 million. That is one of the projects, if it happens, it would be hopefully closer to the $70 million. If it is not until fiscal '12, we would be closer to the lower end of the range.

Okay.

Stan, on that side, 3.6 megawatts (multiple speakers)

If you want to just average around 4 megawatts, 1300, so it is like 5000 megawatt hours, so that would be about 5000 SRECs.

Approximately 5000 SRECs.

Okay.

For a year.

For a whole year.

All right. And just one last question and I will let someone else ask one, but, at your Analyst Day, you had a chart broken out among the mid and late-stage projects. I am just wondering if you can kind of give us a sense for what to expect for the rest of this year and into next year about -- in addition to the Manalapan project and the two Adler buildings and also [certainty] what we should expect to see coming online or at least announced related to solar?

Well, here we are in May and obviously we only have four or five months left in the fiscal year. Again, today, we reiterated our expectation of $50 million to $70 million, so it will just be throughout the -- timing of each deal is different, so just -- we have no specific public expectation of a timing of announcing deals, but we obviously, as we did yesterday, will announce them as they are signed up.

Okay, thanks, Glenn.

(Operator Instructions). Heike Doerr, Robert W. Baird.

Good morning, it is Heike, how are you today? A quick question on the New Jersey regulatory environment. I believe there is a vacancy and another commissioner whose term recently expired in March. Do you have any idea for the timing of either a reappointment and/or a replacement?

We have not heard anything on that, Heike.

Okay, thanks.

There are no further questions at this time.

Okay, well, thank you, everyone. This concludes our conference call today and we will see you next quarter. Goodbye.

That does conclude today's conference. You may now disconnect.