New Jersey Resources Corp (NJR) 2011 Q3 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 third-quarter 2011 earnings conference 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)

Thank you. I would now like to turn the call over to Dennis Puma, Director of Investor Relations. Please go ahead sir.

Thank you,Tracy. Good morning everyone. Welcome to New Jersey Resources third-quarter fiscal 2011 conference call and webcast. I'm joined this morning 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 or 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 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 items in the forward-looking statement 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 August 4, 2011. All these items can be found at our website, as well as 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 also like to point out that there are slides accompanying this morning'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 think everyone has seen our announcement. As you can see, we continue to make great progress in the transformation of our business model. As Dennis mentioned, I will be using slides for my presentation.

Starting with slide 2, you can see our forward-looking statements and, obviously, during the presentation I will be making forward-looking statements; and, as Dennis noted, our actual results will be affected by many factors, including those that are listed on the slide. It is a busy slide, but I would ask you to review it carefully and I would also note that the complete list is included in our 10-K.

On slide 3 is our disclaimer regarding non-GAAP financial measures. During the presentation today, I will be referring to certain non-GAAP measures such as net financial earnings or NFE as I present our results. We believe that NFE provides a better measure of our performance; however, these non-GAAP measures are not intended in any way to be a substitute for GAAP and they are discussed more fully in item 7 of our 10-K and I would encourage you to please take a look at that disclosure.

Let's go to slide 4, and I will review our third-quarter highlights for fiscal 2011. Fiscal 2011, I think as you can see, is shaping up as another strong year for New Jersey Resources. We announced net financial earnings for the 9 months ended June 30, 2011, of $2.56 per share versus $2.49 last year. That represented an increase of 2.8%. With regard to our earnings guidance, we changed that, we lowered the end of the net financial earnings guidance. The new range is $2.55 to $2.65 per share. Again, we raised the lower end from $2.50 to $2.55. Earlier this year, we implemented a 5.9% dividend increase.

We continue to see very strong results from New Jersey Natural Gas as a result of steady customer growth, higher BGSS incentive margins, as well as the margin from our AIP investment program. Our clean energy strategy continues to make progress. We have 4 projects in place and have announced 3 ground-mounted projects as well. And, we had a positive earnings contribution from NJR Energy Services, Home Services, and our Midstream assets.

Moving to slide 5, you can see some additional details on the 9-month numbers. As I said, for the 9 months ended June 30, 2011, NFE per basic share was $2.56 versus $2.49 last year. The results, as you can clearly see, driven by the strong performance of New Jersey Natural Gas -- again, the main drivers being customer growth, AIP and our BGSS incentives, as well as investment tax credits generated from our solar investments at NJR Clean Energy Ventures, and an improvement in both Home Services and Midstream, which more than offset the lower results at NJR Energy Services, which we had expected.

With regard to the earnings guidance as we move into the fourth quarter of fiscal 2011, we are increasing the lower end to a range of $2.55 to $2.65, and again, our prior guidance was $2.50 to $2.65 per basic share. In increasing that, that reflects the continued strong results of New Jersey Natural Gas, as well as better-than-expected results at NJR Energy Services, which although lower than last year, have benefited from recent increased volatility in wholesale natural gas markets due to the hot weather in July and the impact of a tax settlement, which is disclosed in our press release.

Moving to slide 7, just a little bit more detail on the expected contribution to net financial earnings for fiscal 2011. We have adjusted that slightly. The range is now, for New Jersey Natural Gas, we expect that to be between 65% and 70% of the total; Clean Energy Ventures of 10% to 20%; NJRES, we've increased that to 10% to 20%; Midstream of 5% to 10%; and the balance of 2% to 5% from Home Services. If you look at that closely, you see that, taken together, our infrastructure businesses should contribute up to 90% of our fiscal 2011 net financial earnings.

On slide 8, we give you sense of our cash flow through June 30, 2011. You can see very healthy cash generation from operations, more than $227 million -- you can see where that went, in terms of our capital expenditures for utilities, solar, cost of removal, totaling almost $98 million. In our financing activities, we issued $10.9 million through our dividend investment plan. We repurchased $7.2 million, paid dividends of almost $44 million, paid down debt of $29.4 million, for a total of $69.4 million and had excess cash of almost $60 million. You can see the very healthy cash flow that continues and enables us to fund not only our capital expenditure program, but also handle our financing activities as well.

Moving to slide 9, just a little bit of history on our dividend growth, the continued strength of our performance combined with our financial profile, which remains strong, did enable us to increase our annual dividend rate by 5.9%, to an annual rate of $1.44, which was effective January 3 of this year. It was the 18th increase in the last 16 years. When you look at our dividend growth rate relative to our peers, we are higher, but at the same time, we are maintaining a lower payout ratio, which enables us to not only maintain a strong financial profile, but support future growth in net financial earnings.

Let me turn to some of the important subsidiary performance metrics, starting with our customer growth rate in New Jersey Natural Gas. In the first 6 months of this fiscal year, excuse me, in the first 9 months of this fiscal year, we added 4,610 customers, which was a 17% increase over the same period in fiscal 2010. We currently expect that these customers will add about $2.4 million of new gross margin each year. When you look at the pie chart you can see that new construction has slightly out paced conversions through June 30, 2011, and residential customers have contributed more than 60% of gross margin. Our current expectation is that we will add between 12,000 and 14,000 new customers during fiscal 2011 and 2012, and we expect that the annual margin growth from these new customers should be in the range of $3.4 million.

Moving to slide 11, you can see the very strong price advantage that natural gas has in the service territory versus other fuels and, certainly, that is helping our marketing department in their efforts to pursue conversions. On slide 12, we have information about our very successful Basic Gas Supply Service incentive program. I think as many of you will recall, that these programs have been in place since 1992 and, in total, have saved customers more than a $0.5 billion, very, very successful. During the first 9 months of this year our shareowners realized total margins of $7.7 million compared with $7.4 million last year.

We've been able to work collaboratively with our regulators on these programs and over the past almost 20 years we have been able to put in place incentive structures that are benefiting our customers, our shareowners, and the state as a whole. Also happy to report that, on July 25 of this year, a 4-year extension of these incentive programs was stipulated by all parties and we expect that a final agreement will be in place by October of 2011.

Let me turn now to our regulatory initiatives and the agenda remains active. I'm on slide 13. You can see some of the important initiatives that we already have in place, starting with our Conservation Incentive Program, or CIP, which is now in place through September 30, 2013, originally put in place back in 2006. It has worked very well for not only our customers who have saved nearly $186 million since its inception, but it also protects our utility gross margin from declining weather and usage, and so it has worked as intended.

On the Accelerated Infrastructure Program side, that program continues to go very well since its inception in 2009. New Jersey Natural Gas has spent almost $68 million, those numbers are through June. $36.4 million of AIP expenditures are now included in base rates and on June 1 we filed to place the remaining AIP I on the portion of AIP II in base rates; and, just to remind everyone that the rate recovery of the program spending is at our weight average cost of capital of 7.76%. Another $60.2 million was approved by the BPU under AIP II as of March 31, 2011, and that spending will be at a weighted average cost of capital of 7.12%; but, importantly, both of them include our allowed return on equity of 10.3%, the difference being a change in basically lower debt rates.

Moving to slide 13, we still have several filings before the BPU. Our annual filings for BGSS, CIP, and AIP were filed on June 1; when you net the impact of all of those filings, customers would realize a net 9.3% price reduction, and that's a result primarily to lower wholesale natural gas prices. We filed with the BPU on June 16, 2011, for natural gas refueling stations, that would entail an investment of $15 million, $1.60 per gallon equivalent based upon current prices, and we expect that the $15 million would fund construction of 7 to 10 stations, obviously located in the service territory. If it's approved by the BPU, we would begin construction immediately, but no later than December 31, 2012, and we have filed for rate recovery of that program's spending at a weighted average cost of capital of 7.76%.

And then finally, the SAVEGREEN project, which again, has been very successful for our customers in advancing the state's policy and focus on energy efficiency, we are looking to extend that program through December 31, 2012. We've invested over $20 million and that is currently recoverable through a rider at a weighted average cost of capital of 7.76%. As you can see the regulatory agenda remains active.

Going to slide 15, let me talk a little bit about our clean energy investments and how we are doing with the implementation of that strategy. Just to remind everyone, I think many of you, again, will recall that we rolled that out in March, and we believe that these investments are appropriate and they are consistent with our core energy strategy. From a strategic rationale, we think there are a number of very clear reasons, again, for making these investments.

It's an opportunity to create shareowner value. As I said, it's consistent with our core energy strategy. Our customers can save money on their electric bills. We are also promoting economic development and job creation and we're supporting the state's environmental goals; and when you think -- when we put all that together, we think it's a business that makes sense for us.

Within the last 6 weeks the state released a 2011 draft energy master plan. In reviewing that, you can see that the overall, it is positive for natural gas focusing on generation, NGBs, and oil-to-gas conversions. It does have a number of policy recommendations. I think, importantly, it supports the legislative renewable portfolio standard target of 22.5%. It does suggest a review of the solar alternative compliance payment.

It subjects solar renewables to -- renewable incentives to a cost-benefit test that recognize -- that, in that test, will be recognized the economic development benefits that are associated with those investments,, and it promotes solar voltaic that promotes economic and environmental benefits. The plan is going through public review and comment right now, and it will be finalized after that. The specific timing of the finalization of the plan is not yet known.

On slide 17, just to give you an update and remind everyone that there are 3 sources of value here, the Investment Tax Credit, the energy sales and the SRECs, and you can see the pie chart on the right there gives the relative contribution from each one. The tax credits obviously, reduce the capital at risk. The ITC at the federal level is in place through 2016. We have a relatively short payback period. And, in doing the economic and financial analysis of these investments, we are using a market cost of capital that recognizes the different risk profile of these investments compared with New Jersey Natural Gas.

Moving to slide 18, some program specifics starting with our residential program, the Sunlight Advantage. We have seen strong customer interest. We have signed 473 leases, the average size is 7.5 kilowatts, and a total of $9.3 million in capital has been committed in fiscal 2011. We have been growing our installation network of contractors and, since the announcement of the program, we have received over 1000 inquiries, really with not a lot of active marketing. It has gone well for us.

Turning to the commercial side on slide 19, again, our focus is on rooftop and ground-mounted solar installations. Main focus on projects of the size of 0.5 megawatt to 10 megawatts, looking at both retail and wholesale energy transactions. Currently, our plan is to invest up to $60 million to $70 million this year; and, as we've stated publicly, we have identified a multi-year pipeline of projects that totals more than $250 million, and those projects are in various stages of review and development right now.

If you go to slide 20, you will see some information on a number of the specific projects that we are working on. 4 rooftop projects have been completed representing about 4 megawatts and $18 million of invested capital, and we have announced 3 ground-mounted systems. The first one, Manalapan Village is an $18 million project, 3.6 megawatts, which we expect to be completed in the fall of 2011. McGraw Hill, which is our largest project to date, an almost $60 million project, 14.1 megawatts, again, we expect completion in fiscal 2012. And then, finally, Vineland, which is a single access tracking system, which will provide 25% greater energy output; that project calls for a capital investment of $23.7 million, 4.7 megawatts, and we expect completion in fall of 2011. From a status standpoint, the program is progressing well.

Finally, just to update you on NJRES and our Midstream investments, I think as everyone knows, the value of capacity and storage has been affected by changing markets that has resulted in lower margins; but, as I said, we had a strong July given the weather that we experienced. We continue to focus on our long option strategy, which has served us well in these changing market conditions, and maintaining a very disciplined risk-management process inside the Company. NJRES contributed $19.4 million to our fiscal year-to-date 2011 net financial earnings. That was compared with $29.3 last year. Finally, Midstream, overall those assets contributed $5.7 million to our fiscal year-to-date 2011 net financial earnings. It is expected to contribute 5% to 10% and approximately 30% of the Steckman Ridge capacity is now under long-term contracts and I would also remind everyone that those assets include Iroquois as well.

So, finally, on slide 22, as we announce our year-to-date earnings, and affirming our guidance, tightening up the lower end, we expect to continue our reputation for delivering consistent results. You can see from this slide, on a 1-year basis, we've had very strong performance compared with our peer group. But, if you look at a longer term time horizon, going at 5 years, our performance is equally strong against our peer group and the S&P 500. But as we look at our fundamentals and looking at fiscal 2011 and beyond, we believe those fundamentals are strong; our core customer growth, our regulatory initiatives, and our solar investments -- that, we believe provides us with the ability to increase dividends while maintaining a strong financial profile to access the capital that we will need to support our infrastructure of businesses.

And, as I close, as always, I just want to say thank you to all of our employees. They are the ones that make all of this happen, doing their best every single day, and I particularly want to mention, not only our utility, but our home services people who, during the month of July, just did a great job with extraordinarily hot weather; and I thank them for all that they do. Finally, our investors, many have been with us for long time, we appreciate the confidence you've shown in us. So, with that, we will open it up for Q&A.

(Operator Instructions)

Mark Barnett, Morningstar.

Good morning guys. A couple of quick questions. On that AIP filing into base rates, I'm not sure if it was in the filing, but when might you see a decision on that and whether -- on the AIP and the remaining of AIP II?

Oh, to include the investments in --

Yes, sorry.

The next several months probably.

Okay, okay.

Hold on one second, Mark. Kathy Ellis wants to add something.

There's a -- the BPU has a 180-day maximum time limit to act, so certainly by the end of the year.

Okay, that's helpful. And then, on the solar projects, obviously some pretty strong response, without even the marketing, you got over 1000 inquiries, are there any bottlenecks that you're actually running into on being able to pursue all the projects that you want? With, I guess either with contracting or supply chain issues?

I wouldn't say significant bottlenecks. We've put together a fairly diverse team of contractors on the outside, and these are the normal operating issues that you've got to deal with, permitting and things like that; but really nothing substantial that would really impede the program. Nothing out the ordinary. Stan Kosierowski is with us -- would you add anything to that?

Oh, just the normal [interconnection] in permitting processes; we believe that the process is in place and it's not determined our construction schedule

Yes, there's a lot of little details, but we have really staffed up very well in Clean Energy Ventures and have continued to improve the logistics there. When you look at the team that we have in place, they are experienced, not only in solar, but they understand the processes here at the state, through their experience in clean energy and that has obviously helped us.

Thanks a lot for the detail.

Thanks, Mark.

(Operator Instructions)

Joanne Fairechio, Capstone Investments.

Good morning, everyone. Larry, you mentioned a 17% increase in your customers.

Yes.

And it appears that the mix between new customers and conversions might be switching back a little bit closer to more historical levels. Is that strictly a function of the economy, or whether some events, such as a large development or something that was delayed, that contributed to the increase?

If you go back really several years, the difference between new construction and conversion was a lot greater. It was probably at one point going, what, 60% new, 40%, and so we've have seen it come down. Obviously, the pie has gotten smaller as the numbers have come down, so we don't really view the shift between the 2 as being material. I think earlier in the year, in the first quarter, it was slightly more conversions than new construction; but, having said that, we are seeing good activity in the conversion market and we are seeing some signs of growth in the new construction side, but, certainly, not something that will drive us up to several years ago where we were at 60% or 40%. And that's where we are trying to communicate that in the projection that we are putting out from 2011, 2012 that we should be somewhere between 12,000 and 14,000 which would equate to a growth rate about, to the 1%, 1.5%, in that range, which still stacks up very well versus the industry.

Okay. And then I had a second question. In your news release you mentioned a tax settlement at NJR Energy Services, I guess, that will positively influence your fourth-quarter results; can you just expand upon that for a minute?

I will ask Glenn to take that.

Yes, Joanne, actually that was recognized in the third quarter.

Oh, okay.

And it had to do with an issue that dates back to 2004 through 2007 and it just had to do with how the state of New Jersey allows companies to allocate taxes to different states. So, we settled that dispute in the third -- in time for us to recognize it in the third quarter. So, bottom line, that was about a $0.06 per share in the third fiscal quarter.

Okay, thank you.

It's a non-recurring item.

Okay, thanks, Glenn.

(Operator Instructions)

There are no further questions at this time.

Thank you very much. Goodbye, everyone.

That concludes today's conference. You may now disconnect.