New Jersey Resources Corp (NJR) 2011 Q4 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 fiscal 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. And I'll now introduce, and turn the call over to Mr. Dennis Puma, Director of Investor Relations. Please go ahead, sir. You may begin your conference.

Thank you, Tracy, and good morning, everyone. Welcome to this quarter's 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 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 including many factors, that are beyond NJR's ability to control or estimate precisely, which could cause results to materially differ from the Company's expectation.

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 today on Form 8-K and on our Form 10-K to be filed on or about November 23, 2011. All these items can be found at SEC.gov. NJR does not by assuming -- NJR does not -- by including the 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 there are slides accompanying today's discussion which are available on our website. With that said, I'd like to turn the call over to our Chairman and CEO, Larry Downes. Larry?

Thanks, Dennis, and good morning, everyone. Just before we begin, I just want to build on what Dennis had said. As you can see on page 2 of our slides, regarding forward-looking statements, I will be making such statements today. Our actual results may be affected by a variety of factors. Those are listed on the slide that you can see. But I think as Dennis noted the complete list is included on our Form 10-K, so I would encourage everyone to please review those carefully. Moving to slide 3, I will also be referring this morning to certain non-GAAP measures, such as net financial earnings or NFE as we call it, in discussing our results. We believe that NFE provides a better measure of our performance. However, these non-GAAP measures are not intended to be a substitute for GAAP, and they too, are discuss more fully in Item 7 of our 10-K. So again, I'd strongly encourage you to please review that information.

So let's go to slide 4, and talk about some of the highlights of what was a successful fiscal 2011 for the Company. We achieved our 20th consecutive year of net financial earnings per share growth. The numbers are $2.58 a share, compared with $2.46 a share last year. That was almost a 5% increase. We also implemented a 5.6% dividend increase that will be effective January 3, 2012. That brings the new annual rate to $1.52 per share. We experienced very strong results from New Jersey Natural Gas driven by steady customer growth, a variety of regulatory initiatives that I'll speak more about in just a little while. And finally, continued performance from our BGSS incentive margins.

On the non-utility side, we made good progress on our clean energy strategy, five commercial and 349 residential projects were completed. They are currently in service. They total almost 10 megawatts, and we have a variety of other projects, including McGraw Hill that are on schedule to be completed in fiscal 2012. And then finally, we received positive earnings contributions from NJR Energy Services, NJR Home Services, and our midstream assets.

So moving to slide 5, you can see our net financial earnings. As I noted, this was our 20th consecutive year of improved financial performance. For the year, we earned $106.5 million. That represented $2.58 per share, and compared with $101.8 million last year, which was $2.46 per share. As we did last year, we expect to issue guidance with our first quarter results that will be announced in early February. This timing will allow us to have a better sense of the impact of the winter, on both NJR Energy Services and NJNG's BGSS incentives. And I think it will also enable us to be more specific about the status of the clean energy investments that we're in the process of developing right now.

So if we move to slide 6, we can give you some additional details broken down by Company. Our results were driven first and foremost by New Jersey Natural Gas, which delivered another solid financial performance during the fiscal year, supported by steady customer growth, the ongoing acceleration of infrastructure investments, and gross margin from incentive programs as the primary drivers. NJR Clean Energy Ventures, which was in it's first full year of operation completed several projects, and contributed $6.8 million which represented 6.3% of the Company's total net financial earnings. And finally, we saw improvement in both home services in our midstream assets, which offset the lower results in NJR Energy Services. However, I think it's very important to point out that NJRES had a very solid year, despite challenging market conditions. But taken together, about 80% of this year's net financial earnings have come from infrastructure-based businesses.

Slide 7 gives you a summary of our cash flow. And you can see that our cash flow from operations of about $250 million was strong. When we look at where those dollars went, we had capital expenditures of $175.1 million. The majority of that went to our utility plant and our solar investments. And on the financing side, you can see the new common stock issued. That was primarily through our dividend reinvestment plan. We repurchased about $10 million of common stock, paid dividends of almost $59 million, and paid down debt of about $15.3 million, so coming up to our change in cash of about $6.5 million. But I think when you look at this from a high level, you can see that cash flow remains strong, and continues to support our healthy capital expenditure plans, primarily in New Jersey Natural Gas and Clean Energy ventures.

Moving to slide 8. As I think everyone probably saw last week, our Board approved a 5.6% increase in our quarterly dividend rate to $0.38 per share, from $0.36 per share. The new quarterly rate will be effective with the dividend that is payable on January 3, 2012 to shareowners of record on December 15, 2011. And as I previously noted, the new annual rate will be $1.52 per share. This was the 17th consecutive year of dividend growth. In fact, it was the 19th increase in the last 17 years.

Moving to slide 9. If we look at on the other hand, our payout ratio, which this year is at 56%, that remains low relative to our peers. And I think it helps us maintain an appropriate balance between payments to our shareowners, and very importantly reinvestment in the Company to support future net financial earnings growth. Also our balance sheet remains very strong, with an equity ratio of 50%, which is obviously important giving the capital expenditures that we expect in the future.

So going to slide 10, let me turn to some of the key statistics related to the performance of our subsidiaries, starting with New Jersey Natural Gas Company's customer growth. During the year, we added 6,783 new customers. That compared with 6,189 new customers last year, and converted an additional 641 customers to natural gas heat in fiscal 2011. We currently expect these customers will add about $3.5 million of new gross margin each year. And as you can see from the pie charts on the right of the slide, the growth was basically evenly divided among new construction, conversion customers, while residential customers are expected to contribute more than two-thirds of gross margin. As we look forward to 2012 and 2013, we expect to add between 12,000 and 14,000 new customers in total, which will translate into a growth rate of about 1.4% each year. And we expect that, that growth rate will compare well, compared with our peers.

Moving on to slide 11, you can see the price advantage that we have in the service territory, versus competing fuels. And certainly, our marketing efforts are being aided by that strong price advantage, and is helping us to attract new conversion customers in the service territory. On slide 12, we talk about our BGSS incentives. These programs have been around now for almost 20 years, and we've been able to work with our regulators to create incentive structures that benefit not only our shareowners, but just as importantly, our customers. During the fiscal year, our gross margin from these incentive programs totaled $9.3 million, or about $0.13 per share. That compared with $9.4 million of gross margin last year. In August of this year, we received approval to extend these programs through October of 2015. But when we look at it, in total, since 1995, the programs have saved customers over $540 million, while adding about $1.76 per share in earnings for the year for the Company.

Going to slide 13, and looking at some of our regulatory initiatives, first of all, our conservation incentive program, which just to remind everyone is in place through September 30 of 2013. It's been in place since 2006, to encourage customer conservation, and it had been a success. Customers have reduced usage, and they've saved over $193 million since inception. And at the same time, the CIP protects New Jersey Natural Gas gross margin from decline in usage and weather. Our accelerated infrastructure programs also continue to do well. They were extended on March 30, 2011. These capital projects are helping us not only to support system reliability, but to create jobs in the service territory. And as you can see from the chart on that slide, the total capital approved is about $131 million, 23 different projects. And we expect that all of the projects will be completed by October 31, 2012.

On slide 14, we talk about two of our pending regulatory initiatives. First of all, our natural gas refueling stations. We submitted that filing to the BPU in June, on June 16 of 2011, calling for a potential investment of up to $15 million. We look at the dollars today, the gallon equivalent is $1.60, which is obviously attractive based upon current prices. If it is approved by the BPU, we will be in construction immediately, but no later than December 31 of 2012. And you can see the way that the annual rate recovery would work. And secondly, our SAVEGREEN project which has been very successful in creating jobs and promoting energy efficiency in our service territory, we have sought an extension in that program through December 31, 2012. It's created over $73 million of economic activity in the state. We currently have over $20 million investment, which is recoverable through a rider at our weighted average cost of capital of 7.76%.

Let me move now to the non-utility side, and starting with our Clean Energy investments. We had a successful outcome in our first full year of operation. Our Sunlight Advantage Program, which is our residential product for customers has seen strong interest. We've signed over 700 leases. We finished 349 of them in fiscal 2011. The average size of the unit is 6.9 kilowatts, and deployed $9.7 million in capital during fiscal 2011. We've also been able to expand our installation network of contractors, which has helped us grow that side of the business.

On slide 16, you can see the update on our commercial projects, and I'll be referring to the chart on that page. If you look at fiscal 2011, five projects there are Adler Buildings, which were rooftop megawatts of 3.9 -- 3.9 megawatts, $18 million in capital. And we completed 75% of a project, our Vineland project, which was a ground mount, almost $20 million in capital. So taken together, investment of $37.7 million. Now, as we look forward to fiscal 2012, we have a number of key projects there. We have two more Adler projects, which will be capital of $6.8 million. The remaining Vineland expenditures was about $4.8 million, and investment in Manalapan, New Jersey, just west of our headquarter's building, about $18 million. And then finally, McGraw Hill almost $61 million. And if you look at the investment on the commercial side, a little over $90 million with 20.2 megawatts associated with that. We've got a -- we have successfully executed on our plan. We are working through our pipeline, and the response has been -- the response has been good.

On slide 17, just to touch on the balance of our non-regulated investments, NJR Energy Services generated $18.6 million in net financial earnings during the year, despite challenging market conditions. That compared with $24.8 million last year, which was not unexpected. But I think what's important here is really the efforts of our team to deal with changing market conditions, and optimize the value of our capacity and storage assets which contributed to their performance. The performance of our midstream assets has been steady, contributing about $6.8 million to net financial earnings versus $6.4 million last year. Steckman Ridge, which I think as most everyone knows is our joint venture with Spectra Energy, now has about 30% of it's capacity under long-term contracts. And although not on the slide, I would also point out that NJR Home Services had a very successful year. They increased earnings by more than $2 million, to a total of about $2.4 million through a combination of efforts. But a very, very good year for Home Services.

So as we look forward to 2012, moving to slide 18, there are a number of key assumptions. First of all, we expect utility capital expenditures to total $121.2 million. That includes $49.9 million for AIP. We are also anticipating a continuation of steady customer growth in New Jersey Natural Gas, about 6,500 new customers. That would represent a growth rate of about 1.4%, and the margin associated with that, about $3.5 million annually. And then finally, we expect that our Clean Energy capital expenditures that will be eligible for investment tax credits should be about $104.3 million, about $90.1 million will be on the commercial side, and $14.2 million will be on the residential side. And as I said earlier, we will give guidance in early February 2012, with the release and announcement of our first quarter earnings for the fiscal year.

So in 19 -- on slide 19 in conclusion, I think as we make our announcement today, I believe we are continuing our reputation for delivering consistent performance for shareowners in fiscal 2011. Those results produced a one year total return to shareowners of over 12%, which is certainly well above our peer average in the S&P 500. And similarly, over a five year horizon, we've also outperformed our peers, and the S&P 500. So as we look forward to the balance of fiscal 2012 beyond, continue to believe that we have the fundamentals in place to achieve long-term net financial earnings growth, through our core customer growth, our regulatory initiatives, our clean energy investments and our other non-utility investments.

We currently expect to be able to continue increasing our dividends, while maintaining a strong financial profile to support our growth. And as always as I close, before we open it up for questions, I want to say a very sincere thank you to the 900 women and men of New Jersey Resources for their dedication to meeting the needs of our stakeholders. I can't be more proud of everything they have done to make us what we are today. And as always, I want to say thanks to our investors, for the confidence that you've shown us for a long period of time. And extend my best wishes for a Happy Thanksgiving. And with that, we'll open it up for Q&A.

(Operator Instructions).

Joanne Fairechio with Capstone Investments.

Good morning, everyone, and thank you for the comprehensive review. I have a couple of questions. Have you gotten any feedback yet from the BPU on your natural gas refueling station filing? And maybe the timing, would your guess be an early 2012 decision, or would you expect that to drag on for most of the year? And my second question, are you looking at any other projects in the midstream area?

Mark, do you want to take? -- Mark Sperduto, our Vice President of Regulatory, Joanne, will answer that first question.

Joanne, on the natural gas, the CNG refueling station, we just begun discussions with the regulators, which is the BPU staff and the division of rate council to try to settle the CNG matter. We would anticipate that we could wrap that up some time by year-end, and have to program in place early in '12.

Okay, year-end meaning, year-end 2000 in -- are you talking about calendar year?

Yes.

This year?

Yes.

Okay. Okay.

Okay, Glenn you want to take --?

And on midstream, Joanne, on the investment side, yes, we continue to look for opportunities but there's nothing imminent as we've talked about before. There's a lot of competition out there, and especially with the MLPs from a capital side. Energy Services continues to work with producers, looking for additional opportunities from a producer services perspective. But we don't have anything to disclose, as far as imminent investments on the midstream side.

Okay. Thank you, Glenn.

You're welcome.

Thanks, Joanne.

Mark Barnett with Morningstar.

You mentioned in the slide, now that you've got your long term contracts kind of percentage around 30%. I was wondering, kind of what's your target there? And how you think about that, and maybe some obstacles to getting that number any higher?

Mark, it's Glenn again. When we went into the project, quite frankly, we were hoping for about a 50/50 split between long-term contracts and open space for short-term contracts. So the market obviously did not cooperate, as we've built the projects. That's when the whole Marcellus Shale and the shale plays exploded, and hurt spreads in this market. So we're happy that Spectra has been able to contract 30% long-term, but I would think the more optimum level would be more towards the 50% level. But again that's going to be a function of supply and demand, and what's going on with the market with spreads. And right now, we're comfortable that 30% is the right number given today's market.

Okay. And I guess also at NJRES, did you have any impact in the fourth quarter from turnbacks? Some of your peers had some major problems with those. I guess how much do you utilize those secondary transportation rates?

I'll -- we're not -- I'll turn it over to Steve, but as far as any turnbacks, we're not aware of anything. As far as any pipeline disruption issues or contract issues, we have not had any issues in the fourth quarter that might have happened to some of our peers.

Okay. I guess it was more on the volumes side, the firm transportation just being pretty much all delivered, and knocking the secondary off the pipe. But that's great, if you didn't have that issue. Here is my last question --

(Multiple Speakers). Mark, some color -- Steve, do you want to say --

(Multiple Speakers). -- Steve Westhoven on that.

Sorry.

Yes, Mark. We didn't have any issues with capacity constraints or managing our book. Over the past few months, I know a lot of companies did report that. And as far as our assets in the future, we continued to contract as we see appropriate, and continue to grow that business and take advantage of some of the growth opportunities in and around some of the new shale plays.

And Mark, when I said in my remarks -- this is Larry -- about the strong year that RES had, that's part of it. They were able to deal with a somewhat challenging market out there. And that's certainly part of it, the way they've dealt with some of the issues that you've raised here that have affected others.

Okay, great. Thanks for the comments. And one last question if I may. Did you see a larger percentage of the $18.6 million in earnings from NJRES this year, coming from producer services versus 2010, how is kind of the progress on that front?

Mark, this is Steve again. Yes, it was larger, and although I don't think we had broken it out into that level of detail, we continue to concentrate on that business, and feel that it's going to be a good area to concentrate on moving forward.

Okay. Thanks guys.

Thank you.

Roger Liddell with Clear Harbor Asset Management. <Roger Liddell - Analyst - Clear Harbor Asset Management> <liddellroger> A couple of questions. First, on the state energy plan, my understanding is that the state has become even more favorably disposed toward natural gasses being central to the state's energy mix, but I don't have any real texture. Can you supply anything, in terms of new sensitivity or additional opportunities opening up because of that?

I think there's a lot, the plan is going through the process of public scrutiny and discussion right now. From my point of view, the original document was already very strong on natural gas. So there's a lot of discussion going on. But as you said, we were very comfortable with the original document and it's position on natural gas. Mark, I don't know if you want to add anything on that?

The only thing I would add, is the one area where we've already made a filing related to it was in the CNG market. The master plan encourages fleet conversions to CNG, and we were right on the edge of that, and made our filing within weeks of when the plan came out. And as Larry said, this plan is still in discussion and hasn't been finalized yet.

And I'd say, Roger, what has been from our standpoint, positive, that the plan recognizes not only the important role that natural gas can play in the state's overall energy policy. But also recognizes that these decisions are not either/or, and that we need diversity of supply from all different energy sources. From our perspective, the plan clearly recognizes that, which even as I know has been a challenge on many fronts at the federal level for a long time.

Well, four weeks ago -- you know of my longstanding interest in distributed generation opportunities.

Absolutely.

The storm four weeks ago, sent yet another reminder of the vulnerabilities of overhead systems versus pipe and ground. I'd like to think that would move forward.

(Inaudible) -- you're right.

The other question is in the clean energy side, these tremendous declines in the price of modules roughly of 30%, 40%, 50% kinds of declines. I know the module part of the total installation cost is, well probably, it's a third or something like that. But surely, with this kind of decline, there's even more going to drive more interest in the program. Do you see there being any step function upward in interest?

From our perspective, I mean the pipeline has been robust. I mean, you're right. The prices have come down, but I think also from our perspective when you think about the incentives and all that, are available for clean energy, the market is doing what the incentives are designed to do. And that's to bring those price points down. We have a very good structure here in New Jersey with the renewable portfolio standard. That begins -- that continues to ramp up over the next 15 or so years, but the level of interest remains strong. And as you can see, our quote/unquote pipeline for this year is very strong, I think reflecting that.

Okay. Thank you.

Thanks, Roger.

[Jay Yannello] with [Skyden Capital]. Your line is open.

Good morning, Larry. It looks like 2012, you have a very nice book of business in CEV.

Yes.

Can you give us a little flavor, how many people do you have in this division? How much of a commitment does the Company have to it? And I know it's very early and a tough question, but how far out can we go to see some level of projects kicking in, in the years ahead. In other words, is this -- could -- maybe 2012 is a very strong year, but can this go on for 3, 5, 7, 10 years? Is there that much capacity out there to put these projects in and around the state?

I'll answer the -- let me answer the question. I'm going to -- I'll turn it over to Rick Gardner who is our Vice President down there about the staffing and all that. But I'll answer the question, in the context of the environment here in the state, not specifically to the Company and what the opportunity might be. The point I would make on the part of the Company's commitment, you can see that through roughly $140 million that's been committed, and the commitment that we've made and have announced publicly on the residential and the commercial side. And you can see that commitment in fiscal 2012. But speaking at a high level from the state's perspective, when you look at all of the pieces that are here in the state, the renewable portfolio standard, the SREC market, I think even the statements that have been made in the energy master plan reaffirming the legislative commitment to the 22.5% renewable portfolio standard, we think that, that's a strong environment. It would be impossible for me to speculate though, how far that would go out. But I think what the public information shows us is that the macro environment is good. Just a quick overall comment on the -- on the what we have done of our internal structure, and I'll ask Rick to comment on, it is to really staff it appropriately, so that we've got the appropriate levels of control just beyond our financial investment. But I'll ask Rick Gardner to comment more on that.

Really, there's 15 individuals, and some are divided to handle the commercial, out to business development, going out and finding new projects for NJR to purchase or complete the construction of. And then we have a group that is dedicated to the residential programs, Sunlight Advantage.

And Jay, this is Glenn. I'll add that we talked publicly about having the tax asset side of about $70 million to $90 million a year in CapEx, in order to utilize those ITCs. And as you can see, we're averaging about $75 million in the first two years of the program. So that gives you a sense of internally what our goal is. And from an overall market perspective, I think it's obviously public knowledge, the RPS would call for about ten times the amount of capacity out there, that is now by 2026 in order to meet the RPS standards. So we think assuming the incentives stay, and that's just another big issue, the ITC and the federal ITCs currently in place until 2016. So one of the major points of interest from a market perspective, would be what's going to go on for the Federal Government, and what's happened to price points between now and then, to see, are these projects still economic, depending on what happens with the ITC.

And Jay, one more point and again, bringing it into the context of the Company's overall financial philosophy. These go through the same disciplined review that any capital commitment that we make goes through. And I think when you look back over a long period of time, that's been an important catalyst in our ability to continue to deliver consistent results.

Okay, and how is the reaction to the wind farms been, as they pop-up, or as they're developing, whether it's on a private property or like the one in Manalapan, which I've candidly, haven't seen yet.

Okay, well, the -- in Manalapan, that's solar, not wind.

I'm sorry, I meant solar on both, I meant solar.

The -- we have not had any problems with that before. We've seen good interest on the residential side. And it takes -- there's a thousand moving parts to all of this. And an important part is making sure that the relationships at the local level are appropriate, and we work hard on that. But we've not seen any negative reaction. A number of them, quite honestly are on rooftops, so unless you're in a helicopter, you really are not going to see them. And the other ones that are ground mounted have not created any issues for us. But Rick, I don't know if you was in to comment as well?

There's not a whole lot to add to that. But even the ground mounted projects that we have, Jay, are somewhat screened. We set up berming, we'll put up vegetation. We're really trying to be a good corporate neighbor, and not disturb the view that the neighbors do have.

Okay, thank you.

David Grumhaus with Copia Capital.

Just a little bit of questions on clean energy. Can you talk a little bit about the accounting on that, on the tax credits in terms of how much you're taking up front, and how much you're extending out over a longer period of time? And how the break down looks on that?

Yes.

Glenn will take that.

Yes, I'll take that. We've opted for the recognition when the project is placed in service. So we earned 30% of the property placement service in the year of it's placed in service. And as we discussed at our seminar last year, our conference, there is a negative adjustment to our tax basis. So for modeling purposes, you basically need to estimate the amount of capital that's placed in service and eligible for ITC, so it's not always 100% of the capital. Things like land and interest capitalized is not eligible for ITC, but a vast majority of the capital on any project -- and I'm talking north of 95% -- is usually eligible for ITC. And you would multiply that by 24% to take into account 30% ITC credit, and an offsetting about 6% negative deferred tax adjustment for the lost tax basis. So those are the types of numbers to use when modeling the impact from a tax credit perspective.

Okay. So if I look at this year, it looks like you spent about $47 million between the commercial and the residential?

Yes, and you'll see later in the 10-K, that about $42 million was eligible for ITC.

Okay, and then off that, that generated the $6.8 million of net income?

Well that number times 24% was the tax benefit. And then the rest of the business, the overhead, et cetera and first year operations would have reduced that number to get to the $6.8 million, correct.

So then when I look at that $42 million going forward -- -- there are no more credits generated off of that?

No, the future benefits of those projects are strictly electric sales and SREC revenues.

Okay, And what do those end up looking like?

Well, you'd have to model based on the capacity of the projects, and the math on what you expect SREC revenues to be, to come up with both an expectation of SREC revenues, and then a reasonable price for the sale of electricity. Something a little bit below our retail rate is normal for us to use, and in some cases a wholesale rate, to then estimate a revenue on a project. We don't disclose all the revenues by project.

Okay.

David, what we have said publicly though, if you look at the economics, that it's about 24% coming from the ITC, about 60% from SREC, and the balance from the energy sales and the life of the project.

Okay.

So the life of the project.

And those SREC and energy sales will then just be pretty flatlined over the useful life of the project, ten or fifteen years?

Well again, that depends on your view of what's going to happen when SREC prices and (inaudible) over time.

Okay. I guess, when you all model it how do you think about that?

But we usually -- we would look at the current market for SREC prices, and whatever we've negotiated, as far as a contract, if there's a PPA with a customer. Or we would have our own curve and assumption with the wholesale rate if there is no PPA. So we always when we go to the Board for approval, we would use the then current market price of SREC prices.

Some of that David, as you might imagine is commercially sensitive, the way we're running our economics.

Okay, so in terms of sort of guidance about how that looks going forward, we're sort of on our own on that?

What we will do in February, as we've done last year is to give you ranges by segment, where we see the breaking out, similar to what we did last year.

Okay. As a follow-up -- I know you'll give guidance later, in the next quarter. Can you talk a little bit about drivers? Obviously, we've talked a fair amount about clean energy, but just within the utility business, is it just continued investment in the CapEx?

Yes, the two, if you look at Slide 18, what we've given there, is what we expect the total CapEx to be, $121.2 million of which about $49.9 million will be AIP. And then our expectation of 6,500 new customers and margin of about $3.5 million.

Okay, that's helpful. Thanks a lot. Have a nice Thanksgiving.

Thank you.

You too.

Michael Gaugler with Brean Murray.

Just one question. I noticed that your O&M ticked up pretty materially in the quarter. Just wondering as we look forward into 2012, if that's a normalized rate we should be anticipating?

I think we've said publicly, that we usually target about a 3% or so, which is close to inflation for us, with our wage increases that are in the contract. So we usually shoot for about a 3% annual increase on a year-over-year basis.

Okay. That's all I had guys. My other questions were answered, thanks.

Thank you.

[Peter Hark] with Zimmer Lucas Partner.

Hi, Larry, hi, Glenn, Happy Thanksgiving.

Thanks.

Just to further the discussion on the solar market. I was wondering what you think might happen in Jersey to rationalize the SREC prices. I know there's a legislative attempt to propose a bill to advance the requirements, or I guess the BPU could do it by fiat, but how do you see this playing out, and what's the timing going to be to restore SREC pricing?

The timing is hard to know. I think at this point, what is -- what you focus on, is the fact that construct is in place for the RPS going out, going on fifteen years which in effect creates the demand if you will. There are, as I said earlier, prices -- price points did come down which tell you that the incentives are actually working. And I think that the state is working through that right now. But as I also said, I think the affirmation of the commitment to the 22.5% RPS was positive on the state's part. There's a lot of moving parts here right now. It would be impossible to speculate when all that gets resolved, because there are different responsibilities that the legislature has. There are different things within some limits that the BPU can do on it's own. But again, we keep coming back to the fact that the RPS is in place, and that's going to guide the level of demand going forward.

I mean, if they were to advance the requirements for '13 into '12, what do you think would happen as SREC pricing? Would it go back from -- it's around $200 now -- do you think you could get it back to $400 to change the economics or?

I wouldn't even want to speculate on, where SREC prices could go.

The economics of your projects are so tied to the pricing. If it doesn't get fixed, does it -- will it obviously weigh on your decision, in terms of future investment? I mean, or is there another structure? Is there a way to -- could you elect to spread the ITC out over a period of time over the life of the project, instead of taking it up front? Or are there other avenues for the Company to pursue to -- continue on the investment path, because it seems like your investment dollars have gone up a little bit for '12. And that's good, and we would like to see you recognize the ITCs in '12 associated with that. But on a going forward basis, '13, '14, it seems like you'd need to have something happen in the SREC market to justify continuing the spend.

We've made the decision on -- again as Glenn has said, we've made the decision on how we're going to account for the ITC. That won't change. But I think it's important to look at both sides of the equation. And I'm not putting a projection out there on SREC prices, is that prices have come down, but so have price points.

Right.

So it's important to look at both sides of that. And then with regard to the Company, I would just reiterate the point that I made earlier about the Company's continued commitment to a disciplined capital allocation process, which we have adhered to over the years, so with a really deep understanding of the returns that we need here.

Do you think it will be driven more by the BPU, or by legislative -- do we have to have the legislature reconvene or?

It's not an either/or. There are responsibilities that were laid out in the original legislation, as to what the legislature can do, and what the BPU can do.

Okay. And then just on a detailed question. For instance, with Vineland, with 75% of that complete, and 25% in '12, when do you get to book the ITC? Do you book, can you --

We book 75% of the ITC in fiscal '11 and we would book the remaining 25% in '12.

Oh, so you could do it that way, Glenn? Instead of -- you don't have to wait for the whole project to be--

As long as the project itself is set up so that the 75% is actually interconnected with the grid and up and running, which in this case it was. So it depends on the particular project and how it's constructed.

Okay. And so to David's earlier question, for the planned spending for '12, that $128 million at least on the commercial side, we can go through the same mechanisms to come up with potential ITC for '12?

Yes, except that, I think your number was wrong. If you look at the slide, I think it was close to $204 million between the commercial and the residential side.

I'm sorry, that's right.

So back to -- if you go to slide 18, we bring together the commercial and residential there. The 90.1 and the 14.2, what you see right now.

Oh, I've got it, the 104, that's it.

Correct.

Yes.

Thank you very much.

Thanks.

(Operator Instructions).

Don Hanson with Paersidis.

Good morning.

Good morning.

My questions have all been answered. Thank you very much.

Thank you.

At this time, there are no further questions in the queue. I'd turn the call back over to the presenters.

Okay, thank you, Tracy. I'd like to thank everybody once again for joining us. As a reminder, a recording of this call is available for replay on our website. Again, one more time, thank you for your interest and investment in New Jersey Resources, and enjoy your holidays. Good day.

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