New Jersey Resources Corp (NJR) 2012 Q1 法說會逐字稿

Good morning and welcome to the New Jersey Resources first-quarter 2012 earnings call. All participants will be in listen-only mode. (Operator instructions). After today's presentation there will be an opportunity to ask questions. (Operator instructions). Please note, this event is being recorded. I would now like to turn this conference over to Dennis Puma, director of investor relations. Please go ahead.

Thank you, Amy. Good morning, everyone. Welcome to New Jersey Resources first-quarter fiscal 2012 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 include many factors that are beyond NJR's ability to estimate precisely or control what 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 on Form 8-K and on our Form 10-Q to be filed on or about February 7, 2012. 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 also like to point out that there are slides accompanying today's discussion, which are available on our website.

With that being said, I'd like to turn the call over to our Chairman and CEO, Larry Downes. Larry?

Thanks, Dennis. Good morning, everyone, and thank you for joining us. This morning, I'll be giving you an overview of our first-quarter results, we'll announce our guidance for fiscal 2012 and I'll also review some of the key drivers of our performance. Just to start out with a number of key highlights, our financial results are strong. New Jersey Natural Gas is performing well. We continue to make very good progress on our clean energy strategy. Our other non-utility investments are performing in line with our expectations. And as you'll see from our guidance, we expect that fiscal 2012 will be another year of improved financial results. As Dennis mentioned, I'll be using a PowerPoint today and hopefully you've been able to access that.

Starting on slide 2, during the presentation I'll be making forward-looking statements. Our actual results will be affected by many factors, including those that are listed on the slide. The complete list is included in our 10-K and I would ask you, as always, to please review them carefully. On slide 3, I will also be referring to certain non-GAAP measures, such as net financial earnings, which I will refer to as NFE as I discuss 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 are also discussed more fully in item 7 of our 10-K. And once again, I would strongly encourage you to please take a look at that disclosure for more discussion of those non-GAAP measures.

So moving to slide 4, just to give some additional insight on our performance for the first fiscal quarter of this year, our net financial earnings for the quarter increased by 54% to $1.09 compared with $0.71 last year. We are announcing our net financial earnings guidance for fiscal 2012 at a range of $2.60 per share to $2.80 per share, and we currently expect that 60% to 70% of that will come from New Jersey Natural Gas. In January we implemented a 5.6% dividend increase. We continue to see strong results from New Jersey Natural Gas resulting from steady customer growth, the continuation of our AIP investments and higher margins from our BGSS incentives. We also completed four commercial projects and over 100 residential solar projects, and we saw a very positive earnings contribution from NJR Energy Services.

Moving to slide 5, just to look at the quarter in a little bit more detail. As I said, net financial earnings per share were a strong $1.09 per share, that compared with $0.71 last year. The results were driven by our Clean Energy segment, which placed a number of projects into service, as well as strong performance from New Jersey Natural Gas and the results of NJR Energy Services. What I'll be doing is going through the details of each one of these businesses in just a moment. Moving to slide 6 for fiscal 2012, we're providing initial NFE guidance at a range of $2.60 to $2.80 per basic share. If we're able to achieve this it would represent the 21st consecutive year of improved financial performance, which we believe is the longest streak in the utility industry. As you can see, we expect that extremely strong growth rate that we enjoyed in the first quarter will moderate throughout the balance of the fiscal year.

Moving to slide 7, which gives some more details on our fiscal 2012 earnings guidance, we currently expect that New Jersey Natural Gas will contribute between 60% and 70%; Clean Energy Ventures will be between 15% and 25%; Energy Holdings, which is our mid-stream assets which will contribute between 3% and 10%; NJR Home Services will be between 1% and 5%; and NJR Energy Services will be between 5% and 15%. But if you look at those numbers and you look at the components that are represented by our infrastructure businesses, they are expected to contribute about 90% of fiscal 2012 net financial earnings. And if you look in the press release, you'll see additional detail of the numbers behind those percentages.

On page 8, looking at our dividend growth, again, because of the strength of our performance and the strength of our financial profile, we increased our annual dividend rate by 5.6% to an annual rate of $1.52, that was effective January 3, 2012 and represented the 19th increase in the last 17 years. From a payout ratio perspective, you can see that our dividend growth rate remains higher than the peer group average, but we are maintaining a below peer group average payout ratio, which is enabling to us maintain a strong financial profile and support future net financial earnings growth. Moving forward to slide 10, you can see the discussion of our capital expenditures for the quarter. We spent a total of just more than $67 billion, most of that coming from our Clean Energy ventures, the utility just short of $20 million. Compared with December 31, 2010 you can see a much higher level of spending, but I think importantly on this slide, as we look at the estimate for the entire fiscal year, you can see that the total that we expect to spend, about $208.3 million, the majority of that will come from New Jersey Natural Gas. Second is Clean Energy and some other minor non-utility spending. So another healthy capital expenditure program to support our overall infrastructure businesses.

On slide 11, turning to our subsidiary businesses now, first starting with customer growth during the quarter. We added 2,001 customers, which was a 22% increase over the same period of fiscal 2011, and another 104 existing customers added heating to their homes. We expect that these customers will add about $1.1 million of new utility gross margin each year. Now if we look at the new customer breakout you can see that conversions for the quarter accounted for about 66% of our total additions, and we expect that over the fiscal year that number will move more towards a 50/50 split between conversions and new constructions, which was similar to where we were last year. From a gross margin perspective, residential customers contributed more than 66% of our gross margin. But looking forward, we expect to add between 12,000 and 14,000 new customers during the next two fiscal years and the annual margin growth from these new customers is expected to be about $3.5 million.

We continue to see the benefits of lower gas prices for our customers on slide 12. We have a clear price advantage over competing fuels in our service territory. That is helping our marketing efforts, and particularly, on the conversion side because the price advantage between fuel oil, propane and electricity remain substantial. Moving to slide 13, as we look to the future for customer growth the outlook is still very positive on the new construction side. We see potential new customers of about 90,000, and that is supplemented by potential conversions of almost 128,000 in total over the longer term. So the long-term customer out -- customer growth outlook remains strong for the Company. In the area of customer satisfaction, our team continues to do an excellent job. We have read over -- almost 6 million meters, handled more than 1 million customer calls. Last year we invested almost $94 million to support customer growth and maintained our record with the Board of Public Utilities for the lowest number of complaints per 1,000 customers. We've done that now for 19 consecutive years. As you can see, we also won our third consecutive J.D. Power award on the residential side and since 2002 we have won six J.D. Power awards in total.

On the regulatory side, the best way to describe our agenda is not only active but, importantly, collaborative. Our conservation incentive program, which is now in place through 2013, continues to work very well, benefiting both our customers and our shareowners. Customers have saved more than $200 million since its inception a little more than five years ago, and at the same time, New Jersey Natural Gas margins are protected from declining usage in weather. On the infrastructure side, our accelerated infrastructure programs again continue to work well. They were extended on March 30, 2011. You can see the total capital that's been approved there of $131 million. We expect that that will be completed by the end of October of this year, and you can see the numbers in terms of the return on equity and the weighted average cost of capital.

Moving to slide 16, our BGSS incentives, which have now been in place since 1992, almost 20 years, continue to benefit both our customers and our shareowners. Customers have realized savings of more than $550 million since they started, and our shareowners have realized earnings of $1.80 per share, an average of about $0.08 annually. As you can see, good performance in the first quarter from the incentive margins, a slight increase over last year at $2.8 million versus $2.7 million. And once again, the incentives are an example of our ability to work collaboratively with our regulators to create structures that benefit not only our shareowners but our customers, as well. Moving to slide 17, in December the state released its new Energy Master Plan. That is designed to provide a blueprint for New Jersey's energy future. From a natural gas perspective, it was very supportive. It encourages natural gas-fired electric generation, NGV's, the increased use of natural gas in conversion markets and the necessary infrastructure expansion to facilitate growth into these markets. So our plan is to continue to work with our regulators to help the state achieve the goals that are laid out in the Energy Master Plan.

On slide 18, switching now to our solar strategy, just to take a moment to go through the strategic rationale for our participation in that business. Fist of all, it's important to focus on the significant long-term legislative commitment that the state has made to solar. From the prospective of New Jersey Resources, it is consistent with our core energy strategy, allowing us to reduce energy usage and lower prices for our customers, again, which are two important elements of the Energy Master Plan. It is supporting economic development and job creation, and it's helping the bottom line with a meaningful earnings contribution with a risk profile that we believe is manageable. In the first quarter of fiscal 2012, our clean energy investments contributed about $10.1 million to net financial earnings.

Moving to slide 19, which shows the legislative renewable portfolio standard. This is important information when thinking about why this is an appropriate business for New Jersey Resources. What it carves out is the amount of solar for each year going out to 2026. The green bars that you see there represent the amount of clean energy that must come from solar every year and it's the rapid increase in coming years as that level of solar investment ramps up that gives us confidence that this business is, indeed, sustainable. As we look at slide 20, also very importantly, as you can see what has happened to the costs of solar and the significant decline that has occurred really since 1998. We look at this as evidence that the incentives that are associated with this business are actually doing what they were designed to do, and that it's bringing down prices, which has certainly helped the industry as a whole, and we expect that continued progress will be made in that regard.

Going to slide 21, let me switch to some of the specifics of our activities. Our sunlight advantage residential program continues to perform very well. In the first quarter of fiscal 2012 we had 140 units that were operational with the average size at more than seven-kilowatts and we deployed about $3.8 million of capital. We currently project that capital associated with our residential program will be about $14.2 million, and to date all of the homeowners who have participated in the program are expected to save over $300,000 on their electric bills. The bottom line for this aspect of our program is that the level of residential solar demand remains strong.

Moving to slide 22, talking about the commercial aspect of our sunlight advantage program, you can see the completed projects in fiscal 2011 and 2012. Total capital of more than $123 million representing almost 28-megawatts of electricity that we've been able to install. But to look at it from a different perspective, the environmental perspective, which is certainly important from a policy point of view, you can see the equivalent of the number of cars reduced is almost 4,900, which is significant. We placed almost $94 million into service so far in fiscal 2012, and as we look out to the future in 2012 and beyond, we still see strong growth opportunities. Looking at slide 23, just to give you a sense of the magnitude of some of these projects that we've put in place, I think you might be familiar with the McGraw Hill project that we announced just about a year ago and that was put in service ahead of schedule and at a lower cost than we originally expected. So from an operational point of view, logistics point of view, our team has done a good job bringing these projects online.

Moving to slide 24 to talk about NJR Energy Services and NJR Energy Holdings, I think as everyone knows, market conditions have been changing in the natural gas market. NJRES generated net financial earnings of $7.6 million. That compared with $3.2 million last year. But I think as we're communicating through our guidance, the challenge of weak wholesale markets we expect will continue to affect this business, as the value of our capacity and storage assets have reduced the number of optimization opportunities. But we think in the context of that market environment, NJRES continues to do a good job. The performance of our mid-stream assets has been steady, contributing about $1.8 million to our net financial earnings in fiscal 2012 compared with $1.7 million last year. Steckman Ridge, which is our joint venture with Spectra Energy, now has 30% of its capacity under long-term contracts, which provide the measure of stability there.

So moving to slide 25 just to wrap up, we continue our strong focus on performance. Certainly, we have a track record of growth and providing consistent results for our shareowners. The fundamentals are in place to deliver long-term NFE growth. A combination of solid customer growth, progressive regulation and disciplined solar investments. Our ability to work with a diverse group of key stakeholders in a collaborative way remains one of the strengths of the Company. We also maintain a strong financial profile, which will certainly be important as we pursue our capital plans. And we have demonstrated our commitment to dividend growth; a 17-year history of increasing our dividends. And when you bring all that together, that adds up to a record of consistent performance and a positioning of the Company for long-term growth. And as I close, I just want to say thanks to our employees. They continue to do just an outstanding job executing the strategy that we've put in place.

With that, we'd be happy to take any questions. Thank you.

(Operator Instructions). Our first question comes from Mark Barnett at Morningstar.

Good morning, guys.

Morning, Mark.

How you all doing?

Good, doing well, Mark, how are you?

I'm doing great. A couple of quick questions here. So I guess just looking at the guidance for new capital on the solar side, I think maybe guidance was around $104 million and now your slides are at about $86.5 million. Is there any impact there from projects coming out, or is that all sole cost of your activity already this year?

Mark, let me have Glenn explain those differences for you.

Yes, Mark, the only difference is timing. Several projects started construction in fiscal 2011 and had capital spent last year but not finished yet, and some of that capital then spilled into 2012 as far as capital fees in service. So from a cash flow perspective, last year was in the $70 million range and this year it's going to be around $87 million, or about $150 million plus or so in total, but placed in service will be skewed more towards 2012 versus 2011.

Okay, thanks. Also, are you anticipating -- with Steckman Ridge, you know it looks like a pretty good quarter, are you anticipating higher earnings over the balance of 2012, as well, or do you think maybe there's going to be some impact from just maybe some declining drilling activity, the warmer temps so far this year?

Mark, it's Glenn again. I think if you look at the numbers, Steckman Ridge was pretty -- just slightly better than last year, and if you looked at our guidance for the year, I think we're guiding towards pretty flat year over year in the whole midstream segment, basically for both Iroquois and Steckman Ridge.

Okay, I appreciate that. Just last thing, I know this is a small part of business at the moment, but with the announcement of declining drilling activity and a lot of producers maybe are sitting a lot of gas and not sure what to do with it, do you think this might be an opportunity on the services side?

Mark, you are referring to NJRES?

Yes, I'm sorry.

What we've been trying to do is just that. In addition to our base activities is to focus more on providing producer services in the area. So to answer your question's, yes, we continue to see that as an opportunity.

Okay. With the announcements that, a lot of -- there's a lot of gas that producers don't really know what to do with I guess in general, I was wondering if maybe the low gas costs today actually are an opportunity for that business or how I should think about that?

Let me ask Steve Westhoven to give you some insight on that. Steve?

Hey, Mark. Yes, we think there's opportunity just because there's been a lot of changes going on relative to a lot of the infrastructure in and around all the new natural gas that's being produced in these shale plays and we're pursuing that as we speak, putting together (inaudible) services-type transactions and trying to grow that side of the business because -- obviously because there's been a decline in the value of some of our assets it's a good place to place our efforts.

All right. Thanks a lot, guys.

Thanks, Mark.

The next question comes from Eric Beaumont at Copia Capital.

Good morning, guys.

Eric, good morning.

A couple questions. Obviously knowing there's still a lot of uncertainty out there, but you give the $260 million to $280 million and you give the breakdown for each segment, which gives a much wider range, can you just talk through some of the key drivers? Obviously in solar it would be -- when I think about, A, dollars employed does it go into service in 2012 versus 2013 and are there any transmission constraints (inaudible)? If you can just point me toward diesel I think it gets the main drivers, but you have a pretty wide range for both solar, Energy Services and Energy Holdings, if you could just walk through where you're thinking the -- what pushes you towards each end there that'd be helpful?

Yes, I think the widest range we gave was with Energy Services and I think the driver there, again, will be what, if any volatility does come about, for example with the summer and heat and things like that.

Yes.

So by its very nature, that business' results are still somewhat going to be driven by the amount of volatility. So clearly, I think we placed the widest range on that business. And solar is going to be on the ability to continue to find the appropriate investments and be successfully negotiated and completed, with the goal, again, of us spending about $70 million to $90 million a year on an annual basis from a capital budget perspective. So those are clearly the biggest drivers on those two businesses. Then in Steckman Ridge and Iroquois, again, they're somewhat subject to the same issues that impact Energy Services as far as the value of those assets. As Larry mentioned, the good news of Steckman Ridge is about 30% of the capacity is under a long-terms contract, which generated about 66% of the revenue at Steckman Ridge for the quarter. So that gave us confidence to guide as we did pretty flat with last year despite the challenge in wholesale market.

Okay. And on solar, can you comment on just where we stand in the SREC market? And additionally, for the larger projects are you seeing any delays from transmission interconnect tie-ins? I know that your peers down the road had seen some transmission interconnect delays, are you seeing similar or no?

I think -- first of all, I can't comment on south Jersey --

Yes.

-- but the issue of interconnection is something that we factor into our process when we're making a decision to go forward so we can avoid that, to the best of our ability. I think the SREC market, as you know there's a lot going on with legislation in New Jersey right now. The good news from our perspective is what has been expressed through all of the conversation is really the need to add stability to the SREC market. There's been no discussion in any way of reducing, for example, the renewable portfolio standard. So I think those issues have to work themselves out. I think from the perspective of the customer, I'll go back to the slide, which talks about what has happened to the cost of solar, particularly recently, which I think goes to the value, if you will, that the incentives in the SRECs have provided. But I'll ask Rick Gardner or Stan Kosierowski to comment on that further. This is Rick speaking now. Go ahead.

Larry, you've covered it all. There have been interconnect issues. You hear that anecdotally. Our projects we put in place and we really haven't had any major issues because, as Larry mentioned, we have put that in the planning process. So right now we're in good shape and we're out looking for prospects every day.

Is there anything going on in the Energy Master Plan that would help expedite the transmission interconnect, or help facilitate them?

I think the way we look at it is the Energy Master Plan is the overall level of support for solar. It does suggest certain changes, but through the -- if you look at the regulatory process and issues that the BPU is responsible for, they are aware of that issue and are, from my understanding, considering different proposals to deal with that issue. Again, Rick or Stan, you may want to add something to that?

I guess one last question with regards to whether it's Steckman Ridge or storage you procure through the (inaudible), given the moderate winter we've had, are -- on either side are we bumping up against limits where's there might be forced withdrawals and/or penalties?

Steck -- this is Rick. At Steckman Ridge, the inventory has been stifled to a point where there's no issues with having any forced withdrawals or penalties.

Okay. And the same from the utility side, are you facing that you maybe haven't drawn down enough storage that there might be any forced withdrawals and/or penalties?

No, none at all.

Okay, thank you very much.

Thanks, Eric.

(Operator Instructions). Our next question comes from Joanne Fairechio at CapStone Investments.

Thank you and good morning. I was -- actually sounded interesting to see your customer addition numbers and I was wondering if there's one area of your service area that has had better customer growth over the others, or has the growth been spread across all of your counties?

I'll let Kathy Ellis answer that question, Joanne.

Good morning, Joanne.

Hi, Kathy.

We -- Ocean county is -- has historically been our area of greatest growth and that continues, but also with Hurricane Irene coming through northern divisions we've seen quite a lot of conversion activity around the flooded area of Morris county. So I would say the aberration is the activity in Morris county.

Morris county, okay. Okay. And you said that, I guess, was because of some of the flooding last fall and last summer?

It is a result of the flooding, but we also have initiated a fairly aggressive marketing campaign in that area. In fact, we set up a mobile office, Joanne, and we've had quite a bit of success in those neighborhoods.

Okay, thank you.

Thanks, Joanne.

At this time we show no further questions. I would like to turn the conference back over to management for any closing remarks.

Okay. Thank you, Amy. We'd like to thank you all for joining us this morning. As a reminder there's a recording of this call, which will be available on our website. Again, we appreciate your interest and investment in NJR. Thank you very much, have a good day. Bye.

The conference is now concluded. Thank you for attending today's event, you may now disconnect.