New Jersey Resources Corp (NJR) 2012 Q2 法說會逐字稿

Good morning and welcome to the New Jersey Resources second-quarter fiscal 2012 Earnings Conference 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, Andrew. Good morning, everyone. Welcome to New Jersey Resources' second-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 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 today on Form 8-K and on our Form 10-Q to be filed on or about May 4, 2012. All these items can be found at SEC.gov and our website. 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 again we thank you for joining us today as Dennis mentioned during my presentation I will be making forward-looking statements and our actual results will be affected by many factors including those that are listed on slide 2 and again as Dennis mentioned the complete list is in our SEC filings and in our press release and I would ask you to please review those carefully.

On slide 3, we talk about our non-GAAP financial measures and I will be referring to certain non-GAAP measures such as net financial earnings or what we refer to as NFE as I discuss our results. We use NFE because we think it provides better measure of our performance, but any of the non-GAAP measures including NFE are not intended to be a substitute for GAAP and they are discussed more fully in Item 7 of our 10-K. And again, please take the time to review the information regarding those non-GAAP financial measures.

So let's get into our results on slide 4, and I think as you can see from the announcement today that fiscal 2012 is shaping up as another year of consistent performance. We announced higher NFE for the six months ended March 31, 2012, $2.88 per share versus $2.33 per share last year, which represented an increase of 24%.

We are this morning reaffirming our NFE guidance for the year, a range of $2.60 to $2.80 per share. Earlier this year we implemented a 5.9% dividend increase that was effective on January 3, 2012. Our results have a number of drivers starting with strong results from New Jersey Natural Gas driven by steady customer growth, the ongoing success of our AIP programs, and as you probably know we filed our SAFE program.

We continued to make steady progress in our Clean Energy strategy and we also saw positive earnings contributions from our Midstream assets, as well as, NJR Energy Services.

Moving to slide 5, as I mentioned for the six months, NFE per share were up 24%, you saw the strong numbers versus last year. Those results were driven by strong performances from both NJR Clean Energy Ventures and New Jersey Natural Gas. We also have positive contributions from NJR Energy Services. And NJR Home Services continues to provide a solid and growing performance to our results.

Moving to slide 6, for fiscal 2012 based upon what we know now, we reaffirmed our NFE guidance in a range of $2.60 to $2.80 per share. If we were able to achieve the midpoint, that would represent an increase of about 5% over fiscal 2011, and I think it's clear that that performance would underscore our reputation for consistency in the financial performance that we continue to achieve.

Going to slide 7, we talk a little bit more about the 2012 earnings guidance. We are not changing the sources of growth and we currently expect that New Jersey Natural Gas will be the majority of our earnings of 60% to 70%. Clean Energy Venture should be in a range of 15% to 25%. NJR Energy Services should be in a range of 5% to 15%. NJR Energy Holdings, which is our Midstream asset should be in the range of 3% to 10%. And Home Services should be 1% to 5%. But if we take those numbers and we focus on the results driven by our infrastructure businesses, they should contribute about 90% of our fiscal 2012 net financial earnings.

Moving to slide 8, the continued strength of our performance combined with our strong financial profile gave us the ability to increase our annual dividend rate by 5.6%. That brought the annual rate to $1.52, and it was the 19th increase in the last 17 years. But I think to put that in different context, it compares very favorably with our peer group who had a one-year growth rate of about 3.7%.

Moving to slide 9, while we're able to achieve the higher growth rate, we're able to maintain a lower payout ratio, which supports both our strong financial profile and a higher earnings retention rate that will support future NFE growth.

Moving to slide 10, if we look at our capital expenditures, you can see that we continue to invest heavily on our businesses. If we look at New Jersey Natural Gas, total spending for the period was $49.1 million. We expect for the year spending will be more than $120 million. And in total we think our capital budget for the year will be slightly more than $225 million. So those capital expenditures continue to build our infrastructure businesses and support growth.

Now let me turn to some of the specifics of the individual businesses, starting with New Jersey Natural Gas, and our customer growth remained strong for the first six months of the year. We added 3,492 customers, which was a very solid 14% increase over the same period last year. In addition to that growth, we had 261 existing customers who added heating to their homes.

Now, if we look a little closer at the customer breakdown and the margin, you will see that for the six months, conversions accounted for about 59% of total new customer additions. As we go through the rest of the year, we think that that will end up closer to a 50/50 split between new construction and conversions.

Residential customers contributed about 63% of gross margin during the first six months. And as we look forward, we expect to add between 12,000 and 14,000 new customers during this fiscal year as well as fiscal 2013 in total. The annual margin growth from these new customers should be about $3.5 million.

Going to slide 12, where you can see the price of natural gas relative to some of our competing fuels. Obviously, we have a very significant advantage particularly over electricity and that has helped us in our conversion activities, as you can see in our growth numbers.

And then if we go to slide 13 and we take a look at the future going beyond the next two years, we continue to believe that our service territory has very good long-term potential for strong customer growth. And as we look at that longer-term inventory of potential new customers and conversions, that's really what we're using to support our estimate of the addition of between 12,000 and 14,000 new customers during fiscal 2012 and 2013.

Moving to slide 14, let me talk about our regulatory initiatives and I would start by saying that our regulatory agenda remains active and our relationships remain collaborative. Our conservation incentive program remains in place. It has been in place since 2006 and will extend through September 30, 2013. It has worked as intended and it has helped both our customers and our shareholders.

Our accelerated infrastructure programs, again they remain in place as well. AIP II, as we call it, was extended on March 30, 2011. Now, the total capital approved has been about $131 million for 23 projects and that extends through October 31, 2012 and we expect to complete those projects in that timeframe.

Moving on to slide 15, on March 20, we filed our Safety Acceleration And Facility Enhancement program, which we refer to as SAFE. It is a $204 million program over a five-year period and it is designed to replace about 60% or 343 miles of unprotected steel and cast iron distribution mains. We will look for annual recovery and our weighted average cost of capital of 7.76% looking for AFUDC accounting treatment, which is what we have in place for the AIP programs and from an economic development point of view, it creates about 2,100 new jobs. We are also in alignment with the Energy Master Plan, which supports programs that enhance both safety and reliability.

Moving on to slide 16, just to give you a sense of the excellent record that we continue to have with system safety. We are spending a lot of money in terms of new capital and we're seeing consistent improvement in that performance. Here is one statistic that you can see and that is the steady decline in our number of leaks per mile over the past several years.

On slide 17, from a customer satisfaction point of view, we continue to do very well. During the past year, we've read over 6 million meters. We've handled more than 1 million customer calls. We've invested slightly less than a $100 million to support both growth and reliability and we are doing that with a strong track record with regard to customer satisfaction.

We continue to have the lowest number of complaints per 1000 customers of the BPU. We've done that now for 19 consecutive years and our record with regard to winning J.D. Power awards is really second to none in the state. Most recently for the second consecutive year, New Jersey Natural Gas was ranked highest in customer satisfaction with business natural gas customers and we have won three consecutive residential customer satisfaction awards for total of seven J.D. Power awards since 2002.

Moving to slide 18, talking about our very successful BGSS incentive programs, these have been in place since 1992 and in total have saved customers over $573 million since we began them. Through March 31 of this year, shareowners realized total utility gross margin of $6.1 million. And I think what's important about BGSS incentives is not only the benefits that they have provided to both our customers and our shareowners, but also our ability to work with our regulators to create incentive structures that really benefit all of our key stakeholders. I think it's also important to note that last year the BPU approved an extension of these incentive programs through October of 2015.

Now let me change gears a little bit here and move to our solar strategy on slide 19. And just to review some of the key objectives here, first of all, it is consistent with our core energy strategy. From a customer point of view, we are saving the money on their electric bills. It's I think part of what is clearly a significant legislative commitment to renewables and solar in New Jersey. We're supporting the Energy Master Plan and of course creating new growth opportunities. And when you look at our results for the first six months of the fiscal year, you can see that our clean energy investments contributed about $22 million to our net financial earnings.

Moving on to slide 19, just to look a little more deeply at the legislative commitment and here is the renewable portfolio standard and the amount that is specifically dedicated to solar. You can see that the Renewable Portfolio Standard or the RPS is really the foundation for a long-term sustainable solar market in New Jersey. If you look at the green bars, they represent the amount of clean energy that has to come from solar every year according to the law going out to the year 2026. And I think not only in terms of that commitment, but just in terms of the process and public statements, New Jersey has continued to indicate their strong support for the solar industry.

Slide 21, we just give you a little bit of an update to discuss the state's current renewable energy, specifically solar power. I think there is three key points here. First of all, when we look at the state's new Energy Master Plan, which has been out since last December, it is supportive of renewable energy in terms of job creation, economic growth and meeting the state's environmental goals.

Right now there is a bipartisan effort in progress to consider alternatives that would refine the legislative mandate to support the long-term sustainability of the business and two of the areas that are under consideration, there is a possibility of an acceleration of the RPS and a reduction in the SACP. So the bottom line here is, we continue to believe that the state will continue to support the solar industry in New Jersey.

Now let me shift gears again on slide 22 and talk about our results because in this relatively short period of time that we've been in business, our team has really turned in impressive results. Now starting on the residential side of our Sunlight Advantage program, in fiscal 2012, we now have 272 operational units at an average size of about 7.4 kilowatts and that represents capital of about $7 million. We currently project capital on the residential side of about $20.5 million and I think very importantly from the customer's point of view is that they've been able to save about $390,000 on their electric bills annually.

Slide 23, we talk about the progress that we've had on the commercial side of the Sunlight Advantage. You can see the projects have completed totaling 27.6 megawatts. Our largest project, McGraw-Hill, was originally planned to be finished in 2012, March 2012, we finished that in December of 2011. This morning in our press release we announced another project which will be built in Medford, New Jersey and we expect that the Medford project will be about $20 million in new capital, 6.7 megawatts and finished in the first quarter of fiscal 2013.

On slide 24, we will give you an update on our wholesale and energy businesses. NJRES generated $23.5 million compared with $19.2 million last year during the same period. As we continue to communicate through our guidance, there are other challenges associated with the wholesale markets and that will continue to affect RES for the rest of fiscal 2012. The team in RES has done a great job repositioning our book which has enabled us to focus more on fee-based opportunities such as producer services.

On the midstream side, we saw a steady contribution of $3.8 million to net financial earnings that compared with $3.9 million last year and specifically Steckman Ridge, our joint venture with Spectra now has about 30% of its capacity under long-term contracts.

So in summary, I think you can see that we are continuing to build on our record of consistent performance. Our strategy is straight forward which we will grow our core utility. That will continue to provide the majority of our earnings, our cash flow, our assets. We are pursuing what we believe are complementary non-regulated businesses.

We understand the importance of working constructively with our regulators and policy makers and we think we've been able to do that in a collaborative way and maintaining a strong financial profile so that we have appropriate access to capital to support our investment plans.

From a performance point of view, I think our track record of consistency is obvious. We recognize also that as a life line service provider that it is essential that we meet the needs of our customers and I think we have put together really excellent results in that regard.

Our average five year net financial earnings growth of 6.5% is strong and we've created the opportunity to continue to increase the dividend while we're maintaining an appropriate payout ratio.

And then finally as we look at growth, we expect customer growth in our core utility. We think that there will be other regulated infrastructure opportunities. We have I think a sensible and disciplined approach to clean energy. And finally, growth opportunities in our retail energy services business.

So, as I close, before we take questions, as always I want to say thank you to our employees, because everything that I am talking to about today is the result of their dedication and commitment.

And with that, we would be happy to take questions.

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Mark Barnett of Morningstar. Please go ahead.

Hey, good morning, guys.

Good morning.

Hey, Mark.

I am sorry, I don't have the slides in front of me. But, I am wondering, can you talk a little bit about transportation spread along the Northeast, along your sites? And then in general, after the quarter went a little bit more ordinary weather where kind of where those spreads you see -- seeing that moving a little bit?

Mark, I'll ask Steve Westhoven, who heads that business for us to answer that question.

Hey, Mark, this is Steve. The transportation trends that you've seen recently obviously have been impacted by the warm weather that we had experienced this winter. And they've been very volatile in the forward markets considering a lot of the expansion that's going to be taking place and a lot of the new piping that's been installed relative to the Marcellus Shale play and some of the things that are taking place in and around the Pennsylvania shale gas expansion.

So, I think, this winter they've been depressed. Looking out in the forwards, it really depends on where supply comes in and how much that transportation is needed to move some of this new gas to market and I think it's the forward markets. We really haven't sorted that out yet.

So, Mark, we tried to communicate where we think all that ends up through the range of guidance that we put out again this morning.

Yes. Just one more quick question. With the producer services side of the business -- I apologize for that. Given that there are probably a lot of producers out there really desperate to get their gas to market. Have you seen any kind of strengthening in your position I guess in terms of contracting with them?

Mark, I'll ask Steve again to comment on that.

Mark, I think, we certainly have seen some strengthening in those contracts and we've done several transactions and have partnered up with few producers and executed some transactions to move some of their gas. Looking forward, the $2 gas market that we currently have is certainly challenging some of the drillers' programs and their capital expenditures related to their production growth. So, I think, we'll see how long that lasts and how long these producers can continue to drill at these levels.

All right. Thanks, guys. See you soon again.

Thank you.

Thanks, Mark.

(Operator Instructions) And we have a question from Joanne Fairechio of CapStone Investments. Please go ahead.

Good morning everyone. Larry, kind of quick question. Have you received any comments back at on your SAFE filing? Would you expect to before an actual order and what's your best guess on the timing?

It's very early in the process, Joanne, so I wouldn't want to speculate on any of that, to be honest with you. I would just say that we've been able to work collaboratively with both the -- with the Board of Public Utilities staff and Rate Counsel, but it's very early in the process.

Okay. Thank you.

The next question comes from Michael Gaugler of Brean Murray Carrett. Please go ahead.

Good morning, everyone.

Good morning, Mike.

Just kind of a quick question, wondering where things stand? Or if you could add us a little color regarding your natural gas fueling station initiatives and where that process is?

I will ask Kathy Ellis, our COO from New Jersey Natural Gas to respond to that.

Good morning, Mike.

Good morning.

Again, I can't really predict when the filing will be concluded, but I can tell you that we've been working very closely again with BPU staff and Rate Counsel. And everything that we hear is quite favorable. We had expected to be on the last board agenda, which we were not, and hopefully will be on the next agenda at the end of May.

But I think the other important point there is, I referenced the Energy Master Plan earlier and I just point out again, the initiatives that we are looking at are really lined up with that plan.

Okay. If you let's say you get the go ahead end of May, how long do you think it would take you to site and start construction and get through that process?

Kathy, you want to take that?

Our marketing group is working with a couple of potential customers as you would expect. So, once we get approval, I think the process -- the construction process can begin fairly soon. I really couldn't predict when the first one would be ready.

All right. Thank you. That's all I had.

Thanks, Mike.

(Operator Instructions) The next question comes from Spencer Joyce of Hilliard Lyons. Please go ahead.

Hey, good morning, guys.

Good morning.

Larry, Glenn, we haven't spoken before. But, yes, I look forward to meeting you guys this weekend.

Thanks, Spencer.

Sure. Thanks, Spencer.

Just one quick question here, on the solar CapEx, I see we are projecting about $100 million for this year. My first question is, I was still looking at $90 million to $100 million for fiscal '13 and then what the potential headwinds or what potential levers may cause us to come in maybe below those numbers?

Yes. From our capital budget perspective, we've targeted $80 million to $90 million a year and that has not changed. If you look at the first two years, if you look at the two years combined, it would be about $150 million. So clearly we're skewed towards year two versus the first year. But on an annual basis we would expect that $80 million to $90 million to continue. I will let Rick talk about the project pipeline, but obviously the state that Larry talked about is still committed to solar with those aggressive RPS standards. Obviously, the extract market will impact the economics to certain transactions. But currently we are still confident, we will be able to deploy about that $80 million to $90 million of capital.

Okay. I guess --

Larry, I just want to add to that, it is very important to focus on the role of the RPS in all of this and what that means for driving the level of demand for solar in the state going forward and that as I said in my comments is really set by legislation.

Okay. Well, that's all I had, like I said looking forward to meeting you all this weekend.

Great. Thanks, Spencer.

Thanks. Take care.

Thanks.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Puma for any closing remarks.

All right. Thank you, Andrew. We thank you all for being on the call this morning. And as a reminder, a recording of the call is available for replay on our website. We appreciate your interest and investment in New Jersey Resources. Thanks and have a good day. Bye, bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.