New Jersey Resources Corp (NJR) 2012 Q3 法說會逐字稿

Good morning, and welcome to the New Jersey Resources third quarter fiscal 2012 results conference call. All participants will be in listen only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Dennis Puma, please go ahead.

Thank you, Valerie. Good morning, everyone. Welcome to New Jersey Resources third-quarter fiscal 2012 conference call webcast. I'm joined by Larry Downes, our Chairman and CEO; Glenn Lockwood, our Chief Financial Officer, as well as other members of our senior financial 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 of 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 we from the Company's expectations. A list of these items can be found, but is not limited to the items, in the forward looking statement section of today's news release filed on form 8K on our form 10-Q filed this evening. All of 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 presentation 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?

Thank you, Dennis. Good morning, everyone. Thanks for joining us. As I always do, I want to begin the presentation by pointing out that I will be making forward-looking statements this morning. Our actual results will be affected by many factors, including those that are listed on slide 2. And I would remind everyone that the complete list is included on our 10K, so please review those carefully.

On slide 3, you can see our disclaimer regarding non-GAAP financial measures. I will be referring to certain non-GAAP measures, such as net financial earnings or NFE as I discuss our results this morning. We believe that NFE provides a better measure of our performance. However, I want to stress that these non-GAAP measures, including NFE, are not intended in any way to be a substitute for GAAP. They are also discussed more fully in our 10K in item 7. And, again, I would strongly encourage you to please take the time to review this information as well.

Turning to our results on slide 4, I'd begin by pointing out that this has been a year of milestones for our Company. In June we celebrated the 60th anniversary of the formation of New Jersey Natural Gas and you can see by some of the metrics on the slide there that we have certainly come a long way during the past six decades. We also are celebrating the 30th anniversary of the formation of our holding company, New Jersey Resources, the 30th anniversary of our listing on the New York Stock Exchange and then finally in July we celebrated the addition of the 500,000 customer for New Jersey Natural Gas.

As we move through the fiscal 2012, we are continuing a record of very strong performance. We highlighted a number of the key performance metrics thus far this year and are focused on enhancing value for our shareholders. Starting with our net financial earnings. We announced this morning higher NFE for the nine months ended June 30, 2012. Results of $2.98 per share, compared with $2.56 per share last year which represented a 16% increase. This morning we are narrowing our guidance for fiscal 2012 to a range of $2.65 to $2.75 per basic share. And that would put us on track for our 21st consecutive year of improved financial performance as measured by net financial earnings growth. Importantly you can see the majority of our total earnings are coming from New Jersey Natural Gas.

Because of the strain of our financial profile, we increased the dividend again. It was the 19th increase in the last 17 years. A growth rate of 5.6%. When you look at our peer group, their comparable rate is 3.7%, and that is providing investors an attractive yield of 3.3% which certainly is a strong number given the interest rate environment we are in right now. Finally, because of our financial strength we are continuing to return value to shareholders through our share repurchase program. We repurchased more than 200,000 shares this year, which has brought the total amount of repurchases since 1996 to over 7.5 million shares.

Moving to slide 6, we give you a little more detail on our results that we are announcing this morning. And as I noticed the nine months ended June 30, NFE per share--we're showing $2.98 per share, compared with $2.56 last year. The results, as you can see from the chart, were driven by solid performances from New Jersey Natural Gas and NJR Clean Energy Ventures, as well as positive contributions from Energy Services, Energy Holdings and Home Services.

Moving to slide 7,as I indicated we're updating our fiscal 2012 guidance. We are narrowing the range by $0.05 in each end of the ranged. And now estimate NFE in the range of $2.65 to $2.70 per basic share. I think if we're able to achieve these results, we will once again underscore our repetition for being able to deliver consistent performance for our shareholders as well as consistent value.

On the slide 8, we give a little more detail on the earnings guidance. You can see from a segment perspective, we currently expect that New Jersey Natural Gas will contribute between 60% and 70% of our earnings, which is obviously the majority. Clean Energy Ventures will be in the range of 15% to 25%, NJRES will be between 5% and 15%, Energy Holdings 5% to 7% and, finally, Home Services 2% to 4%. When you look at it from an infrastructure perspective, we are currently guiding that those businesses will contribute about 90% of our net financial earnings for fiscal 2012.

Slide 9 gives you some details on our capital expenditures. As you can see, we continue to invest significant amounts of new capital, which is helping to build a foundation for future growth. The majority of the capital is being invested into NJNG. As you can see we look at those details, our accelerated infrastructure programs are expected to total almost $50 million for fiscal 2012.

Moving to slide 10, a little bit more perspective on our dividend growth record. It is the continued strength of our financial performance, combined with our strong financial profile, that has enabled us to increase the dividend again this year. The annual rate by 5.6% to a rate of $1.52 per share, that was effective January 3, 2012. Again as I pointed out, it was the 19th increase in the last 17 years. Comparing favorably with our peer group which has an average one year growth rate of about 3.7%. Moving on to slide 11 where we talk about the payout ratio, you can see how our payout ratio compares with our peers. It is lower than average. And that is not only helping our financial profile but allowing us to achieve an earnings retention rate that will support future growth in that financial earnings.

On slide 12,we give you a little bit more detail on share repurchases. Again it is the strength of our balance sheet that has enabled us to make these targeted repurchases as a means of further enhancing shareholder value. Thus far, this year we have invested about a $8.7 million, and if we go back to September of 1996, we have invested more than $227 million. We've repurchased about 7.5 million shares. And we've done that at a split adjusted cost of about $30.31. So you can see where that compares with our share price today. You may recall that New Jersey Resources was one of the first utility holding companies in the industry to put a share repurchase program in place.

Let me turn now to our subsidiaries and their performance, beginning with New Jersey Natural Gas which as you know is our largest subsidiary in terms of assets, earnings, people, investment. We expect their earnings this year to contribute the majority of our overall net financial earnings. That will be driven by steady customer growth and a growing service area and margin from our accelerated infrastructure program. As you will see, as I go through the presentation, our fundamentals remain strong. I want to focus on some of those fundamentals, beginning with the customer growth.

You see on slide 14 that we are continuing to record strong customer growth for the first nine months. We added almost 5000 customers. In addition, 395 existing customers added heat to their homes. Conversions are playing an important roles in our new customer growth this year. They accounted for 57% of the total new customer additions. And by the end of the fiscal year we expect that there will be a 50/50 split between new construction and conversions. Residential customers, from a margin perspective, contributed about 64% during the first nine months. As we look forward, during fiscal 2012 and 2013, we expect to add between 12,000 and 14,000 new customers, which would represent a new customer annual growth rate of about 1.3%. Which I think you'll agree is strong by industry standards. The annual margin for those new customers should be about $3.5 million.

Moving to slide 15 will give you a little bit more detail about the service territory. In some, the service territory demographics remain strong with overall solid population growth. The chart that you see here on the left breaks down our customer distribution by county. While on the right side you can see the population growth by each county over the last decade compared with the state. Clearly Ocean County stands out and is now accounting for about half of our growth and remains one of the fastest growing counties in the state. Moving to slide 16, certainly the significant price advantage that natural gas currently enjoys, has helped us in the conversion market. And if you look more closely about where natural gas is positioned relative to competing fuels, that relationship for us is very strong compared -- particularly in comparison with propane and electricity.

On slide 17, you can see that our regulatory agenda remains very active. Two of our regulatory initiatives are Conservation Incentive Program or CIP, and our Accelerated Infrastructure Program, or AIP continue to benefit both of our customers and shareholders. CIP, as you may recall, has been in place through September 2013. It protects us from declining usage and weather. Certainly that was important this year. A critical element of the CIP has been our efforts to encourage customer conservation. That has produced real savings for customers. We estimate that it's been over $225 million since inception in 2006. AIP, again the Phase II that we're working on right now is approved in March of 2011. Really those investments are helping us support system reliability, but it is also helping to strengthen New Jersey's economy and you see the detail on the projects and spending for both AIP I and AIP II.

Moving to slide 18, I think it is important to comment on the Energy Master Plan because that has been established by the state as a key document for creating the framework for energy policy in New Jersey. It is also driving a number of our own initiatives. If you look at the document, you can see that it is very positive for natural gas as it supports natural-gas fired electric generation, alternative fuel vehicles, natural gas vehicles. It expresses a preference for natural gas over oil in conversion markets and it emphasizes the importance of strong and reliable infrastructure.

That leads us to slide 19 where we discuss our SAFE Program, which is filed with the BPU on March 20, to replace about 343 miles of unprotected steel and cast iron distribution mains. That could ultimately lead to an investment of more than $200 million over a five year period. We're looking to recover the cost associated with that investment at our weighted average cost to capital from our last rate case of 7.76%. And from an economic development point of view it should create more than 2000 jobs. Again, I go back to the Energy Master Plan which is supporting the increased use in natural gas and enhancements to infrastructure.

Moving to slide 20, I think it is important to focus not only on the amount of capital that is being invested but also how that capital is affecting the performance of our system. On this slide we've got two metrics for you; leaks per mile and pending leaks both which have declined significantly since 1996. In fact we look at the amount of new capital that we have invested in our system since 2002, it totals more than $800 million. So we continue to focus on the issue of reliability and back that up with a lot of new capital going into the system.

On slide 21, I want to talk about one of our latest regulatory initiatives. And that relates to natural gas vehicles, which referring to the NJNG NJV Advantage. That was approved on June 18 by the Board of Public Utilities. It gives us the ability to invest up to $10 million to install, own and maintain CNG infrastructure. Basically, what we're looking to do is to help grow the market for clean natural gas vehicles in New Jersey which, as I said earlier, is consistent with the Energy Master Plan. We have been pleased with the interest that we have received so far from package beverage delivery, to waste haulers and municipalities. And we really look forward to focusing on the NGV Advantage for the balance of the year.

On slide 22, there's an update on our PGF incentive programs which have been placed now for almost two decades and during that time have saved customers almost $600 million. Since June 30 -- through June 30th of this year, our shareholders have realized utility gross margin of a 7.9%. I think from a strategy point of view you can see, not only the different incentives that are in place and if you look at them they have certainly evolved over the past two decades. But I think more importantly it has been it excellent example of how we've been able to work with our regulators in a way that creates not only incentive structures that are benefiting our customers, our shareholders and our state overall. I would also note that in 2011 the BPU approved an extension of the existing incentive programs through October of 2015.

Finally with New Jersey Natural Gas, it is important to focus on what our team has been able to achieve in the area of customer satisfaction because it remains the best in New Jersey and the best in the Eastern region. In addition to what we have done in the area of JD Power awards, including seven since 2002. And this past year we've won them for both residential and business customer satisfaction. We continue to have the lowest number of escalating complaints per 1000 customers of any natural gas or electric utility in New Jersey. That is a record that we have held for almost 20 years. In fact, we've had the lowest number of escalated complaints, according to that metrics, since they first started keeping those statistics back in the early 90s.

Let me change now and move on to Clean Energy Ventures and start by talking about the Sunlight Advantage. A little bit of a summary there. Those investments contributed about $20.8 million during the first nine months of this fiscal year. We think, as I stated earlier, that they will contribute between 15% and 25% of our fiscal 2012 NFE. So far we've got 34 mega watts of installed capacity, over 20,000 SRECs have been generated. From a strategy point of view, in addition to being consistent with our core energy mission, it has been creating meaningful energy -- earnings growth opportunities providing customers with competitively priced electricity. And has been supported by strong legislative commitment here in New Jersey as evident by the legislation that Governor Christie signed in July.

On slide 25 we give you just a summary of that legislation which was designed to bring long-term stability to an industry in New Jersey that has been growing dramatically. The governor has indicated his support through that legislation for the solar industry. He obviously recognizes the environmental job creation and energy costs benefits to New Jersey. Two key areas in that legislation was, first with regard to renewable portfolio standard which was significantly increased starting in the energy year 2014. At the same time adjustments to the solar alternative compliance, or SACP, which has been lowered to better reflect current market conditions. I think the important point from our perspective is that the legislation has provided a framework to promote the long-term sustainability of the solar industry in New Jersey.

On slide 26 we give you some more specific detail on the renewables portfolio, where it was and where it is now. You can see, again, how it has been front loaded beginning in the energy year 2014. Essentially it has now doubled for the energy year's 2014 through 2016 and it is higher than the previous standard through energy year 2022. But through that acceleration reasonable restrictions on grid connected projects, as well as new measures to improve the investments in the so-called pipeline, the new law is designed to bring balance to the market.

If you look at slide 27 I think this is an important statistic because it shows since 1998 what has happened to the installed cost of solar. As you can see, that install cost has come down from about $11 a watt about 14 years ago. Today we are estimating it is closer to $4 a watt. That has been important in terms of the--not only competitiveness of the solar, but it is also reducing the reliance on incentives which ties back to the states ability to reduce the SACP as we have done in the legislation.

Going to slide 28, let me give you some of the details on our residential and commercial programs for the Sunlight Advantage. We have continued to make excellent progress in the residential solar program. Year-to-date we've got 536 operational leases. The average size has been about 7.4 kilowatts and [ancilet]] to the deployment of almost $14 million thus far this year. We think that number for the year will be close to $20 million. And from a customer perspective we have been able to save customers over $500,000 on their electric bills. And we think that will happen on an annual basis and will grow as we add more people to the program.

On slide 29, we talk about the business Sunlight Advantage completed projects in place totaling 27.6 mega watts. That's capital investment of more than $127 million. In fiscal--fourth fiscal 2013 we've announced two projects. Previously on Medford project, in-ground mounted system. An investment of about $20 million. A 6.7 megawatt project. We expect that to be in service in the first quarter of fiscal 2013. This morning we are announcing the Wakefern food court project which is a rooftop system. An investment of $6.9 million. That will be a 2.4 megawatt project with an in-service date planned for the second quarter of 2013. Again, the market remains robust and our pipeline remains strong in terms of the evaluation of new projects.

Let me touch on the balance of our non-regulated businesses on slide 30. We talk about NJR Energy Services which contributed $18.1 million to our net financial earnings in this first nine months of fiscal 2012. Our expectation is that NJRES will contribute between 5% and 15% for the entire fiscal year. NJRES continues its focus on long-option strategy and disciplined management. As well as providing asset management services to producers. On slide 31, we have an update for -- for you on NJR Energy Holdings, which is our midstream asset Steckman Ridge and Iroquois. NJR Energy Holdings contributed about $5.4 million during the first nine months of fiscal 2012. Iroquois was about $2.1 million of that. And again our expectation is it will contribute between 5% and 7% for the entire fiscal year.

And then finally on slide 32. Home Services, which has continued to experience a strong growth rate contributing about $750,000 to net financial earnings so far this year. 32% increase over last year. We think that they will contribute between 2% and 4% of fiscal 2012 net financial earnings. Right now, in addition to our focus on the service territory, we have been pursuing geographic expansion. And currently marketing in the counties of Sussex, Warren and Hunterdon outside of our service territory. As you can see from this slide we've been putting more emphasis on advertising, marketing and branding.

So to summarize, as we do on slide 33, we continued to deliver premium results. Our strategy is straight forward. We are focusing on making sure that New Jersey Natural Gas is providing the majority of our earnings, pursuing complementary non-regulated businesses. Understanding the importance of working constructively with regulators, policy makers, any broad group of stakeholders. And given the capital intensive nature of our business to maintain a strong financial profile. We have the foundation for continued growth driven by core customer growth in New Jersey Natural Gas. Additional regulated infrastructure opportunities are clean energy investments and expanding array of retail energy services.

And then finally, performance, which is really what we have developed, I think, a strong reputation for. We have a very attractive track record of consistent results. We've been able to increase the dividend while maintaining a payout ratio that enables us to reinvest in the business to support our future financial results. When you look at our returns over the last five years, they have been greater than the peer group average. And we've been able to do that by really understanding the importance of maintaining strong customer service and safety which is what our customers really look for in terms of what New Jersey Natural Gas and New Jersey Resources gives them.

So, that is how we are doing. It has been a strong year so far. We expect that will continue for the balance of the year. And as always I want to say thanks to our employees because it is really because of everything that they do that I'm able to report these results to you today. Thank you and well be happy to take any questions.

(Operator Instructions)

The first question comes from Spencer Joyce of Hilliard Lyons.

Good morning, guys. Just a couple of quick questions here. Dennis, I might have to circle back with you this afternoon, but I noticed we did not have any SREC sales in this quarter. Is that basically in anticipation of a rebound in the market with the new legislation going through? Or does that possibly reflect maybe a large number committed through forward sales or contracts there?

No. It is the former. We believe the current market is very over supplied and therefore prices are depressed. We have made a risk management decision for now to not sell those SRECs that we generated.

Yes, that makes sense. Another, keeping with the solar. Just sequentially from Q2, can you talk about what projects may have come online? I know we obviously will see greater generation during the summer but can you just talk about which projects--I'm thinking maybe McGraw Hill--maybe gave some impact to Q3 that maybe didn't in Q2.

I think virtually all of our larger commercial projects were put in service by the end of December. The activity really since then has been our residential program. So, the only incremental and full capacity since very early in the fiscal year has been just a continuation of our residential program.

Okay, thanks for that. That's all I had for now. Thanks, guys.

Thank you.

(Operator Instructions)

The next question comes from Mark Barnett of Morningstar.

Hi, good morning, guys. Last quarter it was a little too early to comment on where your discussions around the SAFE filings stood and around timing. But do you have any further clarity on that here in August?

Mark, we are just going through the normal process regarding responding to questions that are being asked by the party. It is just going through its normal process.

Okay, so you don't really have any target there on timing?

But I would not speculate on that at this point.

Okay, just shifting gears here. Obviously, you mentioned a new project this morning. Can you talk about that residential pipeline. I don't know which slide that is, but can you talk maybe about some details on that? And some demand and how you expect the demand for the residential side of things to move given the change in legislation?

What I'll do is I'm going to Stan Kosierowski, who heads that business unit for us, to just give you some additional insights on the market dynamics. Stan?

If you talk about the residential program as far as the residential pipeline, it is relatively strong and I think the lease model we have -- has proven to be very successful. We continue to not experience any sluggishness (technical difficulty) and we expect that program to be pretty robust within coming years on the residential side. Do you want to talk about commercial as well?

Yes, any comments would be great.

With the commercial market that a lot of the legislation has certainly helped provide some sustainability in the long-term in New Jersey. And we have projects in the neighborhood about 180-megawatts that we are looking at for the future.

(Operator Instructions)

This concludes our question and answer session. I would like to turn the conference back over to Dennis, for any closing remarks.

Thank you, Valerie. We appreciate all of your time this morning. As a reminder, recording of this call is available for replay on our website. Again, we appreciate your interest and investment in New Jersey Resources. Thank you very much, have a good day. Bye.

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