New Jersey Resources Corp (NJR) 2012 Q4 法說會逐字稿

Good morning, and welcome to the New Jersey Resources fourth 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 Mr. Dennis Puma, Director of Investor Relations. Please go ahead.

Thank you, Ashley, and good morning, everyone. Welcome to New Jersey Resources' fourth quarter 2012 conference call and webcast. I'm joined here today by Glenn Lockwood, our Chief Financial Officer; Kathleen Ellis, our Chief Operating Officer at New Jersey Natural Gas; 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 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, the items in the forward-looking statement section of today's news release filed on Form 8-K and on our Form 10-K filed on November 28, 2012. Both 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 would also like to point out that there are slides accompanying today's discussion that are available on our website and that were filed today on a Form 8-K. With that said, I would like to turn the call over to our Chief Financial Officer, Glenn Lockwood. Glenn?

Thanks, Dennis. Good morning, everyone. Thanks for joining us today. Before I begin our presentation today, I would like to let you know that Larry cannot be on the call today. Larry's dad unfortunately passed away recently, and he is tending to family matters. On behalf of everyone at NJR, we offer our sincere condolences to him and his family.

Also, as you are well aware, one month ago today, on October 29, Superstorm Sandy made landfall here in New Jersey. The Jersey shore, which is part of our service territory, was among the hardest hit. Our thoughts and prayers go out to all of those affected by the storm, including many of our customers. After our normal presentation regarding our 2012 results, we will be discussing Sandy and its impact on our service area and customers and give some preliminary estimates of the costs involved.

During my presentation, I will be making forward-looking statements. Our actual results will be affected by many factors, including those listed here on slide 2. The complete list is included on our 10-K, which was filed yesterday. Please review them carefully.

Also, as you can see on slide 3, I will be referring to certain non-GAAP measures such as net financial earnings or NFE in discussing our results. We believe that NFE provides a better measure of our performance. However, these non-GAAP measures, including NFE, are not intended to be a substitute for GAAP. They are discussed more fully in item 7 of our Form 10-K.

Now, turning to slide 4 and reviewing the results for the year, fiscal 2012 was another solid year for our Company. Fiscal 2012 NFE per share increased to $2.71 per share compared with $2.58 last year, a very strong 5% increase. The results were driven by solid performance from NJNG, our utility, NJR Clean Energy Ventures, our solar energy operations and home services. These results more than offset the expected lower results at NJR Energy Services. We will review the results of each of the companies in more detail in a few slides.

On slide 5, we can see that the 5% increase is consistent with our reputation for delivering consistent financial performance and value for our shareowners. Our five-year compounded annual net financial growth rate is a very healthy 5.1%. And on slide 6, you can see on the left was our guidance -- most recent guidance from a segment perspective for earnings, and on the right, our actual results. As you can see, each segment's results were pretty near the midpoint of our guidance, and as you can see, in total, our infrastructure base businesses contributed about 90% of the overall net financial earnings with the majority coming from our utility business.

On slide 7, you can see that our financial performance, combined with our strong financial profile, enabled us to continue to increase our dividend at an attractive rate. Fiscal 2012 dividends increased by 6.9% over 2011. Turning to slide 8, you can see that at the same time, we've maintained a lower than average payout ratio of 57%, compared with the peer group average of 63%. This healthy earnings retention rate helps us maintain a strong financial profile and supports future NFE growth.

Okay, now turning to the fundamentals of each of our businesses, first the utility, New Jersey Natural Gas. On slide 9, you will see our customer growth statistics. During the year, we added 6,704 new customers; in addition, we added 539 -- converted 539 existed non-gas customers to gas heat in their homes. The conversion for the year accounted for 57% of the total additions, with the majority coming from oil. On an annual margin growth from this new customer is expected to be about $3.7 million. Looking forward, we continue to see a healthy growth rate and expect to add between 12,000 and 14,000 new customers over the next two fiscal years. On slide 10, you can see that helping the conversion market is the significant price advantage that natural gas enjoys over other fuels, obviously helping the conversion marketing efforts.

Now, on the regulatory front, starting on page -- slide 11, you can see the update on our safety acceleration and facility enhancement program, as we refer to as SAFE. This program was approved on October 23, 2012, it is a four-year program totaling $130 million. The focus of the program will be to replace approximately 276 miles of unprotected steel and cast iron distribution mains, and that we will recover those costs with a weighted average cost of capital of 6.9%. We estimate that this program will create over 1,300 jobs through the spending of those dollars. As part of the agreement with the BPU, we have agreed to file a base rate case no later than November, 2015, where we would then seek actual cash recovery of the return on those investments.

Now, turning to slide 12. We have an update on our BGSS incentive programs, which have now been in place for 20 years and in total, have saved customers almost $600 million. In fiscal 2012, shareowners realized gross margin of $9.4 million, slightly higher than last year, and you may recall that the after-tax impact of this margin does not count against our allowed ROE. The BGSS incentives are an excellent example of our ability to work with our regulators to create opportunities that benefit our customers, our shareowners and the state. In 2012, the BPU approved an extension of these incentive programs through October 2015.

Okay, turning to our Clean Energy ventures operations on slide 13, you can see that they contributed $19.5 million to NFE during the year. In total, we have now installed 35.7 megawatt of capacity, which would generate in a typical year about 45,000 SRECs. We still see opportunities, even with today's SREC market, to invest additional capital and provide competitively priced electricity to the customers. And I think as everyone knows, following this business in July, Governor Christie signed legislation that provides additional support for the long-term viability of this market.

Turning to slide 14, focusing on the residential portion of our residential program, the amount invested in 2012 was about $21 million. In August, we reached the milestone of adding our 1,000th customer. We estimate that customers saved about -- in total, about $630,000 annually on their electric bills through these programs.

Turning to the commercial side on slide 15, so far over the last two years, we have completed about 27.6 megawatts of projects and invested about $127 million of capital. And as you can see, we have two projects that will impact fiscal 2013. Our $20 million, 6.7 megawatt ground mounted project in Medford, New Jersey has already gone into service. That was on October 15, 2012, and we continue to make progress on a 2.4 megawatt rooftop system in Woodbridge, New Jersey, for Wakefern Foods, that will cost about $6.9 million, and that project is expected to be completed in the first quarter of fiscal 2013.

Turning to slide 16, Clean Energy Ventures also during the year in September of 2012, made an investment of $8.8 million to acquire slightly lower than 20% interest in OwnEnergy. OwnEnergy manages the process for developing onshore wind projects throughout the country. We believe it will provide us an opportunity to have a first-hand knowledge of that opportunity and that business. Through that agreement, we have the option, but not the obligation, to purchase shovel-ready projects for development. And I would like to emphasize that we see this opportunity as a way to diversify our renewable energy portfolio, not necessarily to increase the size of our overall earnings contribution from that segment.

Now, turning to slide 17. Updates on NJR Energy Services. Despite the continuation of a very tough market, NJR Energy Services continued to be very profitable, contributing $10.8 million to NFE during the fiscal year. We continue to be disciplined with our long option strategy and any risk management activities, and we continue to see opportunities with our various customers for additional services. NJR Energy Holdings contributed in total $6.7 million to NFE during the year. Most of it came from Steckman Ridge, our 50% joint venture with Spectra, which contributed $4.3 million, and the rest of it came from our 5.53% interest in the Iroquois pipeline.

On slide 18, we have an update on our Home Services business. During the year, Home Services contributed $2.5 million to NFE. We are actively pursuing expansion from a geographics perspective, going beyond our service territory and in the products we offer. So, Home Services enjoyed nice growth in 2012.

Okay. That summarizes our normal fiscal 2012 earnings update. I would like to turn the discussion now to Hurricane Sandy, which we will refer to as Superstorm Sandy, which struck our service territory in late October. I would like to begin on page -- slide 19 with some facts about the storm, which you see listed here. The one obvious fact that really, you notice when looking at the statistics, is the physical size of the storm. At 970 miles wide, it was almost double the size of some of the other famous storms that have hit the country, impacting over 24 states, with winds over 90 miles an hour, the Jersey shore bore the brunt of that storm.

On slide 20, we've included some pictures so people can get a better feel of the force of the storm and some of the damage it caused. On the top half of the slide, we see some before and after photos of the damage in our service territory along the coast. This is Mantoloking on the Seaside Peninsula. On this page you can see -- on the top page you can see the Barnegat Bay on the left-hand side of each photo and on the right-hand side, the Atlantic Ocean. The after shot shows how the ocean actually went over and through the island and met the bay, creating much damage. The bottom three photos were taken by our teams on the ground following the storm, and you can see first the washed out Mantoloking bridge, a home knocked off its foundation in the bottom center and the major thoroughfare through the island, route 35, for the time being was totally inaccessible.

On slide 21, you can see, again, the Mantoloking bridge and we focused here that is our natural gas main that's exposed. That's the principal feeder line of our service into the island. And over three to four -- that was three to four feet below the earth before it was washed away. The devastation as you see on page 22, further south on that peninsulas and Seaside Heights. Again, on the top half of the page, you can see the before picture including the pier with the now infamous roller coaster on that pier. On the right, you can see the after picture, after the storm was over and on the bottom, you see some close up shots. Part of the town on the bottom left completely underwater. The destruction, really, of the historic Seaside Heights boardwalk. And again, what is now a pretty infamous photo on the bottom right of the roller coaster from that Seaside pier in the ocean.

Monmouth County was hit also hard, as you see on the next slide. This is the Manasquan on the left where severe erosion and flood incurred. And on the right is an example of one of our services. As you can see, the sand is actually covering our meter. These photos give you a sense of the destruction and magnitude of what we were dealing with.

On slide 24, we will give you some operational updates on what's been going on and where we are. In the aftermath of the storm, our team's response was nothing short of heroic. With access virtually impossible, our first responders initially made their way to the affected area by boat. In the first three days following the storm, our crews responded to over 1,300 leaks and made them all safe. Over 400 individuals were on the ground in the affected areas, and we enlisted the aid of other crews from other utilities to work alongside of us.

All throughout this and continuing through today, safety is our number one priority. We made the tough decision that we had to shut down the system on the Seaside Peninsula, with you have seen pictures of, and also another island, which we refer to as Long Beach Island. Approximately 30,000 customers, or 6% of our customer base, was impacted by this tough decision. We were very concerned about the possibility of water in the system and in addition to these islands, there were some other towns on the mainland also impacted, such as Sea Bright and Manasquan. We had to shut down those systems, as well.

On slide 25, we have summarized for you, broken out by the three areas that we referred to, the impact of this decision. First, the Seaside Peninsula with about 160 miles of pipe curtailed. That impacted, or we shut off basically 15,207 customers. Long Beach Island, about 150 miles of pipe involved. We had to shut off 13,756 customers and the other affected areas, smaller in size, but obviously also important, about six miles and a little over 1,100 customers. As I mentioned, over 30,000 customers originally shut off because of the storm.

On page 26 -- slide 26, you can see the status starting of what we did and then we will get into exactly where we are. On Long Beach Island, the assessment actually revealed that the pipe revealed less damage than we were worried about, i.e., there was no significant water damage to the pipe and the majority of the mains and services were salvageable. The restoration plan has been implemented in three phases. First, we had to reintroduce gas into the main. We had to repair and replace thousands of meters to bring natural gas to the meter, and then had to do leak surveys and appropriate pressure testing to get gas back to the customer. The customer becomes gas ready and then gas gets turned on following certification from a qualified technician. The good news is, as of November 26, natural gas is now currently back available to all accessible meters, except those with the most severe damage. We will have some numbers on that in a few slides.

Now, turning to slide 27, Seaside Peninsula had much more debris than Long Beach Island, and that -- it slowed down the assessment process. But we did finally -- were able to complete that assessment and it did reveal more damage in LBI. But again, luckily, no water in the system, which means much of the main is salvageable. We currently expect to begin restoration process by December 3 of 2012. And we are installing about a mile of 12-inch main, which is the backbone of the system that serves this Peninsula, due to there were three breaches of the pipe in Mantoloking. The restoration plan is similar to LBI. Again, three phases that ultimately gets gas back available to the customer and then the customer needs to get a qualified technician to re-hook up his appliances. We currently believe we can finish getting gas to those customers safely by the end of the calendar year, December 31.

So, on slide 28, onto the updates, and where we were just a month ago to where we are now with restoring service to customers. Again, out of the original 30,067, virtually all of Long Beach Island is back in service and, similarly, the 1,100 or so other customers affected, virtually all of them are also back in service. Again, we believe we will begin restoring service back to Seaside beginning in early December, so there are none yet available back on in Seaside Peninsula. From a financial perspective on slide 29, and these are preliminary estimates, we still don't know exactly what we are going to encounter when we get through Seaside Peninsula, especially. But we currently estimate that capital spending will be between $40 million and $60 million. That is related to the main services and predominantly having to replace virtually all of the meter assemblies impacted at the customers' premise.

As with normal operations, these storm related capital costs will be treated as additional rate base, and there are several options we have with how those capital investments are going to be treated from a regulatory perspective. We may use a portion of our SAFE money that was previously discussed and approved for these storm related costs. We will definitely need to reevaluate our quote, unquote, normal budgets, both utility and non-utility. And, as we mentioned earlier, we need to file our rate case anyway by November of 2015. We will reevaluate that and possibly file sooner, if necessary, again, depending on what the final tally is.

There are also several incremental direct operating and maintenance costs which we currently estimate to be between $12 million and $20 million. These are the costs associated with the assessments, the leak survey and leak repair process involved in this situation. We have already filed a petition with the BPU seeking deferred accounting treatment for these incremental storm related O&M costs, and there is precedent in New Jersey for those costs to be recovered in a future rate case filing.

Now, we have decoupled rates and utilities, so we earn our margin on a per customer basis. So, one of the issues we might have to deal with is that there will be lost margin from the customers. To give you a sense of the magnitude of those dollars involved, during a typical winter month, and I say winter because the monthly impact is seasonal, with more earned during the winter than during the summer. We estimate all 30,000 customers, if they were all out for a full month, the lost margin from those 30,000 customers would be between $1.5 million and $2 million. That compares to the total gross margin we enjoy of about $276 million on an annual basis.

And as you just heard from my update, we do expect all customers that are available to have service by the end of December, with roughly half of them already having service by the end of November. So, the impact should be a portion of that $1.5 million to $2 million over two months. There will be some customers that have their houses condemned, and so there will not be service back for an extended period of time. To give you a sense of the impact of what that could potentially be, for 1,000 small residential customers and 50 small commercial customers, if they were lost on a more prolonged basis, the annual gross margin loss for that type of customers would be about $400,000 on the residential side, and about $32,000 on the commercial side.

On slide 32, I want to point out, from a financial liquidity perspective and access to capital, that while obviously unexpected, we are benefiting from our strategy of having a conservative and strong financial profile, and we have more than enough liquidity to cover these incremental expenditures. We already had a $200 million credit facility in place with the feature to expand it by $50 million, that has been exercised and is in place. We already had BPU approval to issue up to $200 million long-term debt. We had already planned to issue $50 million of that $200 million this fiscal year. That could be easily upsized, if necessary. We have had additional credit lines offered to us by our lenders, if needed. We will, of course, reevaluate our normal capital budgets, and we have flexibility with our dividend reinvestment and repurchase plans to raise capital, again, if needed. So, access to capital, despite the size of these unexpected expenditures, is not a problem.

On slide 33, finally, as we look ahead, as we've done in the last several years, we will announce next year's earnings guidance with the publication of our first quarter earnings release, which would be typically in early February of next year. And, as we've been doing all along, we will be making daily updates on the progress from an operations perspective on the website that you can see here on the middle of slide 33.

So, with that, I want to conclude by thanking our employees. Because of their hard work and dedication, we were able to report these results to you today, showing significant progress in the restoration efforts. So, thank you also, our investors, for being there for us, as well. At this point, I'd be happy to take any questions.

(Operator Instructions)

Mark Barnett of MorningStar.

I think I speak for everybody when I say thanks for the work that you guys have put in, and your employees. I did have a question on the cost and the CapEx estimates that you gave. You might have qualified this, but were those two-date numbers, or were those kind of full impact through the next maybe quarter or two?

No, those are an estimate of the full impact, even including the prolonged outages. So, that's the full impact.

Okay. All right.

As of this point in time.

Okay. And quick switch gears, then. With the onshore wind, obviously, you are going -- as you mentioned, you are going to be reevaluating some of the budget and whatnot. But I'm just curious, could you give the idea of a sample size project investment you would be looking at through OwnEnergy? And if the PTC is going to impact any of your investment appetite there?

Yes. First of all, the average size of projects we expect to be shown by OwnEnergy would be ranging between $50 million and $100 million for 100% ownership of a single project. And the PTC issue will impact the speed and the amount of projects that would be available to be developed by Own to begin with, and then ultimately be shown to us. So, that gives you a sense of the size, again, of the projects and the PTC issue.

Okay. Thanks for that.

Very good.

(Operator Instructions)

Spencer Joyce of Hilliard Lyons.

First off, my condolences, both for Larry and all of you guys up in New Jersey with the hurricane, and my thanks as well. Sounds like you all are doing a pretty good job navigating a difficult situation.

Thanks, Spencer.

I actually wanted to ask about the solar side of things. I noticed you all went ahead and decided to sell a few SRECs this quarter, up from none last quarter. I was wondering, have you seen any rebound in SREC prices, possibly from the July legislation, or were those incremental sales just a risk management thing? Or what was the thought process there?

Okay, a couple of things. One, the majority of the sales you are seeing now are based on some hedges we had put in place. It was more related to the risk management decisions we had made. But the good news is, we have started to see the construction -- the monthly construction numbers go down, as you would expect with the weaker short-term prices.

So, yes, we have seen SREC prices stabilize, and actually have gone up a little bit, but not yet back to the levels that we ultimately hope they will get to. So, they have rebounded a little bit, and we are on the right path now, but again, I think it's just going to take time. As we hope to see, again, a continued slowdown of construction, so that the current long market for SRECs ultimately gets back into being levelized.

And there wasn't any damage to any of the solar facilities from the hurricane, was there?

We have 27 residential installations that need to be either repaired or need to be looked at further. We had one commercial rooftop project -- a 1.5 megawatt project where a portion of it was damaged. 1 megawatt is back on, as of today, and we continue to look at appropriate ways of getting the rest of the roof back on. But fairly small amount when looking at the total megawatts of capacity we have of over 37 megawatts, basically about 0.5 megawatt is currently out because of the hurricane.

Okay. And what were -- I may have missed it, what were the ITCs we booked in Q4?

I don't have the Q4 in front of me. I know in total for the year, there was $34 million of total investment tax credits generated after the deferred tax adjustment you have to make because of the lost tax depreciation when you take the credit. The bottom line impact of that $34 million is approximately -- take about 6% off the 30%. So, $34 million represented 30% investment tax credit, you have to take 6% off of that to see the bottom line impact.

Okay, got you. And finally, back to the hurricane. You mentioned the deferred O&M treatment of the $10 million to $20 million there. If I'm to understand correctly, that would keep that from flowing through the income statement, correct?

Yes. These are costs that, in typical accounting, would be through the O&M, but because of the deferred accounting mechanism with the regulators, it will not go through the income statement. Instead, it will be a regulatory asset on our balance sheet. And then in the next rate case, we will request to negotiate a recovery period of those dollars. It will be income neutral.

Thanks.

(Operator Instructions)

Paul Patterson of Glenrock Associates.

Just on the SREC pricing, could you give us a little bit of a flavor as to what you're actually seeing now? And you mentioned that construction was down, and what have you, but just how you see that market developing?

Well, from a spot basis, I think we are seeing SRECs now in the $80 to $90 range. From the three-year strip perspective, we have seen -- our most recent deal was in the $92.50 range. Both of those numbers are a good $10 to $15 higher than they were a few months ago. And again, we believe that's because of what I said about the monthly construction numbers.

Before -- put it this way, in the gold rush, if you will, with bonus depreciation and when the market was short SRECs, you were seeing monthly megawatts installed above 30 megawatts, even 35 megawatts a month being installed in the state. The most recent numbers are below 20 megawatts a month now. So, we think over time, especially given the accelerated RPS standards that the Governor signed into law earlier this year, that if that slowdown, especially below that 20 megawatt a month or so level continues, eventually SREC prices will strengthen even further.

Any sense as to when we might see that?

Well, like I said, I think we've started to see it with already $10 to $15 SREC increase, and that's with really only two or three months showing that lower construction level. I also mentioned, in the legislation there are now new regulations for the BPU to actually monitor and slow down, if you will, and approve on an individual basis, the larger ground mount -- the ground mounted pre-connected projects. And that in and of itself over the longer term, will definitely slow down the amount of new capacity added in any given year versus what happened before those rules were in effect.

Okay. So, generally speaking, we should be probably seeing continual improvement over the next several months? You expect the improvement to continue in the sort of --

We expect that, but quite frankly, that's obviously a forward-looking prediction that nobody really knows. But that's what we expect, yes.

Okay. Thank you very much.

(Operator Instructions)

And showing no further questions, I would now like to turn the conference back over to Mr. Dennis Puma for any closing remarks.

Okay, thank you, Ashley. Thank you for joining us this morning. As a reminder, a recording of this call is available for replay on our website. Again, we appreciate your interest in investing in New Jersey Resources, and we'd like to wish you all a safe and healthy holiday season. Goodbye.

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