New Jersey Resources Corp (NJR) 2013 Q3 法說會逐字稿

Good day, and welcome to the New Jersey Resources 3Q 2013 results teleconference. 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 that this event is being recorded. Now, I would like to turn the conference over to Dennis Puma, Investor Relations. Mr. Puma, please go ahead.

Thank you, Keith. Good morning everyone. Welcome to New Jersey Resources third quarter fiscal 2013 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 of the forward-looking statements include many factors that are beyond NJR's ability to estimate or control 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 statements section of today's news release filed on Form 8-K and on our Form 10-Q to be filed on or after August 7, 2013. Both of these items can be found on our website as well as SEC.gov. NJR does not, by including the statements, 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 which are available on our website and that were also filed on our Form 8-K this morning.

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

Thanks, Dennis. Good morning, everyone. As always, we appreciate your taking the time to join us.

I want to begin by pointing out that 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 1 of our presentation. The complete list is included in our 10K, so I would ask you to please take the time to review them carefully. Also, as we note on slide 2, I will be referring to certain non-GAAP measures such as net financial earnings, which I will refer to as NFE as I discuss our results this morning.

We believe, I think as everyone knows, 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 discussed more fully in item 7 of our 10K and they are being provided pursuant to SEC Regulation G. So I would ask you again to please take the time and review that disclosure as well.

Turning to slide 3, I think everyone knows from our press release this morning that we turned in a very strong third fiscal quarter. I'm going to discuss these results in more detail shortly, but I wanted to start out by reminding you of our financial goals. I know that these are familiar to many of you. And I want you to think about our performance this quarter in the context of those goals going forward.

First of all, we remain committed to average long-term net financial earnings growth of between 4% and 7%. Second, we will continue to strive to provide dividend growth of at least 5%. We have targeted a payout ratio between 60% to 65% of our net financial earnings per share. And third, we will maintain a low risk business profile with at least 60% to 70% of our earnings coming from our core utility business, New Jersey Natural Gas.

So let's take a look at how we have performed over the last 10 years. On slide 4, you can see that we have delivered average annual growth of 5.4% in net financial earnings per share since 2003. As many of you know, we have had a challenging fiscal 2013 to date, but as our results today show, we are performing well despite the challenges of SuperStorm Sandy and a reduction in solar investment tax credits. And what I will do is explain to you today how we believe we have the fundamentals in place to continue our strong record of consistent long-term growth.

On slide 5, we take a look at our dividend and we are shown, as everyone knows, our commitment to consistent increases. When you look at our average annual dividend growth rate you will see that it exceeds our peers. Our current payout ratio is about 60%, which is lower than our peers and supports the sustainability of our growth and our growth in the dividend in the future. And as I said, our payout goal is a range of 60% and 65%.

So on slide 6, you can see the headlines from what was a very strong third quarter. We increased the midpoint of our guidance thanks to very strong results from NJR Energy Services, cold weather, and increased market volatility caused their net financial earnings to grow compared with last year. Our recovery from SuperStorm Sandy continues. Total capital expenditures associated with the storm will be less than we initially anticipated and the BP recently approved our request to defer the O&M expenses associated with Sandy.

In addition, our solar market fundamentals are improving. I'll discuss that in greater detail in just a little bit, and on July 10 our Board of Directors increased our share repurchase program by 1 million shares. But we think more importantly from a strategic point of view, we do have the foundation in place for long-term growth.

On slide 7 you can see for the quarter our net financial earnings per share were $0.23 versus $0.10 last year and for the nine months, net financial earnings per share were $2.73 a share versus $2.98 last year. Strong results from NJRES benefited our performance in both periods. On the other hand, lost gross margin from Sandy negatively impacted NJNG in both periods.

New Jersey Natural Gas Company's quarterly results were also affected by O&M timing due to Sandy. We were catching up in the third quarter on work that is typically done in the first quarter. However, I think it's important to point out that we currently expect higher earnings from New Jersey Natural Gas for the entire fiscal year. Clean Energy Ventures was lower due to less investment tax credits from solar capital spending, which we believe will be beneficial for SREC prices in the long term.

Moving to slide 8, as result of our unit year-to-date performance, we narrowed our fiscal 2013 guidance to a range of $2.60 per share to $2.75 per share. It was the second increase in the lower end of our guidance range this year. The increase was driven by better than expected results at NJRES due to increased short-term volatility, which included colder weather in the spring and a hot July which increased demand for physical gas services. We currently expect, as you can see, improved results for the fourth fiscal quarter and importantly, when you look at the earnings coming from the different components of our business, we think that New Jersey Natural Gas will comprise about two-thirds of total NFE for the fiscal year.

On slide 9, you can see them that New Jersey Natural Gas capital spending is currently estimated at $146.3 million in fiscal 2013. That increase compared with last year was due primarily to our Sandy restoration efforts, and as you can also see we continue to invest in our SAFE and AIP infrastructure programs. And, we have also begun investing capital in our NGV Advantage program. As you will see in just a little while, our investments in NJNG's infrastructure will support safety and reliability and drive our long-term earnings growth. It will also complement our investments in our non-utility businesses.

Now on slide 10, I just want to give you an overview of our long-term growth strategies for New Jersey Natural Gas. We expect two primary sources of earnings growth -- increased infrastructure investment to support safety and reliability and growth in new margin for our customer and other initiatives. We expect to file a base rate case no later than November 2015. However I would point out that the majority of our existing infrastructure spending are already earning a return.

As you can see on slide 11, New Jersey Natural Gas Company's capital invested since our last base rate case in 2008 and looking forward through fiscal 2016 is expected to be over $1 billion. I think everyone is familiar with our normal capital spending, which includes customer growth and system maintenance, and that will comprise about half the total. Our AIP and our safe programs remain in place.

But I want to explain on slide 12 our new infrastructure programs such as the Southern Reliability Link, our Liquefaction project, and NJ RISE which we believe will provide additional opportunities for growth while benefiting our customers. The Southern Reliability Link is a $130 million project which will add additional high-pressure pipeline to support growth in Ocean County, which is where we expect the majority of our customer growth going forward. It will also allow us to diversify our supplier base to increase system reliability.

Our Liquefaction's Facility Project, which will be just a little bit less than $30 million, will allow us to reduce our LNG transportation costs and save our customers money. And the final area shown on that slide is NJ RISE, which is an acronym for reinvestment and system enhancement. That should be about $100 million. It is our storm response filing and will allow us to provide additional pipe to the barrier islands, as well as excess flow valves. I think it's important when you look at all this spending, it is providing benefits to both our customers and to our shareowners.

On slide 13, you can see that we project during the next five years, we expect annual gross margin growth from new customer additions. The growth rate is projected to be at 1.4% to 1.5%, which is very strong compared with our peers and will be driven by improving new construction and a strong conversion market. I'd remind everyone through our conservation incentive program, which reduces the impact of weather and usage on gross margin, we are again providing benefits to both customers and shareowners.

On slide 14, you can see our SAVEGREEN program margin goals. Just to remind everyone, SAVEGREEN supports the state's energy efficiency goals, but it also allows our customers to use less energy and save money. In June, the Board of Public Utilities approved a significant program expansion. SAVEGREEN is helping us promote customer investment in high-efficiency energy equipment and New Jersey Natural Gas earns 9.75% to 10.3% on the equity associated with those investments. And over the next two years, we expect to invest $85 million in the SAVEGREEN project.

On slide 15, we expect the growing margin contribution from our NGV Advantage program from both the infrastructure investment and increased throughput. The total potential investment is up to $10 million. We've committed between $6 million and $8 million already and on those investments, we earn a 10.3% return on equity.

And finally on slide 16, our BGSS incentives, which began back in 1992 and are in place through October 2015, provide benefits to customers and shareowners through better utilization of our supply and transportation portfolio. You can see that since their inception, customers have saved more than $620 million while shareowners receive about $0.08 per share annually.

But on slide 17, when you bring all of those sources of gross margin together, you can see not only significant growth but diversity and where the gross margin is coming from. Incremental gross margin is expected to triple over the next five years which supports our expectation that New Jersey Natural Gas will contribute between 60% and 70% of our total net financial earnings. Customer growth will still provide the majority of NJNG's gross margin, however, as you can see, SAVEGREEN ramps up in the latter years and BGSS margin continues to add to total gross margin over time. And I think it is important to note that these numbers do not include any impact for the projected November 2015 base rate case.

Now let me turn to our non-utility to talk about those growth strategies on slide 18. The strategy there is four major elements. First of all, we are seeing improving market fundamentals for New Jersey solar assets. We intend to reduce our solar investments over the long term by reallocating capital to wind and combined heat and power. We expect steady contributions from our wholesale and midstream operations, as well as an expanded range of products and services in different markets in Home Services.

On page 19, to talk about solar, the increase that was approved back in July of 2012 went into place in June of this year in the form of an increased renewable portfolio standard. What we have seen is a decline in solar construction in the state which we expect to be positive for our long-term Solar Renewable Energy Certificate prices and over the next five years, we expect that our inventory of SRECs will grow to 174,000.

Moving to slide 20, our plan is to begin to reduce our reliance on solar by the time ITC expires in fiscal 2017. The first step in doing that will be a reallocation of capital to onshore wind energy. From a strategy point of view, 29 states and the District of Columbia already have renewable portfolio standards in place, and wind is the most economic solution for meeting renewable portfolio standards in most states.

From where we are, from a Company point of view, we have a strategic partnership with OwnEnergy that you may recall that we entered into last September, and our focus is on small to midsize projects. OwnEnergy's current pipeline is about 1,300 megawatts and our focus will be on projects that include long-term power purchase agreements combined with project financing.

On slide 21, you can see part of our plan is to invest capital in combined heat and power, again from a strategy point of view, federal and state incentives strongly support the project economics of CHP. SuperStorm Sandy drives the need for enhanced reliability and resiliency. And there is some conversation going on right now about a proposed portfolio standard for CHP in the state. To give you a sense of where we are on the unregulated side, we're targeting key markets such as hospitals and food processing and have developed a pipeline of projects of about 6 megawatts right now.

But our long-term goal is to maintain clean energy ventures at about 10% to 15% of our net financial earnings, but to reduce our investment in solar capital, and we expect that the investments in wind and CHP, as well as midstream, which I will talk about in the moment, combined with the reduced solar spending will allow us to avoid any cliff in our net financial earnings in fiscal 2017.

Finally as we show on slide 22, we expect steady contributions and potential growth from the rest of our non-utility portfolio. NJR Energy Services is having an outstanding year. They have been able to identify and will continue to focus on growth opportunities from physical gas marketing and producer services. We have been able to successfully restructure our portfolio to reflect the current market realities in that business and we expect that over time, NJRES will contribute between 10% and 15% of our total net financial earnings.

In the midstream area, our existing investments, which primarily Steckman Ridge and Iroquois, provide us with a consistent earnings stream and we are currently looking at additional opportunities to leverage our customer contacts to look at new investment possibilities. We expect that midstream will provide about 5% to 10% of our total net financial earnings. And then finally in Home Services, we expect growth through the expansion of both our geographic footprint and our service offerings and that their contribution will be in the area of 2% to 5% of our total net financial earnings.

So in summary on page 23, we will continue to build on our record of meeting the expectations of our customers and our investors. We are focused on delivering long-term net financial earnings and dividend growth. We will, as you can see from our presentation this morning, invest significant amounts of capital into New Jersey Natural Gas. That will enable us to support our primary responsibility of providing customers with safe reliable service and increase our gross margins with a diverse range of customer focused initiatives.

We will continue to work collaboratively with our regulators to develop innovative and constructive programs to benefit our customers and supporter our state. You should expect us to continue to invest in solar in the near term, but over time we will reallocate capital to wind, combined heat and power, and midstream projects that will allow us to reduce our reliance on investment tax credits. And also, we will work to sensibly grow our other utility businesses.

As I close, I want to say a special thank you to our employees. We have had a lot of challenges this year starting with what occurred with SuperStorm Sandy. But despite all of that, we are on track for another consistent year of performance for all of our stakeholders, which is the result of our employees' dedication and commitment to every single day.

So with that, we would be happy to take your questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Andy Levy, Avon Capital.

I just wanted to see if I could get some more details on the reallocating of capital into wind and combined heat and power and I guess the midstream business. So maybe just with the wind, I'm not that familiar with OwnEnergy so maybe you can just kind of talk about the partnership itself and basically where you would be doing these projects and is it just on the 1,300 megawatt's that they currently have in their pipeline that you would be investing in? Or this would be new? And then obviously the PTCs are set to expire after this year and they could be extended but just kind of going into that and then I have some questions on the other two businesses.

Okay. Andy, this is Larry. I will give you the overview and then I will ask Stan Kosierowski to comment on that as well. We entered into the agreement with Own last year, made an equity investment of about $9 million. What it did was give us the opportunity access to Own's portfolio. So we have the opportunity but not the obligation to invest in their projects. The focus is going to be on states that have the renewable portfolio standard which is why I mentioned those 29 states, and we will be looking for opportunities that are supported by purchase power agreements. And from a financing point of view, we will look for project financing as well. So what Own is doing is they are actually developing the projects and taking all of that development risk and then as I said, we have the opportunity to then review those projects, decide if that make sense, if they meet our return criteria, and decide whether to invest at that point. So the focus right now, as I said, would be on those 29 states.

Stan, do you want to add anything to that?

Just that the states that we are looking at are the states that not only have RPS standards but also in the future will require capacity that doesn't exist today. So wind is the low-cost provider of that capacity so it provides some good opportunities in that space.

Right, but the opportunities on this curved pipeline of 1,300 megawatt's, is that where the opportunity is right now?

Yes, it is.

Okay. And are these 1,300 megawatt's are assigned PPAs already? Or are these --are things that they have broken ground on this 1,300 megawatt's? What can you tell me about them?

They are all, Andy, the 1,300 megawatt's are divided into various stages of the development process. So we would not really get involved with considering them until they were far enough along including the PPA being in place. Stan, you want to add anything to that?

The purpose of the Own investment was the fact that they would be the developers and then we would be at the late stage. So rather than us spend significant time in early stage development and rejection of projects that Own would synthesize those projects, determine where those projects were the most viable, and then bring those projects to us in a late stage, so that is the relationship with Own and that is how we fit into it.

We do not want to be in the development business and Andy, you had also mentioned the PTC which is ongoing conversation in Washington. Quite frankly, not all of the projects will be dependent upon PTC for the economics and we would factor that into our overall evaluation as to whether or not they qualify for PTC.

How many megawatt's of wind does Own operate right now?

Own is a developer. They don't operate wind projects.

They don't operate? So they develop -- so they do -- it's a turnkey type of thing?

Right they develop the project and then turn it over to an asset owner.

Okay, and then so you would make money on the construction of it? Or you would be part of the PPA?

No, Andy, this is Glenn, we would then if we found a project that met our criteria, buy the project from Own and then we would construct it, own it, and then we would be the beneficiary of the PPA with the local electric utility or whoever it is on the other side.

I understand, and when do you think we would see some capital flowing in that direction?

We are looking at projects as we speak and when they have a project that meets all of our criteria, including long-term PPAs, which we are not ready to announce any yet, that is when we'll start announcing the transactions. But nothing imminent but we have already, for example, looked at, at least one potential transaction that we did not take because it did not meet all of our criteria.

What is your return threshold on this?

We are looking for unlevered returns around 9% which is a market based and based on appropriate leverage and project financing that would be a return on equity in the high teens.

High teens and that would be financed 50-50 or how would that work?

Well, we again -- (multiple speakers)

As far as trying to figure out what your return or --

We see the market financing at about 60% equity, 40% debt, and then we also are expecting up to 40% project financing.

And over the next three years how much capital which you like to put into that business?

That is going to depend on a deal flow. I think Larry mentioned in the presentation the average project is -- the projects they specialize in are $25 million -- $100 million size projects. We're hoping to look at, at least one per year but we do not have a specific capital budget yet. Again, we need to get a better look at the projects as they become available to us.

Okay. And then the same type of questions on combined heat and power. Kind of maybe you can give us the same type of run down and so I just don't have to repeat all these questions but kind of the same line of questioning.

The combined heat and power, just to give some overview on that and ask others to comment on that as well. That is it. That is the market that we see evolving here in the state right now. I think that it has gotten a higher level of focus in the aftermath of Sandy and the increased focus on the need for backup power and things like that. So as a result of that, we have seen more projects that have been developing and we expect that, that is going to continue over the next several years.

The Board of Public Utilities has been involved. We view that as a preliminary conversations that are going on there right now about a potential portfolio standard. But we think that, that market will continue to evolve going forward. Similar to Own, I mean different type types of deals, of course, but similar to Own, we are looking at equity returns that would be in the mid-teen range as far as the equity returns goes. But right now, we're looking at food processors, hospitals, and have identified potential opportunities in the range of 6 megawatt's. Glenn.

The average project size of these from a capital perspective is much smaller than the wind. We're talking upwards on the high side $5 million for a large project that we are looking at. So again, the amount of capital would be on a relative basis smaller than wind.

Okay. And on the midstream? (multiple speakers)

The midstream, as I said in the presentation, we have developed some very strong customer relationships and [Jerry Epps] in there with the services we provide to them, we think there might be opportunities to participate with them with potential investments on the midstream side. That is a bit of a challenging area because of the MLP money and what we are not prepared to do is to reduce our return criteria to try and compete with that. But we do think, and combination with some of the other services we provide to customers, that there could be appropriate opportunities for us.

You said the partnership with who? You said there was -- you mentioned a company or something or did I miss?

Just customers in general.

Yes. The customers that we work with at NJR.

How about your existing pipe investments? Are there any expansion opportunities there from what you are hearing from the main guys running those pipes?

No, we don't see that right now.

And then the last question is just on the 4% to 7% growth rate that you threw out there. Does that include these type of investments? Would that be additive? I also understood that you are doing this to replace the lost solar tax credits but I just want to understand, would this be kind of part of the 4% to 7%? Additive to the 4% to 7%?

It's Glenn, Andy. This would be part of the 4% to -- inclusive in the 4% to 7% including as you just mentioned the lower expected tax credits going forward. In fact, to the extent that we are successful with capital opportunities in CHP in wind, we would probably as we have been talking about in this presentation, reallocate solar sooner rather than later, again to get off of the reliance upon those solar tax credits.

Okay. I got about 10 more questions. Now I'm teasing you. Thank you very much.

Glenn Barnett, Morningstar.

Good morning, everybody. Just a couple of quick questions. The first on the new capital projects that you listed on the slide, maybe 12 there. You mentioned that the timing of the rate base earnings would be by 2017. Maybe you are already kind of hit on that in your comments, but if you are filing in 2015, is there any reason why those aren't 2016? Or is it just timing of project completion?

Mark, that's really a function of our fiscal year. If we file a rate case in November, say November '15, that is fiscal '16 already and it takes a good nine months or so on average to settle a rate case so that brings us right to the beginning of fiscal '17 because we’re also 30 year end.

Oh, that's right. You did file late in '15. Okay. That makes sense. Okay. And then just a second small issue. With the deferral that you had approved for the kind of incremental O&M from dealing with Sandy, your estimate in the past was about $15 million to $20 million. The first part, is that still about the number that we will be looking at? And second would be how much of that have you already hung up on the balance sheet?

Yes, the $15 million to $20 million has not changed. And as of June, I think we are $14.9 million actually spent and on the balance sheet.

Great. Thanks for the details.

Jay Yannello, Skyden Capital.

Good morning. Larry, I know it's not a huge part of your business but the home standby generation market is really hot still. In my town it is roughly I'd say 10% penetration. It is within your service territory. I know you were busy after Sandy with maintenance and then some installs. Are you being aggressive enough in this market? It seems like it is continuing to go, and I'm just wondering if you are spending enough in this market, if you have enough resources allocated toward it? And if you know roughly what percentage of the market you have so far?

The -- you can rest assured we are being very aggressive in the generator market. If you could look around the table you can see the smiles on my colleagues faces. That has emerged, as you suggest, as a very strong growth opportunity for us. I’ll ask Stan Kosierowski, who is head of that unit. I don’t think we have the specific percentages, but I’ll let you answer that.

I think generator sales is obviously is a big market. It hasn’t slowed down. We saw after the last hurricane it was an uplift and when people found out the economics, how much it costs, the people walked away. But this time it just continues and its is a way of life. And we’ve had over I think 3,000 sales leads when we probably had less than 200 leads a couple of years ago. And we’ve put in maybe 10 generators and five years ago we’ve already installed over 300. So it is a very viable market for us and we’re going after it. We have some people dedicated to it and it’s certainly something that our customer base is interested in.

And I know, Jay, you live in the service territory. If you want to buy one, we've be happy to sell you one.

I actually have basement window issues I can't get over with but I'm still debating it. Do have an off the shelf contract, a service contract, or are you working on more of them? I have not seen that much marketing on that side, as far as for generators. And also while I'm on it, the plumbing and electrical, can you give us any early feedback on those contracts? How that's --

And to -- I'll ask Stan to take those. But I got to ask you to look more at the local papers and things like that because we've got a pretty aggressive ad campaign out there right now.

Okay. I was referring to home flyers but I don't read the local papers. I guess I should.

No home flyers. Let may ask Stan to answer your other question.

The issue is we do have a product -- a service contract on generators that we offer and we offer it not just to the units that we have sold but to anybody else who might have had it installed by some other competitors. So we do have that product and we are advertising it quite aggressively. And regarding the plumbing, the plumbing and electrical contracts, they are going well. We’ve sold several thousands of both to customers. Customers who have them love them. And we’re using that as a -- really an advertising brand to get addition people to buy the contracts. They are very successful.

Okay. And as these things cycle on and off in tests, do think you will start seeing that eventually as more and more are installed? Or it will just totally be lost? I'm talking, obviously, in the off-season.

Stan.

Can you repeat that?

I guess once a week, these things cycle on and off and as thousands and thousands and thousands of more of these are installed in your service territory in the off-season, do think you'll start to see this demand?

On service contracts?

No. As the generators cycle on and off, they test themselves once a week for 10 minutes or so. So as again, if all of a sudden you have tens of thousands of these things popping -- will you start seeing that in your low demand?

Yes, but we have decoupled rates Jay.

I realize that. I just mean for managing the -- from managing your throughput, your flows and things like that.

There is a tremendous amount of throughput involved with the cycling part of this whole -- of the machine.

Okay. All right. Thank you.

We have not had the opportunity to deal with that issue.

Exactly. All right. Thank you.

Paul Patterson, Glenrock Associates.

Good morning. Just getting away from the tax credit and you said you’re going into solar and going into wind and what have you. Generally speaking, I mean I think of the PTC as being a pretty significant economic impact associated with wind. But you mentioned that you saw economics outside of that, and I just wonder if you could elaborate little bit on that?

The issue is that the PTC is a short-term event. However, the areas of the country that are -- where wind is being successfully constructed are areas that have capacity demands. Probably not today but there are PS standards over the next five years that requires them to either replace or consider new generation sources. And wind is one of the lower cost clean power sources that utilities are looking at to provide that power. So, in the future what I think we're looking at is where those states are needing the capacity and then taking also the alternatives and there is a lot of [life cycle] alternatives where wind is one of those lowest cost and probably the second lowest cost compared to the combined cycle gas project.

I think, Paul, it underscores as you well know the importance of those renewable portfolio standards.

Okay. How about the underlying purpose of getting away from the tax credits? Is there -- what is the reason for that? Is that because of your own tax appetite or what you see for the market? What is leading you to -- what is actually causing this?

Paul, right now in the laws the tax credit reduces from 30% down to 10% at the end of calendar '16. So we are basically planning assuming that is going to happen. So obviously, without a change we're all of a sudden going to get a third of the tax credit we get from new capital than we get now. So we needed to appropriately so plan ahead and not be so reliant on that tax credit if we want to continue the consistent annual earnings growth, which we obviously do.

Okay.

And I think the other point there, Paul, I mentioned briefly in the presentation is we should be focused on the growing inventory of SRECs and what we expect to come from that.

I got you. The CHP, you mentioned that your current pipeline is 6 megawatt's but you -- I think it sounds to me like are planning on growing that? How much are you thinking of growing that?

It is hard to estimate that right now because as I said, that market is still evolving here in the state. I think the added benefit right now that supports -- that we think supports growth in that market, as I said, is the increased focus on reliability after Sandy.

One of the things is that this has been discussed for some time at the BPU and it does not seem like this really gets off the ground I'm just sort of wondering, you mentioned Sandy and the impact associated with that. How are these projects -- what is the benefit? What are the economics that drive them? Is there some sort of subsidy that comes from other rate payers? What is sort of holding it up, if you follow me?

Well, as I mentioned before --

This is Kathy Ellis, the COO of New Jersey Natural Gas.

As I mentioned before, there are ongoing discussions at the BPU and there has been an indication of very high interest from the governor's office about reliability following Sandy and there is a direct focus on PHP. We don't know what the outcome is going to be but there is money being set aside both at the BPU and the EDA to support these installations. And as I said, we don't know how it's going to end up. It's an ongoing discussion but everything points to a lot of support for PHP installations across the state both from the governor's office and from the BPU which is a bit different, as you said. It's been an ongoing discussion for years and years but this focus is a bit different than it's been in the past.

And in fairness to the [four], I mean they’ve got a lot different stakeholders that they’re dealing with and they are, as they always do, trying to maintain a thoughtful and delivered a process here to come up with a policy.

Yes, and I would add that we are seeing for the first time here that because of Sandy, a lot of businesses and hospitals being basically out of business for over a week because of Sandy, they are interested in being proactive in coming to us to get more information about CHP because they want to basically get off the grid and not have that risk to their business.

Andy was asking about the economics of the PTC. Are you just -- or excuse me, of the wind. Are you guys thinking that the CHP will be similar just without getting into all the details but similar kind of returns? Or do think that is going to be different?

We think slightly better than wind. Wind, with a long-term PPA and improving technology, has the slightly lower return economics. But CHP would be slightly higher.

Okay. I appreciate it.

(Operator Instructions)

Spencer Joyce, Hilliard Lyons.

Good morning, guys. Nice quarter. Just one quick question here for me and for once, it's not about the solar.

(laughter) Success.

I want to touch on the Energy Services just for a second. Just reading through the press release, you all noted whether helping I guess both in fiscal Q3 and year-to-date a little bit. Aside from weather, is there any sort of maybe secular tailwind? Or are we returning maybe to growth in that? Or is the upside this year kind of an anomaly a little bit?

I am going to ask Steve Westhoven, who runs that business for us, to answer that, Spencer.

Spencer, we certainly have seen, when weather comes through, a little bit of increase in volatility. We have also add shifting production areas that are creating the real need for some physical service out in the market and at NJR Energy Services, we concentrate on meeting the physical needs of those markets, and like Larry said before, we have restructured our portfolio to be competitive in this environment. So when the market needs those real physical services that we are able to meet it when they need it the most.

So I think, the physical market is here to stay. You have got production that is certainly growing. And at NJR Energy Services, we are trying to be a part of that market and as far as where it is going to go in the future, I think it looks positive.

Okay. So I guess, maybe weather aside, some of the weakening that we have seen was depressed gas prices or less volatile prices, maybe some of that downside may be or may have played out. (inaudible) If something maybe absent weather, it is either flattish to up from here?

I think it has certainly been a challenging market and there's been a lot of turmoil. Especially relative to the change in the production area. And I think our reaction to that in restructuring the portfolio has been positive. But to the positive side, this market is growing. There's more gas coming online and even from the previous conversation, CHP and other parts of the business are looking to utilize that gas and I think that is an area to concentrate on.

Yes, Spencer, I think again, the two main messages on your question are that our fundamental belief that the demand for physical gas services is going to continue to increase, number one. And number two is because of the steps that we have taken to restructure the portfolio, we have positioned ourselves to meet those physical gas needs. There has been a lot of discussion about the strategies of others. But that's how we have been able to maintain profitability in that market. Steve, do you want to add anything to that?

No.

Yes, that was great color. That's the only thing I had. Thanks, guys.

As there are no more questions at present, this concludes our question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

All right. Thank you, Keith. Thank you all for joining us this morning. As a reminder, a recording of the call will be available on our website. Again we appreciate your interest and investment in New Jersey Resources. Thank you so much. Goodbye.

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