New Jersey Resources Corp (NJR) 2014 Q1 法說會逐字稿

Good morning and welcome to the New Jersey Resources first quarter 2014 results teleconference.

(Operator Instructions)

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

Thank you Chad and good morning, everybody. Welcome to our quarterly conference call.

I'm joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Chief Financial Officer, as well as other members of our Senior Management Team.

As you know, certain statements in our news release and in today's call contain estimates and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We wish to caution readers of our news release and listeners to this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR's ability to 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 forward-looking statements section of today's news release filed on form 8-K and in our 10-Q filed on November 26, 2013. Most 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 there are slides accompanying today's discussion that are available on our website, and were filed on our form 8-K this morning.

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

Thanks, Dennis, good morning everyone and thank you for joining us.

During my presentation I'll be making forward-looking statements, and our actual results will be affected by many different factors, including those that are listed on slide 1. We have the complete list in our 10-K, and I would encourage you to please review those carefully.

Also, as noted on slide 2, I'll be referring to certain non-GAAP measures such as net financial earnings, which we'll refer to as NFE, as I discuss our results this morning. 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 and are discussed more fully in Item 7 of our 10-K and we are providing those to SEC regulations. I would you ask you to please take the time to review that disclosure carefully as well.

Let's move to slide 3, which summarized the results that we announced this morning. You can see that our earnings of $0.95 per share for the first quarter are $0.10 better than last year. And as you can see, the growth in the quarter was driven by strong results of both NJR Energy Services and New Jersey Natural Gas.

Slide 4 gives more detail on our performance. New Jersey Natural Gas had earnings of $27.6 million compared with $25.5 million in the first quarter last year. The results were driven by strong utility growth margin. You can see that AIP contributed about $2.1 million, the customers who returned this year who were off last year because of Sandy were about $1.4 million, Customer Growth was $723,000. Our successful SAVEGREEN project was $446,000, and our consistently performing BGSS incentives were about $341,000. So you can see in total that was just a little bit more than $5 million.

We were also pleased that Moody's upgraded New Jersey Natural Gas Company's secured rating from Aa3 to Aa2, which again underscored the Company's strong financial profiling.

NJR Energy Services had a strong quarter with net financial earnings of $7.4 million versus $3 million in the first quarter last year. That resulted from higher financial margin due to the cold weather, pipeline and storage portfolio growth, and increased sales to major customers.

Moving to slide 5, continuing the review of the performance drivers, NJR Energy Clean Energy Ventures had net financial earnings of $3.6 million versus $5.3 million in the first quarter last year, and that decline was the result of the timing of SREC sales. Midstream had net financial earnings of $1.4 million compared with $1.8 million in the first quarter last year. That reflected lower transportation values at Iroquois and maintenance expense at Steckman Ridge. And finally NJR Home Services had a loss of $574,000, compared with $247,000 in the first quarter of last year.

I would remind everyone that last year's first quarter results were positively impacted by Sandy. This year we have seen lower installation sales although our generator sales remain strong.

Moving to slide 6. On September 11, 2013, we introduced our FY14 guidance of a range of $2.75 to $2.95 per share, and today we are reaffirming that guidance. You can see on the slide the percentage of net financial earnings that we currently expect to come from each segment, and if we achieve this guidance it would represent the 23rd consecutive year of improved financial performance for the Company.

Moving on to the next slide, from a dividend perspective, we have shown our commitment to consistent increases. In September 2013 and we increased the dividend by 5% to an annual rate of $1.68 per share. When you look at that compared with our peers, our annual dividend growth rate through 2013 exceeds those peers and our payout ratio is about 60%. That's lower than our peers, supports the sustainability of the dividend, and our goal remains a payout ratio of between 60% and 65%.

On slide 8, you can see we had strong customer growth in the first quarter of FY14 as the housing market continues to recover in our service territory. We added a total of 2,129 new customers in the first fiscal quarter of 2014, that represented an increase of almost 9% over last year. We are seeing an increase in the pace of new construction, which was up 16% over last year. Our conversion markets remain strong as we converted 1,149 customers during the first quarter and converted another 137 existing customers to natural gas heat.

As we look to the future, we expect to add between 14,000 and 16,000 new customers over the next two years, and if we achieve that, which we certainly expect to do, that would represent a new customer annual growth rate of about 1.5%.

Turning to slide 9, where we discussed the SAVEGREEN project. SAVEGREEN started in 2009, and through SAVEGREEN we promote energy efficiency to help our customers save money. During FY13 we worked with our regulators to put in place a two-year extension of SAVEGREEN, and during the next two fiscal years we expect to invest a total of $85 million in the SAVEGREEN project. And I think it really underscores not only the constructive regulatory environment in New Jersey, but it also supports public policy objectives and it is creating growth opportunities for New Jersey Natural Gas.

Looking at slide 10, we projected over the next four years New Jersey Natural Gas Company's incremental gross margin will more than double. You can see that customer growth will remain the largest component, however we will also receive important contributions from SAVEGREEN and the NJV advantage and our BGSS incentive programs.

As you can see on slide 11, capital invested by New Jersey Natural Gas since our last base rate case which was in 2008, and looking out to FY17 is expected to be over $1 billion. Our normal capital spending, which includes both customer growth and system maintenance, will comprise about half that total. We also have a number of new infrastructure programs such as the Southern Reliability Link, our Howell Liquefaction project and NJRISE, they will provide additional opportunities for rate-based growth. Our current plan calls for base-rate filing later than November of 2015.

Moving to slide 12, I want to talk a little bit about our distributive power strategy, starting with solar. Solar is, from a strategy point of view, is important as it supports New Jersey's energy master plan. We are starting to see improving SREC fundamentals, but as we have indicated over the past several months, it is our plan to gradually eliminate our reliance on solar investment tax credits which are expected to expire by January of 2017.

From the wind point of view, as you know, we have announced a number of investments in wind over the last several months, including yesterday. Our strategy there is driven by the renewable portfolio standards, which is present in 29 states and the District of Columbia. The tax credits associated with wind are based upon production. But very importantly, as you can see from the projects we have announced we have been able to put in place the long-term power purchase agreements, which combined with the production tax credits, we believe, provide annuity-like returns.

Finally, we continue to look at opportunities in combined heat and power, but our view is that here in New Jersey, that market is continuing to evolve.

Moving to slide 13, I wanted to talk a little bit more about the SREC market and if you look at capacity additions, you can see they have declined from their peak in early 2012. And there has been a corresponding increase in SREC prices. But we continue to expect continued growth in our levels of SRECs that we are producing as we continue to invest more money.

On slide 14, we show the details of our investment in the Two Dot wind farm. We announced that back in October of 2013. You can see the details about the size but I think it's important to note that Two Dot is supported by a 25-year PPA with Northwestern Energy. I'm happy to report that the construction is on schedule, and we expect Two Dot to contribute to our earnings during the fourth fiscal quarter of 2014.

Moving to slide 15, I think as everyone probably saw yesterday, we announced our second onshore wind project, and it's located in Carroll County, Iowa. It is a 20-megawatt wind farm. It will involve the investment of about $42 million. That will be PTC eligible. And the project is supported by a 25-year PPA with MidAmerican Energy, which is owned by Berkshire Hathaway. We currently estimate that commercial operation will occur in the Spring of 2015.

Moving to slide 16, as I mentioned earlier, NJR Energy Services had a very strong first quarter, with net financial earnings of $7.4 million. Their focus on both physical natural gas services and producer services has provided us with growth opportunities. Inner changing marketplace, the work that NJR Energy Services has done it's positioned us very well in that market. Cold weather in December created attractive opportunities and again, I think you can see from the results that our team has done an excellent job in creating value in that market.

So on slide 17, we summarize our long-term growth strategy. We expect two primary sources of earnings growth from New Jersey Natural Gas, increased infrastructure investment to support safety and reliability, and growth and utility growth margin from not only new customers but other regulatory initiatives. As I said earlier, we will file a base-rate case no later than November 2015. But I would point out as you look at the capital chart that I reviewed previously, the majority of our existing infrastructure spending is already earning a return.

From the non-regulated perspective, our strategy is to diversify our distributed power portfolio. You can see the efforts we have already put in place there, and the progress that we are making. We'll be expanding our onshore wind investments. We expect that the contributions from NJR Energy Services will be steady but that of course will depend upon market conditions and we will continue to expand our products and markets at NJR Home Services.

This morning we are reaffirming our long-term net financial earnings growth goal of a range of 4% to 7%. Our objective is to provide annual dividend growth of at least 5%, and we believe that that will be supported by our fundamentals. And over the long term, we will target at least 65% to 80% of our earnings to be generated from our regulated businesses.

In closing, as always, I want to say thank you to our employees. I think as everyone knows last year we were presented with a number of very significant challenges, primarily those related to Sandy. I think it is fair to say as we speak to you today that we have emerged as a stronger organization. I would also again underscore that the performance that I'm sharing with you today is the result of the dedication of our employees, their commitment to excellence, and I don't think I have ever been more proud of all that they have done. So we thank you for joining us this morning and we would be happy to answer any of your questions.

(Operator Instructions) Our first question comes from Gabe Moreen with BofA Merrill Lynch.

Good morning, everyone. Questions on the Carroll project, I guess, you laid out accretion on the Two Dot acquisition when you made it, I was just wondering if you can provide some color on the accretion you're expecting from the Carroll Project, whether it's rateable relative to Two Dot? [Inside] of the investment.

Overall Gabe, yes the answer is yes overall, depending on the terms of PPA, not all PPAs are identical, whether they are flat prices or escalating prices, there might be some variation year-by-year. But overall from a return perspective, yes, it's comparable to Two Dot and since it's about twice the size, it would be about twice the accretion.

Great. And then, generally speaking in terms of what is sort of in the pipeline, so to speak, at OwnEnergy. Maybe you can speak to whether you see any more near-term opportunities to acquire projects?

I can answer that, Gabe. We've got several projects under development, obviously with the PTC environment, there is some uncertainty out there. Their focus is on the states with the, I think it's RPS requirements. We have, as you know, the opportunities but not the obligation to buy projects from them when they have reached certain milestones, such as long-term PPAs. We are still optimistic that we will be able to exercise our options as we had negotiated, but obviously we will be watching the PTC situation in Washington, and obviously the timing of the RPS standards in the different states.

Just to underscore, Gabe this is Larry, I think one of the real advantages of the relationship with Own is it insulates us from any of the development risks. And we have seen that now in the two projects that we have announced, Two Dot and Carroll.

Got it, great. Last question for me, if I could, on energy services. Is there any reason to think you guys won't have a similarly strong quarter in 2Q from energy services, given you know what basis is done in 2Q? Just like it did in 1Q as well, so any factors and considerations I guess we should think about for 2Q energy services performance?

Yes. I think you pretty much nailed it Gabe. The first quarter if you think about it, the cold weather -- really out on the West Coast is what dominated the markets back then and that helped our Q1. And clearly, in January, that cold weather has obviously been present in the Midwest and the Northeast. So we haven't changed our guidance as we typically do so after most of the winter is over, but it is fair to say the conditions have been positive for energy services.

Got it. Great. Thanks everyone.

Thanks, Gabe.

Our next question comes from Mark Barnett with Morningstar.

Good morning, everyone.

Good morning Mark.

Just had a question on the customer adds, it was a pretty strong number for the quarter. I guess with a little bit of variation you'll be pretty much on your numbers for the next two years at this pace, but is there anything out there in terms of maybe from an environmental regulation standpoint? Or your state or federal level that might push the oil conversion figure a little bit higher?

Mark, I'm going to ask Tom Massaro, who heads our marketing area, to give you a little more color on the market and focus on your specific question.

Hi Mark, yes, there has been mentioned in both the energy master plan at the state level and then through EPA through some of the boiler regulations on the industrial side that are favoring the conversion from oil over to natural gas. And in the conversions that we have reported to date about 80% of our conversions are coming from the oil market. And there are some pretty strong indications that that will continue going forward.

Okay, I appreciate that. And either at the energy services or at the utility, have you, at this point, it has been a pretty cold winter, had any issues with supply? Or is that not really going to be a problem where you stand?

Mark, I'm going to ask Craig Lynch to talk about the utility, and Steve Westhoven to talk about energy services. Craig?

On the utility side, the utilities performed, as designed, we have not had any issues in deliverability on the utility. Steve?

Yes, to speak of the whole US it seems like the US natural gas period has held up pretty well, given the extreme temperatures over really what is a majority of the US. There has been a few hiccups here and there, but for the most part, nothing major has occurred. It has done very well.

We had a record sendout on January 7. And I think one of the things that -- when you pose that question, Mark, is you have to think about is really the value of all the infrastructure that we have put in, and will continue to put in, in the future.

All right, thanks, that is all for me.

Thanks Mark.

Our next question is from Spencer Joyce of Hilliard Lyons.

First just a quick question, do you all have the CapEx number from Q1?

I can get that for you in a second, Spencer. If you have a second question -- okay I got it right here, Utility CapEx in the quarter is about $30 million. Plus about $5 million cost removal, so about $35 million total. Solar and wind combined about $25 million.

Okay, thanks.

And that will be released in the 10-Q later today.

Okay, great, staying on the CapEx, we have a pretty good breakdown for the utility, but can you refresh us in round numbers where solar and wind may come -- maybe stretching out to 2015, just so we can back into a combined spin for those two? For those three?

Well, on the solar side, we talked about a range of $70 million to $90 million for the next year or two. And then after that, we see the expected decline, getting ready for the expiration in 2017. Wind is a little bit more opportunistic. I think it's safe to say we don't expect any other actual cash out the door this year beyond the two projects that we have already announced. And those are the size of the projects that we are looking for. But on an annual basis it's a little bit more unpredictable on the wind side.

Okay, so it sounds like for the most part no real change there?

Oh, no.

Of course you can see what we plan on the utility side on the Slide 11.

Yes, also switching gears here, and don't feel like you need to get into too much detail, because I'm sure it could be a complicated answer. I noticed you all started discussing NFE on the clean energy venture side for the first time this quarter. Can you discuss what has changed there such that you are altering the disclosure a little bit? Is there a simple answer there?

I don't know if it's simple but it's not too long of an answer. There is nothing from the operational side of CEV that's different. What we've done is refined the tax calculations and we've always in the past have done a quarterly tax adjustment for GAAP purposes using a GAAP forecast. And we just decided this quarter to refine our NFE number, to do a similar adjustment for NFE.

So it's the exact same assumptions, just starting with a different GAAP versus NFE pre-tax forecast. So that from the NFE purpose we have a much more consistent tax rate each quarter based on our forecast.

Okay.

And that adjustment is related mostly to our forecasted tax credits and that's why that adjustment for NFE purposes is part of the CEV segment results.

Okay. I think that makes sense there, so you also mentioned there's really nothing operationally that's different and no change in either the regulatory or the tax code framework?

Correct, this has nothing do with derivatives or anything else, it's strictly the required quarterly tax adjustment. We just decided to be more refined starting this quarter.

Okay. Sounds good, That is all I had. Nice quarter.

Thank you.

(Operator instructions) Our next question comes from Dan Fidel with US Capital Advisors.

Good morning.

Hey Dan.

Nice job on the quarter. I just had a few follow-up questions, a lot of mine have been asked and answered. First, maybe you can give us a little bit of color in terms of where the RISE program stands right now, and what your outlook is for that and timing around it?

Mark? I'm going to ask Mark Sperduto to answer that question.

Yes. We recently received an order from the DPU that sets out the procedural schedule, and without giving you a lot of the minutiae in that order, the decision is probably teed up for April time frame. And so we are in the discovery phase right now, just answering questions regarding the filing.

So, in terms of the procedural schedule, thinking sometime over the summer, likely to have it buttoned up?

Probably a little bit earlier. April, May time frame, I would predict.

Okay great, thanks. Then, just switching topics quickly, on share repurchases, just wondering if you could give us maybe a quick comment in terms of how you are viewing those. Is it still just opportunistic or do you view it as a bigger part of the plan for 2014?

No, we view it as opportunistic, and we think as we've said for years, it's a good tool to have in the overall financial arsenal, but it is opportunistic.

Great. And then just a last question from me. In terms of the utility margins into Q1, you mentioned that you had a nice bounce back after Sandy from the year-ago quarter, about 75% of those customers back online.

Can you talk about what you see the outlook for that remaining 25%, how you see those layering on, if you do see them coming back and under what time frame?

Internally, Dan, we are seeing slow but steady recovery. But definitely it would be much slower. And internally, we are talking the majority to rest over the next two years. But clearly, that is going to depend on a lot of factors. Internally, the majority we see over the next two years or so.

This is Kathy Ellis, Dan.

Dan, just to add that they are releasing the second round of Sandy recovery funds, so you would expect our residents to be accessing some of that in the near future.

Great, very helpful, thanks for the color guys, that's all I had.

(Operator instructions)

There appears to be no further questions at this time, so I would like to turn the conference back over to management for any closing remarks.

Thanks Chad. Thanks everybody 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 and investment in New Jersey Resources, and we'll see you next quarter. Thanks, goodbye.

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