New Jersey Resources Corp (NJR) 2015 Q1 法說會逐字稿

Good day, and welcome to the New Jersey Resources Corporation first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you, Dan. Good morning, everybody. Welcome to our FY15 first-quarter conference call webcast. I'm joined today by Larry Downes, our Chairman and CEO; Glenn Lockwood, our Chief Financial Officer, as well as members of our Senior Management team.

As you know, certain statements in her 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 and NJR's ability to control or estimate precisely which could cause results to materially differ from the Company's expectations. (technical difficulty) not limited to items in the forward-looking statements section of today's news release filed on Form 8-K and our Form 10-Q to be filed later today, and 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 reference 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 were filed on a 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, and thank you for joining us today. For those of you who follow our Company and have seen this morning's earnings release, you know that FY15 is often a strong start for New Jersey Resources. During my presentation this morning, I will be discussing our future and I will be making forward-looking statements. Our actual results will be affected by many factors, including those that are listed on slide 1. The complete list is included in our 10-K, and I would ask you to please review them carefully.

And also as noted on slide 2, I will be referring to certain non-GAAP measures such as net financial earnings, or NFE, as I'm discussing our results. We believe that NFE provides a more complete understanding of our financial performance. However, NFE is not intended to be a substitute for GAAP. Our non-GAAP measures are disclosed more fully in item 7 of our 10-K, and again, I would ask you take the time to review those disclosures carefully.

Moving to slide 3, this morning we announced net financial earnings of $55.1 million or $1.30 per share for the fiscal first quarter of 2015 and that compared with $39.9 million or $0.95 per share last year. Looking at our results, you can see that all of our primary business units performed well. Our excellent first fiscal quarter NFE performance was driven by strong net financial earnings from NJR Energy Services which is off to another good start in FY15. Steady growth from our two regulated businesses, New Jersey Natural Gas and NJR Midstream, and a solid contribution from NJR Clean Energy Ventures.

On slides 4 and 5, I will review the individual performances of our subsidiaries. Results of New Jersey Natural Gas reflect a continued customer growth, as well as increases in our BGSS incentives and regulatory initiatives, which include our accelerated infrastructure programs. NJRES results were driven by periods of cold weather across the country during the first fiscal quarter that created short-term increases in demand for natural gas as well as price volatility, and those factors in turn generated higher net financial earnings.

Turning to slide 5, you can see that Clean Energy Ventures had net financial earnings of $9 million versus $3.6 million last year. We connected one new grid-connected project at 145 residential systems; those where placed into service. We also saw increased Solar Renewable Energy Certificates, SRECs as we call them, sales and prices. NJR Midstream had NFE of $2.1 million versus $1.4 million in the first quarter last year. We saw higher revenues associated with firm sales at Steckman Ridge and the Iroquois Pipeline.

Turning to slide 6, this morning we also affirmed our FY15 NFE guidance of a range of $2.90 to $3.10 per share. As you can see, we currently expect our regulated businesses, which include New Jersey Natural Gas and NJR Midstream, to contribute between 65% and 80% of our FY15 net financial earnings. We also currently expect that NJR Energy Services will contribute between 5% and 15% of our net financial earnings. This is a range that is generally consistent with their results in recent years prior to the outstanding performance that they had in FY14.

I want to spend just a few minutes summarizing our strategy for FY15 and beyond. I think first and foremost New Jersey Natural Gas will remain the primary driver of our strategy and our performance and will continue to comprise the majority of our earnings, assets, people, and capital investments. Our existing midstream investments will also contribute to our regulated earnings. Through Clean Energy Ventures, we will continue to provide our customers with cost efficient renewable electricity from our wind and solar investments.

We are now focused on diversifying CEV's earnings mainly through wind investments and through improving SREC fundamentals. And finally, NJR Energy Services will continue to provide physical and producer natural gas services. As I previously noted, NJNG will represent the majority of our future capital investments, which is illustrated on slide 7. We expect to make significant investments in our utility infrastructure through FY17 and beyond. Our normal infrastructure investments, including customer growth and system maintenance, represent about $350 million or about 44% of NJNG's total capital spending.

We are also focused on enhancing the safety, reliability and resiliency of our system. Some of these programs such as SAFE, which allows us to accelerate the replacement of our cast iron and bare steel, are already contributing to earnings. Through our recently approved NJ RISE program, we will invest over $100 million for storm hardening and mitigation projects in the most storm prone areas of our service territory. Including SAVEGREEN, we plan to invest over $250 million in initiatives through 2017 that will receive an immediate return.

Our Southern Reliability Link will add a second interstate pipeline connection to our service territory in Ocean County. The SRL is part of our program to support safety, reliability, and resiliency of our system. And our liquefaction project in Howell, New Jersey, will give us the ability to liquefy pipeline gas for our peak day needs and create benefits for both our customers and our shareowners. The equipment manufacturing process for this facility is currently underway. As you look at our planned capital spending for Clean Energy Ventures through 2017, you can see that, that supports our portfolio diversification strategy.

Moving to slide 8, New Jersey Natural Gas added 2,581 new customers in the first quarter of 2015; that represented an increase of 21% over last year. Approximately 55%, or 1,420, customers converted from other fuels, primarily fuel oil. Our conversion market continues to do very well as evidenced by a 24% increase in the first quarter. In addition, 1,161 of these new customers were related to new construction; that compared with 980 in the same period last year and represented a 19% increase. Taken together, these new and conversion customers are expected to contribute about $4.2 million annually to New Jersey Natural Gas' gross margin. Going forward, we expect to add between 15,000 and 17,000 new customers over the next two years; that would represent a new customer growth rate annually of about 1.6%.

Now turning to slide 9, you can see our future customer growth potential, which begins with our service area's population growth. As you can see on the graph on the upper left, our service territory remains among the fastest-growing in the state, particularly in Ocean County, which represents about half of our customer base. As we look to the future, we expect continued growth in Ocean County to be driven by favorable demographics. In fact, in 2013, 20% of all new building permits issued in New Jersey were in Monmouth, Ocean, and Morris Counties, which represent the majority of our service territory.

At the same time, the price of natural gas remains very competitive compared with other energy sources, and that is also supporting our efforts in the conversion market. So when we look at all of these factors, we see excellent potential for both new construction and conversion market growth, and over the long term, we see the potential for over 88,000 new construction customers, and more than 113,000 conversions.

Moving to slide 10, you can see that working collaboratively with our regulators remains an essential element of our strategy. On this slide, we've highlighted several of our key initiatives. Our basic gas supply service of BGSS incentive programs are off to a solid start this fiscal year, adding gross margin of $4.2 million in the quarter compared with $2.5 million last year. These programs I think, as everyone knows, also benefit our customers. They've been in place now for more than 20 years and have saved customers more than $733 million since their inception back in 1992.

Our conservation incentive program protects New Jersey Natural Gas Company's gross margin from declining usage in weather while encouraging customer conservation. Since its inception back in 2006, our customers saved nearly $322 million by reducing their usage. Our accelerated infrastructure programs have improved the safety and reliability and resiliency of our system, supported economic development, and benefited both our customers and shareowners. And SAVEGREEN, our energy efficiency program, provides grants and incentives to customers to install high efficiency equipment.

We submitted a filing with the BPU in late December seeking extension of SAVEGREEN through June of 2018, and when we look at SAVEGREEN, it is clearly supported both New Jersey's energy efficiency and economic development goals, and again, has benefited both our customers and our shareowners.

Turning to slide 11, you can see the positive impact on our customer growth and regulatory initiatives are currently expected to have on New Jersey Natural Gas Company's gross margin over the next three years. Customer growth will remain the largest contributor to utility gross margin. We will also receive important contributions from SAVEGREEN and our BGSS incentive programs. Also, at the end of the quarter, we began serving the Red Oak generating Station in Sayreville, New Jersey, which is expected to contribute more than $2 million in additional utility gross margin annually. It will also provide an opportunity to generate additional BGSS incentive margin and customer credits.

Moving to slide 12, as you can see from the chart, and NJR Energy Services had a very strong quarter. Our team continues to do an excellent job meeting our customer needs during periods of extreme weather and has developed a portfolio of competitively priced storage and transportation assets. We remain positioned to take advantage of any market upside as we saw in FY14. And as I previously noted, we currently forecast NJRES contribution to net financial earnings will return to a range of 5% to 15% in FY15 through FY17 with possible upside depending upon the weather.

Moving to slide 13, we announced our latest midstream investment last August; that's the PennEast Pipeline, which is designed to provide Marcellus supply to Northeast markets, including New Jersey. Total capital expenditures are currently estimated at $1 billion, and I think as everyone knows, we have a 20% interest in PennEast. We pre-filed with the FERC last October. FERC staff has scheduled public meetings in New Jersey and Pennsylvania as part of their project scoping process. FERC staff will then prepare an environmental impact statement, and although we were early in the process, we remain on track for commencement of commercial operations in late calendar 2017.

Turning to Clean Energy Ventures on slide 14, we continue to build out our inventory of solar projects while placing more wind assets in service, and as I said earlier, our strategy remains focused on the diversification of our investment portfolio. We have built a strong portfolio in our New Jersey-based solar programs, including both net-metered projects in commercial and residential markets, as well as large-scale wholesale solar grid projects.

During the quarter, we completed a 10-megawatt ground mounted grid-connected system in Howell, New Jersey, and as of the end of the quarter with three other projects under construction, all of which should be completed in FY15. On the residential side, we are now the third largest solar provider in New Jersey through our very, very successful Sunlight Advantage program. Over the last year, we've made steady progress on our portfolio diversification into onshore wind with projects located in Montana, Iowa, and Kansas. By the end of 2015, we expect to have approximately 40% of our distributed power portfolio invested in wind projects. Wind assets now comprise about 23% of our in-service portfolio as Carroll Area, our second wind project, came online last week. And we currently expect to have almost 80-megawatts of installed wind capacity by the end of 2015.

On slide 15, you can see the positive impact that declining solar capacity additions, as well as the annual increase in New Jersey's renewable portfolio standard, are having on SREC prices. Recently, SREC prices have moved over $200 and we expect that favorable SREC market fundamentals should continue to support higher prices. As we look to FY17, we currently expect that the majority of CEV's earnings will come from a higher number of SRECs being generated from our solar portfolio, higher SREC prices, and returns on our wind investments. We continue to expect between 10% and 20% of our total NFE to come from Clean Energy Ventures.

On slide 16, I'd like to conclude with a slide that we introduced at our Investor Conference last October, and as you can see, it summarizes our key initiatives through FY18. These initiatives are expected to drive our objectives of delivering 5% to 9% net financial earnings growth and 6% to 8% dividend growth annually. So to summarize, our growth plan through FY18 is based upon strong customer growth, infrastructure investments, and regulatory initiatives that will benefit both our customers and our shareowners at New Jersey Natural Gas.

We'll be taking advantage of expected natural gas demand and price volatility at NJRES while providing producer and asset management service, we'll diversify CEV's distributive power portfolio combined with improving SREC market fundamentals which provide more steady income streams, and we plan on expanding our midstream strategy including PennEast. So I think as you can see from all of these fundamentals, our outlook remains strong and provides the opportunity for future growth.

But as I close this morning, as always, I want to thank our more than 950 employees for their continued dedication and hard work. Without everything that they do every single day, we would not have achieved the excellent results that we reported to this morning that remain the foundation of our Company, and I am grateful for what they do every single day. With that, now we would be happy to take your questions and comments. Thanks.

(Operator Instructions)

Our first question comes from Mark Barnett of MorningStar. Please go ahead.

Good morning, everyone.

Good morning.

Just a couple of quick questions on my end. First the Red Oak project, you are referring to the supply agreement that was approved at the end of 2013? That's a gas plant, yes?

Yes.

Okay. So this margin is just the gas supply margin. There was some sort of a margin sharing agreement on that as well?

If there are additional BGSS credits, they would be subject to that margin sharing agreement.

Oh, okay. And then when do you expect to hear about extending SAVEGREEN and can you remind me if you asked to upsize the program or if we're just looking at a kind of similar track?

Tom Massaro, who heads up our marketing in energy efficiency area, will answer that question.

Good morning, Mark. We expect to hear resolution of that or settlement of that by the end of June, so we are looking for a continuation of the current programs. We filed for an extension of pretty much what we have in place with very minor modifications. But the spending levels would remain the same for the three-year period that we petitioned for.

Okay. Thanks a lot.

Our next question comes from Michael Weinstein of UBS. Please go ahead.

Good morning, guys. Great first quarter. Just wondering if you could talk a little bit about the possibilities or things that you've seen about opportunities that might be present for monetizing the SREC portfolio or perhaps even securitizing it at some point? I know that it's a pretty thin market for barge transactions but just wondering if you could just talk about that for a minute?

Sure, Mike. We currently, as you point out, it's still a fairly liquid market to do anything really long term as far as hedging or for that type of financial strategy. We currently, as you can tell from, I think, the fundamentals should provide continued strength in that price, and our current strategy is to generate and build our portfolio. Part of the growth and the whole strategy of diversifying from the reliance on ITC is counting on much higher SREC sales from our portfolio down the road both for the volume and price.

Okay, thank you so much.

Thanks, Mike.

Our next question comes from Feliks Kerman of Visium Asset Management. Please go ahead.

Good morning, and congratulations on the great quarter. Given the strength we saw this quarter in the energy services business, do we expect that we can perhaps be in the upper end of the guidance range or the 5% to 15%?

It's our philosophy to wait until the whole winter is behind us before we officially update guidance. But obviously, we are off to a good start.

Can you just provide some clarity on the low natural gas price environment? Is this positive for the business? Are you guys seeing additional opportunities from the volatility?

It's very good for our utility. It helps keep prices low for customers, obviously, and that helps the whole strategy in working with regulators on additional initiatives. And in the energy services environment, again, we don't take price directional risk, if you will, in our strategy.

We hedge any commodity that we own. But when there are pockets of cold weather that we have seen this winter, we have seen some nice spikes in short-term prices that our team can take advantage of.

The only thing that I would add is that the low gas price certainly encourages demand, and as our supply grows in the US, that demand should grow as well so it should provide for more opportunities in the energy services business [to buy those services].

Okay. Thank you.

(Operator Instructions)

At this time, I see no further questions. I would like to turn the conference back over to Dennis Puma for any closing remarks.

Okay. Thank you Dan. I want to thank everyone for joining us today. As a reminder, a recording of the call is available for replay on our website. Again, we appreciate your interest in investment in New Jersey Resources. Enjoy the rest of your day. Thanks. Goodbye.

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