New Jersey Resources Corp (NJR) 2015 Q3 法說會逐字稿

Good day and welcome to the New Jersey Resources Corporation third-quarter FY15 earnings conference call.

(Operator Instructions)

Please note 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, Rocco, and good morning, everyone. Welcome to New Jersey Resources third-quarter FY15 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 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 listeners of the call that the assumptions forming the basis for 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, 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 Monday, August 3. 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'd also like to point out that there are slides accompanying today's discussion that are available on our website and were also 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 have seen this morning's earnings release, you know that we are continuing to perform well during FY15.

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 different factors, including those that we've listed on slide 1. The complete list is included on our 10-K and I would ask you to please take the time review those carefully.

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

Moving to slide 3, this morning we announced net financial earnings of $2.5 million, which was $0.03 per share for the third fiscal quarter of 2015. That compared with $4.5 million or $0.05 per share last year. For the nine months, NFE totaled nearly $157 million, or $1.84 per share, and that compared with $196.3 million, or $2.33 per share for the first nine months of FY14.

Glenn will review our segment results in more detail, but in looking at our results this year you can see that our primary businesses are performing either in line with or exceeding our original expectations. Our better FY15 NFE performance was driven by steady growth from our two regulated businesses, New Jersey Natural Gas and NJR Midstream, improved performance by NJR Energy Services, compared with our original NFE guidance. And although they're are lower than last year, NJRES is having another excellent year. And finally we continued to see solid contributions from Clean Energy Ventures.

Moving to slide 4, this morning we also increased our FY15 NFE guidance range to $1.70 to $1.80 per share from $1.65 to $1.75 per share. As you may recall, we raised guidance twice earlier in the year as a result of NJRES performance, which has been better than expected because of our team's ability to take advantage of opportunities that were created by cold weather.

In FY15 we currently expect our regulated utility and midstream businesses to contribute between 55% and 70% of total NFE and then return to 65% to 80% in FY16 and beyond. And we currently expect NJRES to contribute 20% to 30% of NFE in FY15 and also return to 5% to 15% in FY16 and beyond.

On slide 5 I want to summarize our long-term growth strategy. First and foremost, New Jersey Natural Gas will remain the primary driver of our strategy and our performance. It will comprise the majority of our earnings, assets, people and capital investment. Infrastructure projects, such as SAFE and new customer additions will drive our rate base growth. Our midstream investments will also contribute to our regulated earnings. Combined, our regulated businesses are currently expected to represent 65% to 80% of total NFE in FY16 and beyond. NJR Energy Services will continue to provide physical and producer natural gas services, and is currently expected to contribute between 5% and 15% of total NFE in FY16 and beyond.

Continuing on slide 6, through Clean Energy Ventures we will provide renewable electricity from our solar and wind investments. We are diversifying our earnings within this business, mainly through wind investments as well as stable SREC fundamentals. We currently expect NJR Clean Energy Ventures to provide 10% to 20% of NFE in FY16 and beyond. And Home Services will continue to provide steady earnings, accounting for between 2% to 5% of total NFE. At the same time, our annual dividend growth goal remains at 6% to 8% with a targeted payout ratio of 60% to 65%. With that summary, I will turn it over to Glenn and he'll review the quarterly results. Glenn.

Thanks, Larry and good morning, everybody. Moving to slide 7, quarterly results at New Jersey Natural Gas reflect continued customer growth, increases in our BGSS incentives and regulatory initiatives, such as the SAVEGREEN project and SAFE. RES's better than expected results reflect lower transportation and storage demand fees. Clean Energy Ventures' weaker comparisons were due primarily to last year's results, including a one-time $9.9 million credit support payment related to a change in ownership at one of its commercial solar projects. This year we added one grid connected and one net metered system during the fiscal third quarter and placed 196 residential systems into service through our Sunlight Advantage program, for a total of 6.2 megawatts. Increased revenue from Steckman Ridge was primarily responsible for the higher midstream earnings. Weaker results from Home Services reflected lower equipment sales and installations.

On slide 8 we invested $26 million to add 5,750 new customers to our system during the first nine months of FY15. We are on target to add about 7,800 customers for the year. We remain focused on the safety and reliability of our system and have invested about $50 million on system maintenance so far this year. At the same time, we have invested more than $27 million in our SAFE program, which allows us to accelerate the replacement of our cast iron and bare steel. Through June 30 we replaced approximately 192 miles of the 276 miles of pipe that were approved by the BPU in 2012.

Final preparations are being made to open our first NGV station and we are on track to open all three stations by the end of the fiscal year. Through our NJ RISE program we will invest over $100 million over the next four years for storm preparation and mitigation projects in the most storm-prone portions of our service territory. And we have begun modest spending on program this year.

Our liquefaction project in Howell, New Jersey will give us the ability to liquefy pipeline gas at our storage site for our peak day needs and create benefits for both our customers and shareowners. Through June we have invested $11 million on site preparation and equipment manufacturing for this facility. We have two petitions pending with the BPU regarding our Southern Reliability Link project that will add a second interstate pipeline connection to our service territory in Ocean County to further support safety, reliability and resiliency.

And finally, through our SAVEGREEN energy efficiency program, which was recently extended through July 2017, a total of 38,000 customers have upgraded to high-efficiency equipment since its inception in 2009. And very importantly, I'd like to remind everybody that about half of these capital expenditures are currently earning a return.

Moving to slide 9, NJNG added 5,750 customers in the first nine months, more than 11% above last year. 2,793 of these new customers were related to new construction, compared with 2,463 in the same period last year. Approximately half of the new customers converted from other fuels, primarily oil. Our conversion market continues to do very well, as evidenced by a 10% increase over last year. These new customers are expected to contribute approximately $3.4 million annually to utility gross margin. And going forward we expect to add between 15,000 and 17,000 new customers over the next two years, representing an annual growth rate of about 1.6%.

As you can see on slide 10, we continue to prepare for our base rate case which will be filed in November 2015. The filing was required by the BPU as part of the SAFE approval. We believe the process will take approximately nine months and conclude in early FY17. To date we have retained consultants for our cost of capital, depreciation and cost of service studies and begun our test year, which will be July 1, 2015 through June 30, 2016.

Moving to slide 11, while lower than last year when we experienced extremely cold winter weather, NJRES's results this year have significantly exceeded original projections. Our team has done an excellent job meeting our customers' needs during periods of extreme weather and has developed a portfolio of competitively-priced storage and transportation assets. According to Natural Gas Intelligence, we are now the 16th largest gas market in North America. Our better than expected year-to-date results were driven primarily by colder than normal weather that created short-term increases in natural gas demand, as well as price volatility, which in turn generated higher than expected gross margin for RES. As previously noted, we currently have forecast RES's contributions to NFE to return to a range of 5% to 15% in FY16 and beyond.

Turning to NJR Clean Energy Ventures on slide 12, we continued the build-out our inventory of solar projects while we construct our third wind project. Our strategy is focused on diversification of our investments across this business. We have built a strong portfolio of solar in New Jersey, with over 100 megawatts of capacity now in service. During the first nine months of FY15 we placed $53.3 million of ground-mounted solar projects totaling 20.5 megawatts into service. A 6 megawatt grid-connected system is under construction and is expected to be placed into service in our fourth fiscal quarter.

On the residential side, our Sunlight Advantage program remains a popular choice for consumers and we remain among the largest providers in the state. In the first nine months of FY15 we added 468 customers totaling 4.5 megawatts of capacity, bringing the total number of customers since inception to more than 3,600. We have advanced our diversification into onshore wind with projects in Montana, Iowa and Kansas. Wind assets now total almost 30 megawatts or 22% of our total portfolio, as Carroll Area, our second wind project, came online in late January. The third project, the 48 megawatt Alexander Wind Farm, is currently under construction.

Turning to slide 13, you can see that monthly solar capacity additions in the state have declined significantly from their peak in early 2012, which combined with the annual increase in the renewable portfolio standards, have supported a corresponding increase in SREC prices shown on the graph on the right. Recently we have seen SREC prices over $235 and we believe these fundamentals will continue.

In addition, as shown on slide 14, we have been actively hedging our expected SREC sales. The red line on the chart represents SRECs expected to be generated from our existing portfolio. As you can see, 100% of our SRECs for FY16 are hedged and we have been actively hedging future years as well. We believe that increasing number of SRECs to be generated, our hedging program, expectation of continued strength in SREC prices and expected earnings from our wind investments all support our forecast of 10% to 20% of our total NFE coming from CEV in FY16 and beyond.

Slide 15 provides an update of our capital expenditures for CEV. We have spent about $110 million through June 30, 2015 on the solar and wind projects I detailed a few slides ago. Construction continues at our third wind project, the Alexander Wind Farm in Kansas, which is expected to come online during the first fiscal quarter of 2016. When Alexander is completed we will have about 78 megawatts of wind assets.

I also wanted to reiterate our strategy to mitigate the anticipated reduction in ITCs from 30% to 10% in 2017. As I just demonstrated on the previous slides, we are committed to diversifying our Clean Energy portfolio mainly with onshore wind investments. This, combined with growing SREC revenue and expected contributions from our other business segments, will enable us to continue to grow through this transition.

Looking at our cash flow forecast on slide 17, you can see the future benefit of the higher than expected earnings that we have been generating in 2014 and 2015. We believe now that our capital program can be properly financed over the next two years with a modest amount of new equity, while maintaining appropriate credit metrics for our rating. Now I'll turn it back to Larry for some closing thoughts.

Thanks, Glenn. I'd like to conclude our call today by reviewing slide 18, which summarizes our key strategic initiatives through FY18. These initiatives support our annual 5% to 9% NFE and 6% to 8% dividend growth targets.

You can see the primary components of our growth plans through FY18 are strong customer growth, infrastructure investments and regulatory initiatives that will benefit both our customers and our shareowners. We'll expand our midstream strategy, including PennEast. We intend to diversify Clean Energy Ventures' distributed power portfolio, combined with stable SREC market fundamentals to provide steady income streams, and will take advantage of expected natural gas demand growth and price volatility in NJRES while providing producer and asset management services. I think as you can see, our fundamentals remain strong and provide the opportunities for future growth.

As I close today, I want to thank our nearly 1,000 employees for their continued hard work and dedication. I want to point out because of our employees, New Jersey Natural Gas was once again named the most trusted brand in the East region by Cogent Reports, and that was among all natural gas utilities. Without the efforts of our employees, we could not have achieved the excellent results that we've reported thus far for FY15 and the strong fundamentals we have for the future. Our employees are the foundation of our Company, and as always I'm grateful for everything they do every day. And so I thank you all for your time today and we would look forward to your questions and comments.

(Operator Instructions)

Spencer Joyce, Hilliard Lyons.

Good morning, guys. Congratulations.

Good morning, Spencer.

Another solid quarter here. And another beat and raise. What's that, three? Is that three times?

Third time this year, yes it is.

Just a couple of quick ones from me. Seems like a pretty simple quarter here. Did I hear correctly that Alexander is still online to be completed this year? So looking at first-quarter FY16 for some financial impact there.

Yes, it's actually -- Spencer, this is Glenn -- it's in the fourth quarter of calendar 2016 but it would be the first quarter of our --

Calendar 2015.

Calendar 2015, our first quarter of FY16 that it comes online.

Okay, perfect. So that is on schedule. The other item -- I know we're looking for a little less solar CapEx next year. And I noticed the pipeline, or under construction, is about as low as we've seen over the past seven, eight quarters.

Has there been any change in the pipeline of available projects out there? Has there been any shift in market dynamics? Or does that really just reflect your guys belief that you want to do a little bit less next year?

That is part of the overall strategy. Remember, the majority of that solar spending is related to these grid-connected projects. The residential market is fairly steady year over year. Grid-connected CapEx is really tied to the schedule of those particular projects getting put into service. And we will have more of those projects put in this year than we expect to have next year.

Okay, perfect. Again, good quarter and we will talk soon.

Thanks, Spencer.

Thanks, Spencer.

(Operator Instructions)

Seeing no further questions, I'd like to turn the conference back over to the management team for any final remarks.

Okay, thank you, Rocco. Thanks, everybody, for joining us today. As a reminder, a recording of the call will be available on our website. Again, we appreciate your interest in investment in New Jersey Resources. Enjoy the rest of your day. Goodbye.

Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines.