New Jersey Resources Corp (NJR) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the New Jersey Resources FY15 and year-end conference call.

(Operator instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator instructions)

Please also note that today's event is being recorded. At this time I'd like to turn the conference call over to Mr. Dennis Puma, Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone. Welcome to New Jersey Resources FY15 year-end conference call and webcast. I'm joined here 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 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 items in the forward-looking statements section of today's news release filed on Form 8-K, and in our most recent 10-K filed with the SEC. 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 presentation, which are available on our website and were also filed on 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 our FY15 performance was strong and exceeded our original expectations. Before I begin, I'd like to note a number of changes we've made to our leadership team which I believe have strengthened us for the future. First of all, Amanda Mullan joined us in April. Amanda serves as our VP and Chief Human Resources Officer. And also, as we announced on November 11, Patrick Migliaccio will assume the role of Senior Vice President and Chief Financial Officer; and Tom Massaro will become Senior Vice President of Marketing, Energy Efficiency, and Customer Services. Those will be effective January 1 of 2016. And before you wonder what's happening to Glenn, he is currently planning to retire in January of 2017 and is with us here today.

I also wanted to focus on our half day conference that we had with the financial community on October 21 and say that I'm grateful to those who attended. During that session we were able to do a deep dive on all of our businesses, including Clean Energy Ventures, and I'd like to invite everyone to review our presentations from that day -- in particular, the slides that discuss the solar renewable energy certificate market in New Jersey. We spent a good deal of time at the investor conference talking about the strategy of Clean Energy Ventures and really going a little bit deeper than we have in the past on some of the key drivers of Clean Energy Ventures's performance.

Through my presentation this morning I'll be discussing our future and will be making forward-looking statements. Our actual results will be affected by many risk factors, including those listed on slide 1. The complete list is included in our 10-K, and as always I'd encourage you to please take time to review those risk factors carefully. I'd also note these risks are derived from our annual assessment performed as part of our enterprise risk management program. 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 more complete understanding of our financial performance. However, I would stress that NFE is not intended to be a substitute for GAAP. The non-GAAP measures that we use are discussed more fully in item 7 of our 10-K. And again, I would encourage you to please review that disclosure carefully, as well.

Moving to slide 3, you can see that FY15 was another strong year for New Jersey Resources. Our net financial earnings per share was $1.78. That exceeded our original expectations. You will recall that we raised guidance three times during FY15 because of the solid performance from NJR Energy Services. In FY15 we provided our shareholders with a very strong 22.8% total return, which exceeded our peer group average. Our strong performance allowed us to increase our dividend in September by 6.7% to an annual rate of $0.96 per share. We've now raised our dividend 22 times during the last two decades.

It was another year of extensive investment in infrastructure by New Jersey Natural Gas, and we spent about $179 million for customer growth and to improve the reliability and resiliency of our system. The better-than-forecasted performance of NJR Energy Services over the past 2 years has enhanced our earnings retention by about $94 million, which has strengthened our financial profile and reduced the need for future equity issuances.

Turning to slide 4, continuing with the highlights of FY15, as the economy improved throughout our service territory, we saw a 3.4% increase in customer additions in FY15. Our constructive regulatory relationships with the Board of Public Utilities allowed us to extend both our SAVEGREEN project and our BGSS incentive programs. In September we exchanged our 5.53% interest in Iroquois Pipeline for Dominion Midstream Partners units. That transaction allowed us to diversify our midstream portfolio; and through the diversification of our distributed power portfolio, we continued our ITC transition strategy. In particular our residential solar program, the Sunlight Advantage, now serves nearly 4,000 customers. And our second wind project, the Carroll area project in Iowa was completed. And then finally, NJR Energy Services's strong results were supported by short-term volatility and our team's ability to create value from extreme market conditions.

On slide 5, before I get into reviewing the results for the year, we filed our base rate case on November 13 as the Board of Public Utilities requested when they approved our SAFE infrastructure program in 2012. The $147.6 million rate increase request is primarily to recover costs that we've incurred to improve our system and customer growth. As you can see, we've included the details of the forecasted rate base and cost of capital on this slide. The BPU rate case process typically takes about 12 months, so we hope to have new rates in the first quarter of FY17.

Moving to slide 6, as I said, this morning we announced net financial earnings of $151.5 million or $1.78 per share. For FY15 that number compared with $176.9 million or $2.10 per share last year. I think as everyone knows, our FY15 earnings are at the upper end of our guidance range. Last year, as you know, NJR Energy Services had an outstanding year; strong performance again this year. You can see that when you look at the earnings chart.

Glenn is going to review our segment results in more detail shortly, but in looking at our results you can see our primary businesses performed very well. Our better-than-expected FY15 NFE performance was driven by improved performance by NJR Energy Services compared with our original NFE guidance. As I said, although it was lower than FY14, they had another excellent year. We saw steady growth from our two regulated businesses, New Jersey Natural Gas and NJR Midstream, and we had a solid contribution from Clean Energy Ventures.

Moving to slide 7, this morning we also announced our net financial earnings guidance for FY16 in the range of $1.55 to $1.65 per share. That's consistent with our goal of average annual net financial earnings growth of 5% to 9%, and that uses FY13 as the base. As you can see when you look at the pie chart, we expect our regulated businesses, New Jersey Natural Gas and NJR Midstream, to contribute between 65% and 80% of our FY16 net financial earnings. I think it's also important to note that we expect at this point that NJR Energy Services will contribute between 5% and 15% of net financial earnings, which is consistent with our results in recent years prior to their FY14 and FY15 performance.

Moving to slide 8, we give you a summary of our forecasted net financial earnings through FY18. As you can see, we currently expect 5% to 9% average annual NFE growth. We used 2013 as our base year, but I think importantly you can see the majority of our earnings will come from our regulated businesses; and, as we've been pointing out for the last several years, our reliance on investment tax credits continues to decline. As you look at the bar chart and you see the earnings above the red line in FY14 and FY15 illustrate the $94 million of better-than-expected earnings retention as a result of NJRES' strong performance. The forecast assumes we'll experience levels of weather and volatility similar to the past four years prior to FY14. I emphasize that point because we do want investors to focus on the 5% to 15% that we expect from NJRES and the assumptions that are making up that range.

On slide 9, as I mentioned earlier, in September we raised our dividend by 6.7%. Our goal remains to maintain a dividend growth rate of 6% to 8% annually with a payout ratio of 60% to 65%. We believe that our dividend growth goal will exceed our peers while generating an earning retention rate that will allow us to support both our capital spending program and future earnings growth.

Moving to slide 10, we show our current capital expenditure forecast through FY18, which includes total capital investment of more than $1.4 billion. As you can see when you look at the components of that spending, our expectation is that between 60% and 70% of our capital will be invested in our regulated utility and midstream assets. And, as we have planned, our solar spend declines. So with that I'll now turn the call over to Glenn, and he'll review the details of our financial performance.

Thanks, Larry. Good morning, everyone. I'll take a few minutes to review the results for each of our businesses. The increase in utility firm gross margin that we show on slide 11, for both the fourth fiscal quarter and the year, is due primarily to the impact of our infrastructure investments that are earning an immediate return, SAVEGREEN, customer growth and incentive programs. NJNG's NFE for the year was $76.3 million, compared with $74.2 million at FY14 and was driven by that growth in utility gross margin.

For the three months NJNG reported a net financial loss of $7.2 million, compared with a net financial loss of $5.4 million. The weaker fourth quarter results reflect an increase in our overall state income tax rate. We added 7,858 new customers to our system in FY15, 3.4% more than the prior year, with approximately half of those customers converting from other fuels, primarily fuel oil. These new and converging customers are expected to contribute approximately $4.5 million annually to utility gross margin.

Our BGSS incentive program had a very strong year, adding $0.12 per share to earnings. Since inception these programs have saved customers approximately $800 million and provided shareowners with an average of $0.05 per share annually. Slide 12 illustrates some of the customer growth numbers I just mentioned. We expect customer growth addition for FY16 through FY18 of 24,000 to 27,000, representing an annual new customer growth rate of 1.6%.

Moving to slide 13, working collaboratively with our regulators remains an essential element of our strategy. We have spoken about all the programs before, so I will just highlight a few. Our BGSS incentive programs, which are comprised of our all-system sales, capacity release programs, and our storage incentive program have saved customers money and provided our shareowners with additional NFE. SAVEGREEN, our energy efficiency program, provides grants and incentives to customers to install high efficiency equipment. SAVEGREEN is in place through June of 2017 and supports New Jersey's energy efficiency goals while helping both customers and shareowners.

We opened two public NGV refueling stations in late FY15: one at Waste Management's facility in Toms River in Ocean County, and a second at Shore Point Distributing Company's facility in Freehold in Monmouth County. A third CNG station in Monmouth County is expected to open by the end of the current quarter. NJNJ (sic - NJNG) is authorized to earn an overall return of 7.1% on these stations, including a 10.3% return on equity.

Turning to slide 14, you can see the impact our customer growth and regulatory initiatives is currently expected to have on NJNG's gross margin over the next three years. Customer growth will remain the largest contributor to the utility gross margin, and we'll also receive important contributions from SAVEGREEN and our BGSS incentive programs.

Moving to slide 15, Midstream NFE totaled $9.8 million in FY15 compared with $7.5 million last year. The increase reflects higher revenue associated with better results at both Steckman Ridge and Iroquois. As Larry mentioned, in September we exchanged our 5.53% interest in Iroquois for 1.84 million common units of Dominion Midstream Partners. By doing so NJR Midstream diversified its portfolio with stake in other Dominion Midstream investments, such as its preferred equity interest in the Cove Point LNG facility as well as other DM assets. This exchange generated a pre-tax gain of $24.6 million that is deferred and will be recognized as income when and if the partnership units are sold in the future. PennEast Pipeline, which we have a 20% interest, filed its 7(c) application with FERC in September. NFE from NJR Midstream is expected to remain at between 5% and 10%.

Turning to slide 16, FY15 NFE at NJRES totaled $42.1 million compared with $79.7 million in FY14. Our better-than-expected results were primarily driven by cold weather that created short-term increases in natural gas demand as well as price volatility, which in turn generated higher than expected gross margin. In the fourth quarter, NJRS experienced a smaller net financial loss of $5.4 million compared to $10.4 million last year. The quarterly results reflect the seasonal nature of RES's business, as well as lower operating and maintenance costs in FY14 that did not recur. 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're now the 16th largest gas marketer in North America.

Moving to slide 17, FY15 NFE at NJRCEV totaled $20.1 million compared with $12.7 million in FY14. The higher results were due primarily to increased investment tax credits from solar capital expenditures placed into service during the year. We placed five grid-connected commercial systems into service with a total capacity of 26.5 megawatts. We also invested $25 million in FY15 in our Sunlight Advantage program, our residential solar lease program which provides savings to eligible homeowners. The Sunlight Advantage program added 829 customers, or 7.8 megawatts in FY15, bringing the total number of customers to almost 4,000 and growing its portfolio to more than 35.3 megawatts. Current total capacity of all of CEV's solar projects is now 117.7 megawatts, which produces approximately 145,000 SRECs annually.

Turning to slide 18, we continue to 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've built a strong portfolio of New Jersey-based solar programs, including both net metered projects in the commercial and residential markets, as well as larger scale wholesale grid-connected projects. We have advanced our diversification into onshore wind with projects across the country in Montana, Iowa, and Kansas. Wind assets now comprise about 20% of our portfolio [connected] service. When our third project, the Alexander Wind Farm goes in to service next month, wind will represent almost 40% of our portfolio.

On slide 19 you can see that monthly solar capacity additions have declined significantly from the 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. Since our Investor Day last month, SREC prices have increased from the $230 range to the $275 range, with prices today at right around $260. We believe these fundamentals will continue to support stable SREC prices in the future.

In addition, as shown on slide 20, we've been actively hedging our expected SREC sales. We're currently 89% hedged for FY16, as you can see from the chart, and have been actively hedging for future years. The red line represents SRECs to be generated from our existing portfolio. So you see that in FY16, for example, we're effectively 100% hedged of our existing capacity. We believe that increase in the number of SRECs to be generated, the expectation of continued strength in SREC prices, the impact of our hedging program, 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 and will result a successful transition when ITC drops from 30% to 10% on January 1, 2017.

Turning to slide 21, NJR Home Services's NFE totaled $2.4 million in FY15, about flat with FY14, reflecting slightly lower installation revenues. We expect their NFE contribution to range between 1% and 3% in FY16. Looking at our cash flow forecast on slide 22, you can see the future benefits of the higher-than-expected earnings that we generated in both '14 and '15. We believe that our capital program can be properly financed over the next three years with a modest amount of new equity, while maintaining appropriate credit metrics for our current rating. The forecasted equity requirements you see have been reduced by about 50% because of those higher-than-expected earnings in both '14 and '15. Now I'll turn the call back to Larry for his closing comments.

Thanks, Glenn. I want to conclude our call this morning with a review of our key strategic initiatives for FY16, FY17 and FY18. Many of you recall that the format on slide 23 was originally introduced at our 2014 investor conference in October of that year, and it summarizes our key initiatives that support our annual 5% to 9% net financial earnings and 6% to 8% dividend growth targets. So to summarize that, our growth plan through FY18 is based on strong customer growth, infrastructure investments, and regulatory initiatives at New Jersey Natural Gas that will benefit both our customers and our shareowners.

We want to take advantage of expected natural gas demand growth and price volatility at NJR Energy Services, while providing producer and asset management services. We're focused, as you know, on diversifying Clean Energy Ventures's distributed power portfolio combined with improving SREC market fundamentals to provide steady income streams, and expanding our midstream strategy, including PennEast. We believe when you look at these fundamentals, they remain strong and provide opportunities for future growth.

As I close, I also want to say thank you to our nearly 1,000 employees for the continued hard work and dedication. Without their efforts we would not have achieved the excellent results we have reported to you this morning. Our employees are the foundation of our Company and I'm grateful for what they do for us every single day.

I want to thank you for your time today. Wish you all the best for a happy Thanksgiving. And we're now ready for your questions and comments.

Ladies and gentlemen, at this time we'll begin the question-and-answer session.

(Operator instructions)

Ladies and gentlemen, at this time, it's showing no questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you, Jamie. Thank you all 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 have a wonderful Thanksgiving. We'll see you next quarter. Goodbye.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.