New Jersey Resources Corp (NJR) 2016 Q1 法說會逐字稿

Good morning and welcome to the New Jersey Resources Corporation first-quarter 2016 earnings conference call.

(Operator Instructions).

Please note, this event is being recorded.

I would now like to turn the conference over to Dennis Puma, Investor Relations.

Please go ahead.

Thank you, Gary.

Good morning, everyone.

Welcome to New Jersey Resources first-quarter fiscal 2016 conference call and webcast.

I am joined here today by Larry Downes, our Chairman and CEO; Pat Migliaccio, 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 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 statement 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 statements 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 were also filed on 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.

For those of you who have seen our release this morning, you know that our first fiscal quarter performance was solid.

As we begin this morning I want to remind everyone that during my presentation I will be discussing our future and I will be making forward-looking statements.

Our actual results will be affected by many risk factors, including those that are listed on slide 2. The complete list is included in our 10-K and, as always, I would encourage everyone to please review them carefully.

Also as noted on slide 3, I will be referring to certain non-GAAP measures such as net financial earnings, or NFE, as I am discussing 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 our 10-K and please take the time to review that disclosure carefully as well.

Moving to slide 4, you can see our financial and strategic highlights for the quarter.

NFE for the quarter were $0.58 per share compared with $0.65 per share in the first fiscal quarter 2015.

The difference is due primarily to lower results at NJR Energy Services.

Our fundamentals at New Jersey Natural Gas remain strong.

We added 2,046 customers during the first fiscal quarter of 2016 and remain on track to realize a 1.6% customer growth rate during this fiscal year.

We filed a base rate case in November to recover investment in operating cost incurred to improve our system and support customer growth initiatives.

We also reached another important milestone during the quarter when we retired the last section of cast-iron main in our distribution system.

We are not the only utility in New Jersey to have a cast iron free system.

Our infrastructure investment programs continued as expected.

In the quarter New Jersey Natural Gas spent about $44 million for customer growth and to improve the reliability and resiliency of our system.

Clean Energy Ventures completed their third onshore wind project in December.

The 50.7 megawatt Alexander Wind Farm is located in Rush County, Kansas.

We now have three operating wind farms that are contributing to our earnings and, as you know, we announced a fourth project last night.

Also Congress extended investment tax credits for solar and production tax credits for wind in December.

That has positive implications for our distributed power business.

And although lower than last year, NJR Energy Services is performing well despite the warm weather and their results remain in line with our expectations.

Moving to slide 5, this morning we announced net financial earnings of $49.6 million or $0.58 per share during the first fiscal quarter of 2016.

That compared with $55.1 million or $0.65 per share last year.

New Jersey Natural Gas reported strong earnings as a result of higher gross margin from customer growth, our BGSS incentives and regulatory initiatives such as the SAVEGREEN Project.

Although the quarter was about 35% warmer than normal, our conservation incentive program, which we refer to as CIP, mitigated the impact on earnings.

Our Midstream -- excuse me, moving to slide 6. Our long-term average annual NFE growth rate remains 5% to 9% and that assumes that fiscal 2013 is the base.

Today we reaffirmed our NFE guidance for fiscal 2016 in the range of $1.55 to $1.65 per share.

First and foremost I want to emphasize that the guidance assumes that New Jersey Natural Gas will remain the primary driver of our strategy and our performance.

New Jersey Natural Gas will provide the majority of our earnings, our assets, our people and our capital investments.

Infrastructure projects and new customer additions will continue to drive our investments.

Our Midstream investments will also contribute to our regulated earnings.

Combined with New Jersey Natural Gas our regulated businesses are expected to contribute between 65% and 80% of total net financial earnings in fiscal 2016 and beyond.

As I mentioned earlier, NJR Clean Energy Ventures provides renewable electricity from our solar and wind investments.

We are focused on diversifying our earnings through this business as we continue to grow our portfolio of wind projects.

Clean Energy Ventures is expected to provide between 10% and 20% of net financial earnings in fiscal 2016 and beyond.

Now I think as many of you recall, extreme volatility in fiscal 2014 and 2015 created market opportunities that led to outstanding performance for NJR Energy Services.

This year warm weather conditions created by El Nino patterns have resulted in less volatility than we experienced in the previous two fiscal years.

And so, we expect that NJRES will contribute between 5% and 15% of net financial earnings in fiscal 2016 and that number is consistent with our expectations.

At the same time our annual dividend growth goal remains at 6% to 8% with a targeted payout ratio of 60% to 65%.

Turning to slide 7, in December Congress extended both the production tax and investment tax credits.

Essentially the legislation extended the PTC at its existing value of $23 per megawatt for wind projects that begin construction through December of 2016.

The value of the PTC will gradually decline through 2019 and thereafter will be eliminated.

In addition, the investment tax credit was extended at its current level of 30% for solar projects that commence construction before December 2019.

The credit reduces to 26% for projects started in 2020 and to 22% in 2021 provided that these projects are in service by December of 2023.

Commercial solar projects started after 2021 are eligible for a 10% ITC.

Now I think, as many of you know, over the past several years of strategy reflected our expectation that Congress would not extend these credits.

As a result our plan was to reduce our solar capital spending and to diversify our portfolio, which, as we indicated at our Investor Day in October, we were on track to achieve that.

The ITC and PTC extensions now provide us with options to invest in wind and solar over the next several years and we are currently reviewing how these changes will impact our future CEV investments.

In the short-term you can expect us to focus on the build out of our BPU approved grid connected solar projects in New Jersey, to continue our residential solar program and to add onshore wind projects to our portfolio.

But, I would again emphasize that we continue to expect that CEV will contribute 10% to 20% of our NFE, and that remains unchanged from previous forecasts.

On slide 8, last evening we announced our fourth onshore wind project, the 39.9 megawatt Ringer Hill Wind Project which is located in Somerset County, Pennsylvania.

That is about 60 miles from Pittsburgh.

We will invest about $84 million in this project and we expect that it will come online during the first quarter of fiscal 2017.

When Ringer Hill is completed we will have four wind farms with total capacity approximating 120 megawatts of renewable electricity.

And before I turn the call over to Pat to discuss our quarterly results I want to review slide 9 which summarizes our capital expenditure program.

In the chart you can see that the majority of our capital investments will continue to be allocated to our regulated utility, New Jersey Natural Gas, and our Midstream businesses.

And so, I will turn the call over to Pat who will review our financial results, but I want to remind everyone that Pat officially became our Chief Financial Officer effective January 1. So this is his first opportunity to share our financial results with you.

But Glenn is in the room and he will keep an eye on Pat.

So, not to worry (laughter).

Pat.

Thanks, Larry, and good morning, everyone.

As you can see on slide 10, NJNG's net financial earnings were $30.6 million compared to $28.2 million in the prior quarter.

The improved financial performance was driven by a significant increase in gross margin from customer growth, our BGSS incentive programs and SAVEGREEN, our energy efficiency program.

Since its inception, the BGSS incentive programs have saved customers approximately $800 million and also provided shareowners an average of $0.05 of NFE per share annually.

Turning to slide 11, we added 2,046 new customers in the first quarter with approximately half of those customers coming from other fuels, primarily fuel oil.

Combined these new and conversion customers are expected to contribute approximately $4.4 million annually to utility gross margin.

Although additions are down in the first quarter due to timing differences, we are on track for the year and expect to add 8,150 customers to our system in fiscal 2016.

This will be about a 4% increase over the prior year.

Through our fiscal year 2018 we expect customer growth additions of 24,000 to 28,000 representing an annual new customer growth rate of about 1.6%.

Most of you are familiar with the regulatory programs that we list on slide 12.

I just mentioned the impact that our BGSS incentives have had on our results.

Our CIP, which has been in place for about 10 years, significantly mitigated the impact of warm weather and the resulting lower usage levels in our first quarter.

This past November/December were among the warmest in our company history.

Through SAVEGREEN we invested $8.6 million in the first quarter of 2016 and have VPO approval to invest $220 million through June of 2017.

This program supports New Jersey's energy efficiency goals while helping both customers and shareowners.

Also in the first quarter we invested $7.2 million in our SAFE program.

SAFE is a $130 million four-year infrastructure program to replace 276 miles of unprotected steel and cast-iron main to ensure safety and reliability.

And finally, we invested $5.1 million during the quarter in our NJ RISE program, which is a $102.5 million five-year program consisting in six capital projects designed to improve the resiliency of our system.

As Larry has mentioned, we filed our base rate case on November 13 as the BPO requested when they approved our SAFE infrastructure program in 2012.

The $147.6 million rate increase request will primarily allow us to recover costs incurred to improve our system and support customer growth.

As you can see, we have included the details of our forecasted rate base and cost of capital on this slide.

We are currently in a discovery phase.

The BPO rate case process can take up to 12 months, so we expect to have new rates in the first fiscal quarter of 2017.

Moving to slide 14, Midstream NFE totaled $2.3 million in the first quarter of 2016 compared with $2.1 million in the prior year.

The increase reflects higher revenue from the Steckman Ridge storage facility.

We also have a 20% interest in the PennEast Pipeline, which filed its 7C application with FERC in September and we are currently working through the approval process.

The earnings contribution from NJR Midstream in fiscal 2016 is expected to remain at 5% to 10%.

Turning to slide 15, Larry mentioned earlier that NJRES reported lower NFE of $10 million in the first quarter of 2016 compared with $16.4 million last year.

As expected, their financial margin was lower than last year due primarily to narrow price spreads resulting from lower natural gas prices.

And as Larry mentioned, we expect NJRES to contribute 5% to 15% to NFE in fiscal 2016 and beyond.

Moving to slide 16, first-quarter 2016 NFE at NJR Clean Energy Ventures totaled $7.5 million compared with $9 million last year.

The decrease quarter over quarter was due primarily to lower investment tax credits.

Our Sunlight Advantage program added 84 residential customers, or 0.7 megawatts in the first quarter.

This brings the total number of residential customers to more than 4,000 and our residential solar portfolio to more than 36 megawatts.

Total capacity for all of CEV's solar projects is now just over 118 megawatts, which produces approximately 142,000 SRECs annually.

Adding the three wind projects to that total, our distributed power portfolio is nearly 199 megawatts, of which approximately 40% is wind.

As shown on slide 17, we have been actively hedging our SREC sales.

When considering our expected generation, we are 92% hedged for fiscal 2016, as you can see from the chart, and have been actively hedging future years.

The red line represents the SRECs we expect to be generated from our existing portfolio.

We believe that the increasing number of SRECs, the expectation of continued strength in SREC prices, the impact of our hedging program and expected earnings from our wind investments support our forecast of 10% to 20% of our total NFE coming from CEV in fiscal 2016 and beyond.

I will now turn the call back to Larry for his closing comments.

Thanks, Pat.

I want to conclude our call today with a review of our path to future growth which includes a summary of our key initiatives for fiscal 2016, 2017 and 2018.

I think many of you may recall that the format on slide 18 was originally introduced at our 2014 investor conference.

And really what it is designed to do is to summarize the key initiatives each year that support our annual 5% to 9% NFE and 6% to 8% dividend growth targets.

And so, when you look at the slide you will see the details for fiscal 2016.

And then as you move into fiscal 2017 and 2018 you will see it will be the initiatives from 2016 plus the additional initiatives that you see in 2017 and 2018.

So I just want to take a moment to summarize that.

The growth plan through fiscal 2018 is based upon strong customer growth, infrastructure investments, regulatory initiatives at New Jersey Natural Gas that will benefit both customers and share owners.

We continue to work collaboratively with our regulators on initiatives that benefit not only our share owners but also our customers.

We also expect to benefit from consistent revenues from our Midstream investments.

We are focusing on diversifying CEV's distributed power portfolio combined with improvements in the SREC market fundamentals and the extension of both investment tax credits and production tax credits.

And finally, we will continue to take advantage of expected natural gas demand growth and price volatility at NJR Energy Services while at the same time producing -- providing producer and asset management services.

When we look at the strategy and we look at our fundamentals they remain strong and we think they provide the opportunities for future growth.

But as always, as I close I want to say thank you to our nearly 1,000 employees for their continued dedication and commitment to our Company and our customers.

Without their efforts we would not have achieved the excellent results we reported this morning.

Without everything that they do every day we would not have these strong fundamentals that we have for the future.

Our employees are the foundation of our Company and I am grateful for what they do every day.

So, thank you for your time today.

And we are ready to take your questions and comments.

(Operator Instructions).

Mark Barnett, Morningstar.

Congratulations, Pat and Glenn, first of all, get that out of the way.

Thank you, Mark.

Thank you.

Sure.

Just a couple of quick things here.

One on just a minor item on the rate case.

But you have had a number of ways to generate some incentive extra margin from the utility.

Do you think that any of that is set to change following a new rate regime or should we generally be expecting about a steady performance there?

Mark, we don't expect any of that to change.

Mark, do you want to -- Mark Sperduto is in the room.

Do you want to add anything to that?

No, I think what you might be referring to are the BGSS incentives as well as our CIP.

Those two regulatory initiatives have been decided and they are continuing right through the rate case without any change.

There were recent decisions in both of those areas.

Right, yes, I remember -- just from a bigger picture, just wanted to get your sense of how that would change with a new fixed-rate.

But it sounds like no problem there.

A couple of quick questions on the Ringer Hill project.

You mentioned that it was hedged for 15 years with an industrial offtaker.

So, two things -- one, generally how fixed do you view the revenue contribution from that project?

And then two, how do you view your own sort of cost of capital and hurdle rate with an industrial offtaker versus a utility offtaker?

Mark, I'm going to ask Pat to respond to that.

And we also have with us Stan Kosierowski who heads up CEV.

So they will take your question.

Pat.

Good morning, Mark.

So we hedged a majority of the output on that project, the Ringer Hill project, through that agreement.

And so, while we didn't disclose a specific number, rest assured a majority of the power is hedged.

In terms of the cost of capital assumptions relative to the industrial partner, the counterparty chose not to be named in our press release, industrial partner was as close as we could come to describing their line of business.

But we do consider the credit quality of the counterparty in our return calculations.

And there are credit protections in the agreements with the counterparty should their credit quality deteriorate.

Stan, is there anything to add?

No, that's fine.

Okay, yes.

Just this is sort of a growing trend with some of the more distributed generation.

So I was just curious as to your kind of framework for analyzing this kind of a project when your offtaker is not sort of the fully regulated utility.

But appreciate that, guys.

Thanks.

Brian Russo, Ladenburg Thalmann.

So just to clarify, the wind farm announced last night, that was assumed in your capital forecast, CapEx forecast, correct?

Yes, Brian, this is Pat Migliaccio, that is correct.

Okay, and with the PTC and ITC extension, clearly there is upside opportunities and upside CapEx opportunity.

How much incremental CapEx do you think you can handle without needing a significant amount of equity to fund it?

Brian, I think -- this is Larry.

I think at this point what we are doing is, as you know, just as I said, we had really assumed that we would not have the ITC and the PTC and that was with the CapEx numbers that we were putting out there in the forecast.

Now that this is in place what we will be doing is a complete look see at the portfolio and the distribution between wind and solar.

There may be some changes there, but what will not change is the 10% to 20%.

Got you, okay.

And the SREC hedge slide and average price, it looks like the hedges on a percentage basis increased and so did the average price.

Maybe you could just talk a little bit more about what you are seeing in that market in terms of pricing, etc.

Yes, sure, Brian.

This is Pat Migliaccio again.

We have seen over the course of the last several weeks certainly strength in the SREC market reflecting the BGS auctions and the purchasing behavior that leads up to the BGS auctions in the state of New Jersey.

So to put things in perspective, energy years 2016 and 2017 are trading at a bid ask between say [$2.85] and [$2.95] over the course of the last several weeks.

So as you might imagine, we have been aggressively hedging given those market prices because they are near 90% of the SACP which is the penalty rate that the LSEs pay if they don't acquire those SRECs.

Brian, we also -- and we got into this in a lot of detail at the October investor meeting.

We spend a lot of time internally understanding the market and where it is relative to the renewable portfolio standards.

So as we had said, our expectation was that there would be some improvement in the SREC market fundamentals and we are seeing a little bit of that right now.

But internally, when we are making our hedging decisions, we are not looking to take an inordinate amount of risk on the movement of SREC prices.

And you can see that reflected in some of the hedging strategies and decisions that we've made.

Okay.

And you mentioned PennEast, the FERC filing.

Is it still considered on schedule?

Yes, as we disclosed right now, we are going through the FERC process and expecting to get the FERC certificate.

So there is no change to the schedule right now.

All right.

And then lastly, with the decline in natural gas, what kind of offset do you think there is to the $147 million base rate increase which, on a percentage basis, is fairly large?

I'm going to ask Mark Sperduto to talk about that.

Well the system that -- for gas cost each June and coming up in this June we will do a forecast of our gas cost.

And that forecast will coincide approximately with the timing of our base rate case increase.

So until that time, as you mentioned, gas prices have been historically low and those types of prices would be reflected contemporaneously with the change in our base rate case increase this coming October/November timeframe.

So, Brian, I think at this point it is impossible to really predict that with specificity right now.

Okay.

And then lastly, I noticed Midstream first quarter 2016 was up year-over-year, but yet you sold Iroquois.

I think you mentioned Steckman Ridge growth.

Maybe you could just add a little bit more color to that.

Yes, Brian, Pat.

Again, without -- Steckman Ridge provided more or more than offset the decline in revenue that we saw from the difference in dividend income on our Dominion Midstream units versus the income from Iroquois.

And principally the same fundamentals that we see that drive the good solid performance of NJRES are driving the performance at Steckman Ridge.

So you have got some spreads in the Marcellus area that are leading to higher hub services and storage revenue at least in the short-term at Steckman Ridge.

Okay, great.

Thank you.

(Operator Instructions).

As there are no further questions, this concludes our question-and-answer session.

I would like to turn the conference back over to Dennis Puma for any closing remarks.

Thank you, Gary.

I want to thank everyone for joining us again today.

As a reminder, a recording of the call is available for replay on our website.

Again, we appreciate your interest and investment in New Jersey Resources.

Thanks, have a great day.

Bye.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.