New Jersey Resources Corp (NJR) 2016 Q2 法說會逐字稿

Good day, and welcome to the New Jersey Resources Corporation second quarter fiscal 2016 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, Investor Relations. Please go ahead.

Thank you, Austin. Good morning, everyone, and welcome to this quarter's conference call and webcast. I'm 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 meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions, and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely, which could cause results to materially differ from our 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, first 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. We do 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 which are available on our website and were furnished on our Form 8-K filed 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 reported solid second quarter earnings that exceeded financial community consensus estimates. Our year-to-date earnings were also strong, and we remain on target to achieve our earnings guidance range for fiscal 2016.

As I begin this morning, I want to remind everyone that during my presentation I'll be discussing our future and I'll be making forward-looking statements. Our actual results may be affected by many risk factors, including those that are listed on slide 2. I'd also remind you that the complete lists is in our 10-K and, as always, I would encourage you to review them very carefully.

Also, as noted on slide 3, I'll be referring to certain non-GAAP measures such as net financial earnings, or NFE. Now, 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 I would ask you to pleases review that disclosure as well.

Moving to slide 4, I want to review some of our financial highlights from the second quarter. Net financial earnings in the quarter were $0.91 per share compared with $1.16 in the second quarter of 2015. The difference is primarily due to lower results in NJR Energy Services. We did, however, exceed the financial community consensus estimate of $0.89 per share.

New Jersey Natural Gas had a solid quarter and its fundamentals remain strong. We added more than 1600 customers during the second fiscal quarter of 2016 and nearly 3700 for the first six months of the fiscal year. This performance keeps us on track to achieve a 1.6% new customer growth rate in fiscal 2016.

Although its results were lower than last year, NJRES is performing well despite some warm weather, which underscores our team's ability to adapt to changing market conditions. I think it's also important to note that their results are in line with our guidance range.

NJR Clean Energy Venture's results were in line with our expectations. CEV increased its residential customer base by 207 customers through its Sunlight Advantage program and now serves over 4250 customers.

In the commercial market, we have five grid-connected solar projects under construction and four of those should be completed by the end of fiscal 2016.

Moving to slide 5, I can report to you that our base rate case is progressing at the Board of Public Utilities. I think it's very important to point out that the BPU recently approved our Southern Reliability link, which we refer to as our SRL project.

This morning, we filed supplementary testimony in the rate case regarding the status of the SRL's approval process, and in that testimony we noted that the project will not be completed by December 31, 2016. As a result, we're seeking to modify the rate treatment in the pending rate case to include SRL's spending through September 30, 2016, and to have any additional spending included in the rates on a quarterly basis until the project is complete.

The base rate petition that we filed last November sought to include the total estimated cost of the SRL upon the effective date of the rate case.

Turning to our distributive power business, NJR Clean Energy Ventures, as you know, in December Congress extended the federal tax credits for solar and wind investments. Over the past several years, we've been working on a portfolio diversification strategy to prepare for the possible expiration of the investment tax credits. That strategy consisted primarily of making investments in onshore wind projects and continued investment into residential solar.

We are not changing our fiscal 2016 capital plan as a result of the tax credit extension. As I noted, we currently have five commercial solar projects under construction and our residential solar program is strong and growing.

In addition, construction is continuing at Ringer Hill, which is our fourth onshore wind project. When completed at the end of our first quarter of fiscal 2017, we will have more than 120 megawatts of installed wind capacity.

However, the tax credit extensions for both solar and wind do give us additional options for our future investment strategy. We now have flexibility in fiscal 2017 with regard to the timing of our projects to consider additional commercial solar investments that will be eligible for a 30% investment tax credit.

As we've previously communicated, our residential solar spending will continue beyond fiscal 2016 and now there could be additional opportunities.

I want to mention one more highlight. In March, the FERC issues its notice of scheduling for environmental review of the PennEast pipeline, which indicated that they are moving forward with a full review. This action established December 16, 2016, for the completion of the environmental review. We view this as a positive step toward obtaining the approvals that are needed to begin construction, but what this does is to move the preliminary in-service date to the last quarter of fiscal 2018, which would be the first quarter of our fiscal 2019.

On slide 6, you can see our long-term average annual net financial earnings growth goal remains 5% to 9%, and that is using fiscal 2013 as the base. We are not changing our expected earnings contributions from our business segments.

Now, I just want to make a few comments about our guidance. First and foremost, our guidance range assumes that New Jersey Natural Gas will remain the primary driver of our strategy and our performance. It will continue to comprise the majority of our earnings, our assets, our people, and our capital investments.

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

Our current midstream investments, including Steckman Ridge and the units that we own in Dominion Midstream, will also continue to contribute to our regulated earnings. When you combine that with New Jersey Natural Gas, our regulated businesses are expected to contribute between 65% and 80% of our total net financial earnings in fiscal 2016 and beyond.

Clean Energy Ventures is expected to provide between 10% and 20% of our net financial earnings in fiscal 2016 and beyond. Although our portfolio mix may change, our long-term guidance range for CEV will not change.

Turning to NJRES, as you know, in both fiscal 2014 and 2015, extreme market volatility created market opportunities that led to outstanding performance that, among other things, allowed us to increase our earnings retention rate. This year, warm weather conditions created by El Nino patterns have resulted in lower volatility than we experienced in 2014 and 2015.

NJRES is currently expected to contribute between 5% and 15% of net financial earnings in fiscal 2016 and beyond, and that is consistent with our guidance range.

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

On slide 7, we list several regulatory programs that benefit our customers and our shareowners, but they also underscore the excellent relationships that we have with our regulators. Since inception, our BGSS incentives have not only had a positive impact on our margins but have also saved our customers approximately $842 million.

Our conservation incentive program, which has been in place since 2006, has protected nearly $850 million of New Jersey Natural Gas Company's margins. Through SAVEGREEN, we invested $13.5 million in the second quarter of fiscal 2016, and we have BPU approval to invest $220 million through June of 2017. This program supports New Jersey's energy efficiency goals while helping both our customers and our shareowners.

In the fiscal second quarter, we invested $6.1 million in our SAFE program. SAFE is a $130 million four-year infrastructure program that is designed to replace 276 miles of unprotected steel main and associated services to ensure safety and reliability.

I'd also point out that in December of 2015, New Jersey Natural Gas became the first energy utility in New Jersey to eliminate all cast iron main from its distribution system.

And finally, we invested $2.4 million in the quarter in our NJ RISE program, which is a $102.5 million five-year program consisting of six capital projects that are designed to improve and strengthen the safety and resiliency of our system.

And on slide 8, I wanted to give you a look ahead at some of our programs after the conclusion of the base rate case. First of all, we expect that customer growth will remain strong.

Also, as part of our pending base rate case filing we requested $200 million of additional SAFE spending.

Our regulatory programs, including our BGSS incentives, the CIP, and SAVEGREEN are expected to continue providing benefits for both our customers and our shareowners and, in addition, our $102.5 million NJ RISE program will continue through 2019.

We believe that additional utility margin from these programs, combined with our continued customer growth, will offer the opportunity for future regulated growth.

And with that, I want to turn it over to Pat and he will review our financial results.

Thanks, Larry. This morning we announced net financial earnings of $77.9 million, or $0.91 per share, for the second quarter of 2016. That compares with $99.1 million, or $1.16 per share, last year.

We also reaffirmed NFE guidance for fiscal 2016 in the range of $1.55 to $1.65 per share.

Moving to slide 10, NJNG's current operating assets produced net financial earnings of $49 compared, compared with $48.6 million in the prior quarter. The improved financial performance was driven by an increase in utility gross margin from customer growth, our BGSS incentive programs, and SAVEGREEN, our energy efficiency program.

Although the quarter was about 12% warmer than normal, our conservation incentive program, which we refer to as CIP, mitigated the impact to earnings.

And as Larry had discussed, our future growth in NJNG will be based on continued customer growth, new rates, and regulatory programs such as our BGSS incentives.

The chart on slide 11 shows the changes in utility gross margin in the past 12 months. And as you can see, customer growth is the largest contributor to this increase. Other significant contributors were our BGSS incentive programs and regulatory initiatives such as SAVEGREEN.

Since its inception, the BGSS incentive programs have saved customer approximately $842 million and also provided shareowners an average of $0.05 in NFE per share annually.

Turning to slide 12, we added 3655 new customers in the first six months of fiscal 2016, with approximately half those customers converting from other fuels, primarily fuel oil. Combined, these new and conversion customers are expected to contribute approximately $3 million annually to utility gross margin.

Although additions are down for the first half due to timing differences, we're on track, for the fiscal year, to add 8150 customers to our system in fiscal 2016. This will be about a 4% increase over the prior year. Through fiscal 2018, we expect customer growth additions of 24,000 to 28,000, representing an annual new customer growth rate of about 1.6%.

Slide 13 reviews NJNG's capital spending for the first half of fiscal 2016. Customer growth and expenditures to maintain our system represent the majority of the spending.

We invested $13.3 million in our SAFE program in the first six months of fiscal 2016. 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.

As Larry mentioned, we have a SAFE extension pending with the BPU which would allow us to invest an additional $200 million to complete the replacement of all of our unprotected steel pipe.

We also invested $7.5 million in our NJ RISE program, which is a $102.5 million five-year program consisting of six capital projects designed to improve the safety and resiliency of our system.

Our liquefaction plant is expected to be in service this summer, and we've invested about $5.6 million towards its completion.

And last, we've invested $1.4 million for our SRL project. And as Larry also mentioned, we recently received the BPU approval to construct SRL.

Moving to slide 14, Midstream's assets produced NFE of $2.2 million in the second fiscal quarter of 2016 compared with $2.6 million in the second quarter of 2015. While Steckman Ridge's results were consistent, second quarter NFE included our interest in Iroquois, which we exchanged for $1.8 million of Dominion Midstream Partners in September of 2015.

We have a 20% interest in the PennEast pipeline. As Larry mentioned, FERC issued its notice of scheduling for its environmental review in March. This moves the preliminary in-service date to the first fiscal quarter of 2019.

Moving to slide 15, NJR Clean Energy Venture's current portfolio, yielded NFE in the second quarter of $11.8 million compared with $13 million for the same period last year. The decrease quarter over quarter was due primarily to a lower amount of investment tax credits being recognized.

NFE also reflects higher depreciation on [end] costs, which were partially offset by higher revenues associated with the commercial operation of its wind farms.

Our Sunlight Advantage program added 207 residential customers, or 1.8 megawatts, in the second fiscal quarter. This brings the total number of residential customers to almost 4250, and our residential solar portfolio to almost 39 megawatts.

Total solar capacity for all of CEV's projects is now 120.2 megawatts, which produces approximately 150,000 (inaudible).

Slide 16 shows our three operating wind farms. Our fourth wind project, Ringer Hill, is under construction and, when completed in early fiscal 2017, we will have approximately 120.3 megawatts of wind generation.

Adding the three operating wind farms to our current solar portfolio raises our distributive power portfolio to more than 200 megawatts, of which 40% is wind.

On slide 17, you can see that monthly solar capacity additions have declined significantly from a peak in early 2012. Which, combined with the annual increase in renewable portfolio standard, has supported a corresponding increase in SREC prices, shown in the graph on the right.

In addition to SREC prices, we've added a new line to this chart showing the solar alternative compliance payment, which is currently $323 for energy year 2016. You can see that with current SREC prices trading in the $200 to $285 range, they're nearing almost 90% of the penalty rate.

Accordingly, as shown on slide 18, we have been actively hedging our SREC sales. When considering our expected generation, we're 95% hedged for fiscal 2016 and have been actively hedging future years.

The red line represents the SRECs expected to be generated from our existing portfolio. We believe that the increasing number of SRECs, the expectation of continued strength in SREC prices, and the impact of our hedging program, combined with the expected earnings from our wind investments, support our forecast of [10%] to 11% of our total NFE coming from CEV in fiscal 2016 and beyond.

Turning to slide 19, Larry mentioned earlier that NJRES reported lower NFE in the second fiscal quarter of 2016 compared with the same period 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 to reiterate, we expect NJRES to contribute 5% to 15% to NFE in fiscal 2016 and beyond.

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

Thanks, Pat. I want to conclude our call today by summarizing our total return performance, but first I'd like to just say that I believe the results that we're reporting today show that we are on track with the execution of our strategic plan and have the framework in place to support future growth.

So as you can see on slide 20, we've continued to reward our shareowners with strong total returns over both the short and long term. And that really reflects the outstanding work of our more than 1000 employees because, as I've said to you many times and as I comment on every call, without their efforts we could not have achieved the excellent results that we're reporting this morning. Our employees are the foundation of our Company and, as always, I am very grateful for whatever they do every single day.

So we thank you for your time today, we thank you for being part of the call, and now we would be ready for your questions and comments.

(Operator Instructions) Mark Levin, BB&T.

Hey, gentlemen, congratulations on a good quarter. A couple of quick questions, particularly around PennEast and then ITC/PTC changes on your capital program. Obviously, you guys aren't ready to change the capital program yet, or your expectations, but maybe some guidance as to how you're thinking about not necessarily 2016 but 2017, 2018, and beyond from a capital perspective given the ITC/PTC change.

And then also, the time line for PennEast.

Okay, let's start with PennEast and I'll ask Steve Westhoven to talk about that. Steve?

So we received our FERC environmental schedule and we're moving forward and it appears that it's going to be -- we should receive our final FERC certificate some time second quarter of 2017. That's going to move us forward into the permitting phase in the state of New Jersey and moving forward through that.

So right now we're on schedule to meet the 2018 in-service date, or our fiscal year 2019. And capital expenses will obviously push forward a little bit because they'll line up with construction as it pushes a little bit farther out in the project time line.

Mark, do you want to follow up on that before we talk about the ITC and the PTC? That sounds like no.

No, that's fine. I'm sorry. Go ahead.

Just a comment. When we talk about the ITC and the PTC, I think it's important to really remind everyone that we undertook a strategy going back three or so years ago when we recognized that there was the possibility that there would be a cliff if the ITC was not extended, and that led to really a portfolio diversification strategy -- which we successfully have executed that, and you hear that this morning when you hear the amount of wind we now have in our portfolio.

Of course, the ITC and the PTC were extended, and from our perspective what that has done is to give us additional options in the capital budget. Because we had -- again, we were prepared to continue to grow that business, to grow CEV, with more of an emphasis on wind.

So what we're doing right now is looking carefully at the potential solar opportunities to balance the portfolio. There may be additional commercial opportunities that we will have but certainly on the residential side, where we have been very successful working with our partners here in New Jersey, there could also be the possibility of increasing that as well.

So I think the basic portfolio diversification strategy has worked for us. We'll continue to be focused on that, but we now have another option to consider. And as I said -- and Mark, as you pointed out -- there's no plan right now to change the fiscal 2016 capital budget.

But as we move forward with our internal process that will culminate with presentation of the capital budget for fiscal 2017 to our Board, we would certainly reflect any changes and let everyone know that. So I don't know, Pat or Glenn, if you want to add anything to that?

No. The only thing I'd add, Mark, of course is that the planned capital expenditures that we'd already communicated for residential -- $40 million in fiscal year 2017 and also 2018 -- of course are that much more profitable in a 30% ITC environment than in a 10% ITC environment.

Fair enough. And then just more near term -- when you think about the fiscal 2016 guidance, $1.55 to $1.65, as you kind of sit here through the first six months of the year, do you feel maybe more comfortable toward the lower end of that range, the higher end of the range, or kind of in the middle? How is the year progressing and then maybe thoughts about what would lead you closer to the lower or the higher end of the range?

Nobody's volunteering for that (laughter) so Mark, I'll just say we're comfortable with that range. I think it would be early to pinpoint higher or lower. Obviously we have six months left to go in the utility as well as NJRES, but for the moment I would prefer to stay just with the guidance range of $1.55 to $1.65.

Great. Thanks, you guys. Appreciate it.

Now I suspect that'll be your first question on the third quarter call. (laughter)

Absolutely; 100% -- guaranteed. Thanks, guys.

Michael Gaugler, Janney Montgomery Scott.

Good morning, everyone.

Hey, Mike.

Hey, Mike.

One of my questions was already answered, and that was on PennEast. But just as an aside here, in the energy services businesses, we certainly had some interruptions in the gas flows into the Northeast with the Texas Eastern incident about a week or so ago. Was wondering if that created any opportunities for the energy services business.

Mike, I'm going to ask Steve Westhoven to comment on that. I just wanted to make a comment that our team at New Jersey Natural Gas did a great job responding to that incident and making sure that our supply picture was not affected, because I think that might have been on people's minds. But as far as the impact itself, I'll ask Steve to comment on that.

Hi, Mike. It certainly impacted gas flows to the Northeast and we've got quite a bit of capacity on TexEastern pipeline. So it impacted our deliveries and certainly the business that we have.

As far as commenting on how it's impacting our business, certainly there was some lost revenue from some of the capacity not being able to flow, but we did have some offsets from storage and some other things. So all in all, I think it's relatively neutral and certainly not going to change any of our forward guidance numbers from this incident.

Okay. That's exactly what I was fishing for, so thanks.

Thanks, Mike.

(Operator Instructions) At this time, I'm showing no further questions. I would like to turn the conference back over to Dennis Puma for any closing remarks.

All right, thanks, Austin. Thanks, everyone, for joining us this morning. 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. Have a great day; thanks. Bye.

The conference is now concluded. Thank you for attending today's presentation; you may now disconnect.