New Jersey Resources Corp (NJR) 2016 Q3 法說會逐字稿

Good day and welcome to the New Jersey Resources Corporation third-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, with Investor Relations. Please go ahead.

Thank you, Allison, and good morning, everyone. Welcome to New Jersey Resources' third-quarter fiscal 2016 conference call and webcast. I'm joined 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 statements and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners to the 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, the forward-looking statements section of today's news release furnished 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 will be available on our website and were furnished on our 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 had a strong third quarter. Our year-to-date earnings were also solid, and we remain on target to achieve our earnings guidance range of $1.55 to $1.65 per share for fiscal 2016.

As we begin this morning and as Dennis mentioned, I wanted to remind everyone that during my presentation I'll be discussing our future and I'll be making forward-looking statements. The actual results may be affected by many risk factors, including those that are listed on slide 2. As Dennis noted, the complete list is included in our 10-K, and I would ask you to please take the time to review them carefully.

As noted on slide 3, I'll be referring to certain non-GAAP financial measures such as net financial earnings, which I will refer to as NFE. We believe that NFE provides more complete understanding of our financial performance; however, I want to emphasize that NFE is not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in item 7 of our 10-K, and I'd also ask you to please take the time and review that disclosure carefully as well.

Moving to slide 4, our NFE in the quarter were $0.13 per share, compared with $0.03 per share in the third quarter of fiscal 2015. New Jersey Natural Gas recorded higher utility gross margin from customer additions and the SAVEGREEN project, which is our energy efficiency program.

Our ongoing investments in our infrastructure enhancement programs are on track to improve the safety, reliability, and integrity of our distribution and transmission systems, and that will benefit our customers as well as the growing communities that we serve.

This quarter our unregulated subsidiaries also performed well. NJR Clean Energy Ventures recorded a $6.2 million increase in their NFE as three commercial projects were placed into service. Our expectation is that two more will be completed by the end of the calendar year.

Turning to slide 5, in addition to our strong financial results, we began operating our natural gas liquefaction processing plant at our Howell LNG facility. We now have the ability to liquefy pipeline natural gas for peak day use. The plant supports system integrity and reliability and reduces LNG transportation and capacity costs. Customers will benefit from lower natural gas costs, while the reduced emissions will benefit the environment since we no longer need to truck LNG to New Jersey from out of state.

Our base rate case is currently in settlement discussions, and I will discuss that in a little bit more detail in just a minute. But I did want to point out that the Board of Public Utilities recently extended the SAVEGREEN Project, which, as I noted, is our efficiency program, through December of 2018.

Since SAVEGREEN's inception in 2009 we have been authorized to invest approximately $220 million in this program. SAVEGREEN allows us to provide financial assistance to our customers for energy efficiency investments while advancing the state's clean energy goals.

We are authorized to earn a return on our SAVEGREEN investments ranging from 6.69% to 7.76%, and that includes a return on equity that ranges from 9.75% to 10.3%. We recover our SAVEGREEN investments over two to 10 years depending on the type of energy efficiency investment.

Our infrastructure improvement initiatives include the NJRISE project. That includes six capital projects designed to improve NJNG's service disruption response and strengthen the overall safety, reliability, and resiliency of our natural gas system. These initiatives also include the Safety Acceleration and Facilities Enhancement program, which we refer to as SAFE, where we are replacing 276 miles of unprotected steel distribution main to further enhance our system.

In addition, on July 19 we are proud to report that we retired our last remaining low-pressure distribution system which was located in Freehold Borough. Low-pressure systems were legacy systems originally developed to deliver manufactured gas. They became obsolete with the advent of interstate pipelines; and similar to the retirement of our last piece of cast-iron in December 2015, we became the first local distribution company in New Jersey to accomplish this milestone.

We're also very pleased that PennEast recently received its draft Environmental Impact Statement from the FERC. This represented an important step forward in the approval process.

Moving to our unregulated solar and onshore wind business, NJR Clean Energy Ventures, our residential Sunlight Advantage program increased its residential customer base by 323 customers and now serves over 4,500 residential solar customers.

In addition to that, construction continues at Ringer Hill, which is our fourth onshore wind project, and we expect that that will be completed in the first quarter of fiscal 2017. Once Ringer Hill comes online, we will have more than 120 megawatts of installed wind capacity. And I would note that the market for solar and onshore wind energy continues to grow as customers look to reduce their energy costs with environmentally friendly energy.

Turning to slide 6, as you know, we filed a base rate case in November of 2015. I'm pleased to share with you this morning that the parties are actively engaged in settlement talks and that the procedural schedule has been suspended by the Administrative Law Judge. It's our current expectation that we will have new rates in place early in fiscal 2017.

On slide 7 you can see that our Southern Reliability Link, which we refer to as the SRL, continues to make progress. This 30-mile pipeline is designed to support improved system safety, reliability, and resiliency in Monmouth, Ocean, and Burlington Counties.

The SRL was approved by the BPU in March of 2016. The BPU found the project to be reasonably necessary for service, convenience, and the welfare of the public. And SRL, as we talk to you this morning, is continuing to go through the permitting process.

Moving to slide 8, our long-term average NFE growth rate goal is 5% to 9%. That assumes fiscal 2013 as the base. The expected earnings contribution from our individual business segments remain unchanged, and on the dividend side our annual growth goal remains at 6% to 8% with a targeted payout ratio of 60% to 65%.

Moving to slide 9, as we continue to discuss our strategy, I wanted to briefly review our model for growing each of our businesses, beginning with New Jersey Natural Gas. I think, as everyone knows, NJNG is the primary driver of our performance and our expectation is that it will continue to comprise the majority of our earnings, assets, people, and capital investments.

Utility gross margin is the key to our profitability. That profitability is supported by customer growth, by our energy efficiency programs that support our state's public policy initiatives including the SAVEGREEN project. It's also supported by our basic gas supply service incentive programs that allow us to share the utility gross margin earned with customers and shareowners; and finally, our accelerated infrastructure programs. We think when you look at the fundamentals of New Jersey Natural Gas, those fundamentals remain very strong.

Moving to slide 10, our midstream investments, which currently include Steckman Ridge and the units that we own in the Dominion Midstream Partners, we expect that the future contributions to our midstream NFE from the PennEast Pipeline will ultimately -- we own 20% of that. We will also consider additional midstream investments that meet our financial and strategic criteria.

But taken together, New Jersey Natural Gas and NJR Midstream are currently expected to contribute about 65% of our total NFE in 1fiscal 2016.

Turning to slide 11, our NJR Clean Energy Ventures portfolio currently consists of more than 93 megawatts of commercial solar and more than 40 megawatts of residential solar through our Sunlight Advantage program. We have three operating onshore wind farms, and we expect to complete our fourth onshore wind farm at Ringer Hill early in fiscal 2017.

We continue to evaluate new opportunities and currently expect the NFE contribution from these distributed power assets to remain in the range of 10% to 20%.

Moving to slide 12, NJR Energy Services' strategy is based upon the management of its diverse portfolio of transportation and storage assets. These physical assets, combined with the expertise of our team, drive the net financial earnings from NJRES. You can see, looking at the chart, that we've also developed additional sources of revenue from producer services, utility asset management, and electric generation management contracts.

So in summary, you can see that we've built a portfolio of energy businesses that are focused on meeting the needs of our customers not only today but also in the future. And we believe that by focusing on energy-related businesses that are aligned with our competencies that we are putting ourselves in a position to build long-term value for our investors.

With that I will turn it over to Pat Migliaccio, who will review our financial results; and then I'll be back with some closing comments. Pat?

Thanks, Larry, and good morning, everyone. On slide 11, we've broken out our NFE by operating company for the three and nine months ended June 30, 2016.

NFE for the third quarter of 2016 were $11 million or $0.13 per share, compared to $2.5 million or $0.03 per share last year. For the nine months ended June 30, 2016, NFE totaled $140.1 million or $1.63 per share, compared to $156.7 million or $1.84 per share in the first nine months in 2015.

The chart on slide 14 shows the changes in utility gross margin in the past 12 months. As you can see, customer growth is the largest contributor to the improvement.

Our BGSS incentives are down year-over-year due primarily to decreases in the storage incentive program and the value of capacity. Since its inception, the BGSS incentive programs have saved customers approximately $859 million. And as Larry discussed, our future growth in NJNG will be based on continued customer growth, new rates, and a variety of regulatory programs.

Turning to slide 15, we added 5,289 new customers in the first nine months of fiscal 2016, with approximately 45% converting from other fuels, primarily fuel oil. These new and conversion customers, combined with a large industrial customer switching from interruptible to firm service, are expected to contribute approximately $3.9 million annually to utility gross margin.

Although additions are down for the nine-month period ended June 30, 2016, due to timing differences, we're on track to add 8,150 customers to our system in fiscal 2016. This will represent 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 16 reviews NJNG's capital spending for the first nine months of fiscal 2016. Customer growth and expenditures to maintain our system represent the majority of the spending.

We invested $23.8 million in our SAFE program in the first nine months of 2016, replacing approximately 41 miles of main. Overall, we replaced 257 of the 276 miles we intend to replace as part of SAFE.

For the first nine months of fiscal 2016, we invested $9.4 million in our NJRISE program. While the majority of the expenditures to date have been for excess flow valves, we've also completed preliminary engineering and design work on other important of storm-hardening efforts.

Our liquefaction plant was completed in late June and we invested about $9.6 million for that project this fiscal year. And lastly, we invested $1.8 million for our SRL project so far this fiscal year. As Larry said, we received BPU approval to construct SRL, and last month the New Jersey Department of Environmental Protection determined the SRL project to be administratively complete, which will be followed by a public comment and technical review period. New Jersey Natural Gas continues to proceed with obtaining construction and road opening permits for this project.

Our midstream assets, which are shown on slide 17, produced NFE of $2.3 million in the third fiscal quarter of 2016 compared with $2.5 million over the same period in 2015. Though modestly lower, the consistent results reflect increased storage service revenue and demand for up services at Steckman Ridge, which partially offset the loss of revenue due to the transfer of our ownership interest in Iroquois that we exchanged for 1.8 million units of Dominion Midstream Partners in September 2015.

Moving to slide 18, NJR Clean Energy Ventures' current portfolio provided NFE of $2.4 million for the third fiscal quarter of 2016, compared with a loss of $2.8 million for the same period last year. The positive $6.2 million swing quarter-over-quarter was due primarily to a greater amount of investment tax credits we recognized.

NJRCEV placed three commercial solar projects into service in the third quarter totaling 10.9 megawatts. Two additional solar projects are expected to be completed by the end of 2016, increasing our commercial solar portfolio to 104.4 megawatts.

Our Sunlight Advantage program added 323 residential customers or 3 megawatts in the third fiscal quarter. This brings the total number of residential customers to almost 4,600 and our residential solar portfolio to 40.6 megawatts.

Our solar portfolio's operational availability was in excess of 99%. That high availability rate, combined with the performance of our wind farms, has driven revenue to $28 million for the first nine months of fiscal 2016 in the production of SRECs and electricity.

As shown on slide 19 we've been actively hedging our SREC sales. When considering our expected generation, we are 97% hedged for fiscal 2016 and, as you can see in the chart, 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 20% of our total NFE coming from NJRCEV in fiscal 2016 and beyond.

Our onshore wind portfolio is illustrated in slide 19. Ringer Hill, our fourth wind project, 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 brings our distributed power portfolio to more than 214 megawatts, of which 37.5% is wind and would increase total investment in wind to approximately $232 million. We intend to provide an updated long-term capital plan a little later, in year-end's earning release.

As Larry mentioned, NJRES is having another good year, performing within our guidance range. However, as you can see from the chart on slide 21, margin decreased on a year-over-year basis due primarily to lower volatility and narrow price bids resulting from warmer winter temperatures. Consequently, NFE declined as well for the same period.

On slide 22, you can see the impact volatility has had on natural gas prices in one of NJRES's key market areas over the past two heating seasons. This fiscal year's results are based on a return to more normal volatility.

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 shareholder returns, which you can see on slide 23. As you look at those numbers, you can really see how we've been able to reward our shareowners both in the long-term and the short-term with very good returns. That really reflects the efforts, the work, every single day of our more than 1,000 employees. Because without everything that they do on behalf of our customers, we cannot have achieved the results that we have.

I've said this on every earnings call, but I would say it again: that our employees are the foundation of our Company, and I'm grateful for what they do every single day. So thank you for your time today and we would be happy to take any of your questions.

(Operator Instructions) Ladies and gentlemen, at this time as I'm not showing any questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Dennis Puma for any closing remarks.

All right. Thank you, Allison. Thanks, everybody, for joining us today. As a reminder, a recording of this call is available for replay on this website. Again, we appreciate your interest and investment in New Jersey Resources. Have a great day. Goodbye.

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