New Jersey Resources Corp (NJR) 2017 Q1 法說會逐字稿

Good morning and welcome to New Jersey Resources first quarter FY17 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

I would now like to turn the conference over to Joanne Fairechio.

Thank you, Keith. Welcome to New Jersey Resources first quarter FY17 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 in the forward-looking statements section of today's news release furnished on our form 8-K and in our most recent form 10-Q and form 10K filed with the SEC. These filings can be found at www.sec.gov. We do 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 the slides accompanying today's discussion are available on our website and were furnished on our form 8-K filed this morning.

With that said, I will turn the call over to our Chairman and CEO, Larry Downes.

Thank you and good morning everyone and thank you for joining us today. Before I begin I want to remind you that during our presentation, Pat and I will be discussing our future and will be making forward-looking statements.

Our actual results may be affected by many different risk factors including those that we've listed on slide 2. The complete list is included in our 10-K; and as always, I would encourage you to review that carefully. As noted on slide 3, we will be referring to certain non-GAAP financial measures, such as net financial earnings which we will refer to as NFE. 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 financial measures are discussed more fully in item seven of our 10-K. And I would encourage you to please take the time to review that disclosure carefully, as well.

Moving to slide 4, for those of you who have seen our announcement this morning, you know that we are performing in line with our original expectations, and importantly, we reaffirmed our net financial earnings guidance of a range of $1.65 to $1.75 per share for FY17. Our expectations for FY17 is that New Jersey Natural Gas will continue to provide the majority of our earnings.

NJNG will have a strong year due to margins from customer growth, as well as new higher base rates. We will also continue to invest in Midstream projects such as the PennEast Pipeline and we expect that midstream will contribute between 5% and 10% of NFE this year. Combined, New Jersey Natural Gas and NJR Midstream are currently expected to contribute about 60% to 75% of our total NFE in FY17.

In addition, through NJR Clean Energy Ventures, we will invest strategically in residential, in commercial solar and onshore wind projects, our expectation is that NJRCEV will contribute between 15% and 25% of FY17 NFE. NJR energy services is performing within our guidance range and is expected to contribute between 5% and 15% of FY17 NFE, and our annual dividend rate goal remains at 6% to 8% with a targeted payout ratio of 60% to 65%.

I'm now going to ask Pat to review our results for the first quarter of FY17. Pat?

Thanks, Larry. Good morning everyone.

As Larry indicated, this morning we reported first quarter net financial earnings of $40.4 million with $0.47 per share versus $51.3 million, or $0.60 per share in the same period last year. You can see the breakdown by company on slide 5. Our results are consistent with our expectations and we remain confident that we will achieve our earnings guidance for the fiscal year. I will now explain our performance this quarter, as well the factors that support our confidence that we will achieve our financial goals for the year.

Slide 6 illustrates the changes in our NFE year over year. As you can see, the biggest change occurred at NJRES, where we saw net financial earnings decline by $6.5 million. To put that in context, though, it's important to understand that the first fiscal quarter of 2016 was the second best first fiscal quarter in NJRES's 20-year history. So the decline in NFE from NJRES is consistent with our expectations.

The quarter's results were also influenced by weather; it was slightly warmer than historic averages. The amount of tax credits that we recognized in the given quarter is influenced by both the expectation of projects that we will place in service for the year, as well as the income generated for that same quarter.

Our lower quarterly income resulted in recognizing lower tax credits of approximately $2.5 million than during the same period last year. Additionally, we sold approximately 10,000 fewer SRECs this quarter than in the first fiscal quarter of 2016.

Our utility gross margin was higher than the prior year's quarter by approximately $8 million, and a few were down modestly over last year. This is due primarily to lower VG Assessment Center margin and higher operating and maintenance expenses, which offset the increases in utility gross margin from higher base rates and customer growth during the quarter.

[UCIP], our [rate] to coupling mechanism, NJNG is insulated from declines in utility gross margin from weather and customer usage. However, NJNG still earns utility gross margin on the basis of throughput. As such, the majority of the utility gross margin for the full year is earned during the heating season from November through March.

During the first fiscal quarter, NJNG generated 28% of its utility gross margin; we expect to earn 42% in our second fiscal quarter. As a result, the majority of the benefit of the base rate case will be realized in the second fiscal quarter.

As noted, our first fiscal quarter earnings were in line with our expectations. Additional segment guidance, shown on slide 7, indicates why we are confident we will achieve our annual net financial earnings guidance of between $1.65 and $1.75 for this fiscal year. As you can see, we expect the largest increase to come from NJNG. Distribution margin is estimated to be up about $0.25 per share due to the effects of higher base rates and customer growth.

After offsetting a portion of the increased distribution margin with higher expenses and slightly lower BGSS incentives, we expect NJNG's net financial earnings to increase by approximately 10% to 15% over the prior fiscal year. We also expect positive contributions from NJRCEV and Midstream in FY17.

NJRS services FY16 earnings were slightly outside our 5% to 15% range at 16%. Our expectation for this fiscal year is closer to the mid point of the guidance range for this business and we expect NJRS to perform within that range.

On slide 8 you can see NJNG's capital spending update for the first quarter. There are a few items I want to highlight: our Stage II program is well under way and we have invested $8.6 million in the first quarter of FY17. SAFE II is a BPU-approved five-year extension of NJNG's SAFE program. Through Stage II we will replace the remaining 276 miles of unprotected steelmain and associated services in NJNG's distribution system.

As part of this program, NJNG will earn an allowance for funds used during construction while its invested capital during construction, and will request rate increases for the approved $157.5 million of SAFE II spending and annual filings, consistent with the Company's other regulatory filings. As a condition of approval, NJNG is required to follow base rate case no later than November 2019.

The other items are NJ RISE program. To date, NJNG has installed nearly 7,600 of the approximate 35,000 excess flow valves in storm torn areas of our service territory. These valves restrict the flow of natural gas when there is a change in pressure on the service line. In addition, we're constructing a secondary feed into Sea Bright that is expected to be completed in FY17. The remaining four storm partnering products under this program are in the design and/or permitting phases with all projects scheduled for completion by FY19.

Turning to capital spending at NJR Clean Energy Ventures, on slide 9, for FY17 we expect to place approximately $90 million to $110 million of solar installations in service compared with the $86 million invested in FY16. In the first quarter of FY17, NJRCEV began construction on a new commercial solar project for the Brick Township Board of Education in Ocean County, New Jersey.

This $6.6 million investment represents 2.5 megawatts of capacity, and is expected to be completed in the summer of 2017. NJRCEV has three other commercial projects totaling 24.4 megawatts planned for FY17 completion. The total of 26.9 megawatts of commercial solar projects represents all of the planned commercial solar spend we communicated to investors in November.

Additionally, demand remains strong for NJRCEV's residential solar program, the Sunlight Advantage. We added 314 residential customers in the first three months of FY17, totaling 2.8 megawatts of capacity, compared with 84 customers and 0.7 megawatts of capacity during the same period of FY16. The Sunlight Advantage currently serves approximately 5,400 customers for both roof and ground mounted solar systems. NJRCEV plans to invest approximately $35 million in residential solar systems in FY17, compared with $34 million in FY16. In both the residential and commercial programs, NJRCEV now has a total of 152.4 megawatts in service through December 2016.

Finally, our Ringer Hill wind farm came online in December 2016 at a cost of $88.9 million. This 39.9 megawatt project is located in Summerset County, Pennsylvania, and the majority of the energy produced is hedged under a 15-year agreement. We expect to earn a return on equity of approximately 50% on this investment. NJRCEV's onshore wind capacity now totals 126.6 megawatts.

Before I turn the call back to Larry, I want to briefly review of the effect of potential changes to the corporate tax rates on slide 10. As you know, there are several different versions of tax reform packages that are being discussed. The common link among them all is a reduction in the corporate tax rate. For New Jersey Natural Gas, with the exception of our BGSF incentives, we would expect impact to be at largely neutral, so if there's a precedent to return the benefit of a lower tax rate and any associated reevaluation of deferred tax liabilities to rate payers.

However, for our non-regulated businesses, the impact would generally be positive. We would see a significant one-time benefit for re-measuring their deferred tax liabilities, principally created by (inaudible) at our clean energy business, NJRCEV. We would also see an ongoing benefit for our non-regulated businesses from a low corporate tax rate, as well. That said, a low corporate tax rate would result in a decrease of our tax appetite, and therefore, an increase in the length of time it would take us to utilize tax benefits.

I'll now turn the call back to Larry for some closing thoughts and Q&A.

Thanks, Pat. What I would like to do now is to put our performance into a strategic context. So if you turn to slide 11 you can see that we have built our growth strategy and our capital allocation on the ongoing transition on our nations energy landscape. As we all know, this new energy environment is the result of the abundant natural gas supplies in the Marcellus and Utica fields, as well as new sources across the country that have made possible through advances in drilling technology.

We are focused on three strategic areas: natural gas, energy efficiency, and clean energy that will provide both essential support for the economic and environmental well-being of our communities and our customers, as well as investment opportunities to create long-term value for our share owners.

First, demand for natural gas, which is supported by abundant supply, is driving new opportunities for us to grow our customer base and invest in infrastructure. Second, our focus on energy efficiency enables us to encourage customer savings and pursue growth opportunities that will benefit our share owners. And finally, clean energy supports state and federal energy policy goals that will play an increasing role in meeting the nation's growing energy needs, and it will also create new investment opportunities for New Jersey Resources.

If you move to slide 12 you can see that natural gas is the foundation of our business and anchors our portfolio. The core strength of the New Jersey Natural Gas Company's service territory support a strong and growing market that is largely residential. Specifically, Ocean County is one of the fastest growing counties in our state, which is providing a solid opportunity to invest new capital to add new customers and create long-term value. In addition, our infrastructure programs are enhancing safety and reliability for our customers while also creating long-term investment opportunities.

I'd like to talk about the projects like the Southern Reliability Link, to which we are strengthening our system with a second feed, but we are also creating supply diversity to meet the long-term energy needs of our customers. I think when we think about the SRL, it's important to note that it will provide greater overall system resiliency and benefit over 1 million people in our service territory.

Our basic gas supply service programs, which are now in their 25th year, complement our natural gas procurement activities and provide lower costs for customers and value for our share owners. In fact, since 1992, share owners have earned an average of an additional $0.05 per share each year. And over the past several years our BGSS programs have also added approximately 100 basis points to New Jersey Natural Gas Company's return on equity each year.

Further, growing whole sale demand offers new opportunities for physical and producer services at NJR Energy Services, and increasing long-term natural gas supply combined with growing demand provide opportunities for long-term value creating opportunities for further investments in Midstream infrastructure.

Slide 13 provides an update on the PennEast Pipeline. PennEast, in which we have a 20% interest, will bring low-cost Marcellus natural gas to the New Jersey market place and benefit New Jersey's natural gas customers. According to a study by Concentric Energy Advisors, customers in our region could save nearly $1 billion annually in energy costs.

I also want to emphasize that 90% of PennEast capacity is already contracted by local distributions and others to serve customers including those in New Jersey. And in addition, PJM, which as you know is the independent electric system operator that serves our region, has said that the PennEast Pipeline would greatly improve grid reliability. So I think that when you look at all of these facts objectively, it's clear that PennEast will responsibly support our region's growing energy needs, while offering potential savings for customers.

Last month the Federal Energy Regulatory Commission extended the date for the release of their environmental impact statement by six months, to April 7 of this year. FERC's most recent schedule for PennEast also sets the 90-day federal authorization decision deadline for July 7, 2017. PennEast does not expect this development to impact the anticipated in-service date of the project, which remains scheduled for the first quarter of FY19.

Turning to slide 14, we will continue to invest in clean energy projects. Consistent with our strategy, we've successfully diversified our portfolio between onshore wind and solar. Our portfolio currently includes about 280 megawatts of solar and wind, which is well diversified and that 45% of the portfolio consists of onshore wind.

Turning to slide 15, when we last spoke to the financial community in November, we discussed the mechanics of New Jersey's basic generation service, which we refer to as BGS auction, which is a key component in establishing forward SREC pricing. Ahead of this month's BGS auction, energy year SREC prices have increased by 45% compared with the market price we shared with you on November 17 at our investor conference.

In addition, consistent with our strategies we've been actively hedging our SRECs to mitigate risk. As you look at slide 15, you can also see that nearly all of our SREC sales from facilities that are currently operational are hedged for energy years 2017 and 2018. And about two thirds of our SREC sales from these facilities are now hedged for energy year 2019, which is a significant increase from November of 2016.

So we believe that the increasing number of SRECs from our growing solar portfolio, combined with our hedging strategy and our earnings from our wind investments and tax credits from solar investments will support CEVs contribution of between 15% and 25% of our total NFE in FY17 and beyond.

Moving to slide 16, energy efficiency is another important part of our strategy. I think when we look at energy efficiency the value is clear. Using less energy is the best way to improve the environment and both customers and investors benefit. Through New Jersey Natural Gas Company's Conserve to Preserve program, we are helping customer save both energy and money. In fact, since 2006, Conserve to Preserve has saved our utility customers more than $366 million through lower usage.

The SAVEGREEN Project is just customers who want to affordably invest in energy efficiency, while we earn a return on those investments. Since 2009 we've invested more than $140 million in grants, incentives, and our [on hill] repayment program through SAVEGREEN.

Our Conservation Incentive Program, or CIP as we call it, which has been in place since 2006, protects NJNG's utility gross margin from warm weather and reduced usage. During the first three months of this fiscal year, our CIP rate mechanism protected $2.9 million of utility gross margin, and if you look over the last 10 years when the CIP was first put in place, this program has protected approximately $150 million of utility gross margin and contributed an average of $0.11 per share associated with the CIP. So as you can see, our efforts in the area of energy efficiency has benefited both our customers and our share owners.

So before we open the call for questions, I just want to summarize the reasons why we are confident in our ability to meet our guidance range for FY17. At New Jersey Natural Gas, the positive effect of new higher base rates and customer growth are expected to offset higher O&M and interest expenses, which will lead to higher NFE for the year.

Our customer growth forecast remains at 8,300 new customers for the fiscal year, which will provide $5 million in new annual utility gross margin. We expect NJRES will meet its NFE range of 5% to 15% for the fiscal year. At CEV, additional SREC sales, which are mostly hedged as I pointed out, will provide higher revenues in FY17, and our Sunlight Advantage residential solar program will continue to grow. And in addition, we plan to add four new commercial solar projects in FY17. Those will total 27 megawatts and will generate additional tax credits compared with last year.

So in closing, I think as you look at not only our performance so far and what we expect for the balance of FY17, our long-term focus is on creating value for our share owners. In particular, we were may committed to our dividend growth rate of 6% to 8% annually with a target payout ratio of between 60% and 65%.

Before we head to questions, I just want to say thank you as always to the outstanding work of our more than 1,000 employees. They remain the foundation of our Company and the driving force between everything that we're able to accomplish. So thank you for joining us and we would welcome your questions and comments.

( Operator Instructions )

[Sharl Pereta], Guggenheim Partners.

Good morning guys.

Good morning.

Can you just elaborate a little bit more on the level of confidence in year 2017 outlook because, obviously, weather doesn't appear to be a lot of help this quarter, either. Is it you envisioning the energy services segment, the timing of some of these hedges to offset if you get another quarter week results?

Before began I just want to point out one correction here: in his remarks, Larry had mentioned that the [front] delay for the BIS decision over six months; in fact, it's actually six weeks. We just wanted to have that on the record. (inaudible) But to answer your question specifically, if you look at the bridge we provided as a companion to the earnings release this morning, the majority of the increase from the prior year's results is the natural gas. You know, and as most people know, the six-degree weather that we're having today, which certainly is not a tailwind for [NJRE] services. We still expect them to form in the guidance range and the majority of the earnings this year are coming from New Jersey Natural Gas. We are confident in that ability to achieve that earnings [range].

[I just answered that.] That's why we spent some time on the call and in the press release talking about how the margin is actually realized in New Jersey Natural Gas. It'll give you a sense of [power] layouts the whole year and how that portion of our performance is really underscoring the confidence we have in meeting the guidance range this year.

Got it. Thanks for reinforcing that.

Let me just touch on your tax comments. Depending on what scenario we turn out with on the corporate taxes, I'm curious as to the gas utilities building in a scenario where the higher deferred tax reliability is as a result of the lower corporate taxes. This going to be paid off over the life of an asset -- the life of the assets? Or is there -- do you envision an opportunity where you can finance some of that liability with maybe short-term debt and increase your rate base at a quicker point?

As we mentioned, we expect it's going to be debt-neutral for the utility. To your point, we'd expect lower deferred tax liabilities in a 20% environment than what we have before, so therefore a longer period of time to put those benefits. In terms of the revaluation from the 35% to, say, 20%, that we expect would be regulatory liability that would be returned to ratepayers over some period of time that is as of yet to be determined. As you point out, there's still a number of variables here. At least based on the latest information we have, it looks like tax reform might be in the Spring of 2018.

We have Mark Sperduto here. I don't know if you have anything to add?

No.

Thanks, guys.

Brian Russo, Ladenburg Thalmann

Good morning.

Morning, Brian.

Can you just explain why you sold 10,000 less SRECs this past quarter versus the quarter a year ago?

Brian, it's strictly timing. Each one of our delivery schedules for SRECs are negotiated with the counterparties that we sell to. So it's simply a timing issue.

Okay.

We expect an additional increase of about 16,000 SRECs over the prior year.

Okay, got it.

And it looks like, compared to your prior disclosures, the current SREC price has increased quite notably, and I'm just wondering, is that just a function of what you've described in the past as the liquidity side of things?.

Brian, as we laid out at November on our Analyst Day, we expected an increase in liquidity as we led in the [BGS] auction, which is occurring right now. And that is -- rising prices and somewhat consistent with our expectations of better liquidity in the marketplace. I'd add that, since the Investor Day we've sold roughly 80,000 additional energy or 19 SRECs on average price of roughly $188.

It's Larry.

Going into Investor Day, and we bifurcate that, at the conference it was clear that there was concern on part of the investors about going out looking at energy [or] 19 and so that's why we spent time on trying to explain the relationship of the BGS auction to potential impact on SREC prices. And it's the same here for this step [forward]; that's exactly what we've seen, so we're trying to take advantage of the opportunity now.

Okay great; and the projects that you have in the clean energy services [city yard], I think you mentioned 24.4 megawatts. Can you break that down by each quarter that those megawatts will be operational?

The current plan, the bulk of those projects would be operational either the third or fourth quarter of FY17.

Okay; fiscal 3Q or 4Q. Got it. Thank you.

Sarah Akers, Wells Fargo.

Good morning.

Can you update us on the SRL permitting process and any revisions to the in-service date there?

The process is still going on with the Department of Environmental Protection in this -- as we speak. A way to think about that is, once you have that process is over, and it would take about four months to basically go to the bidding and then another roughly 12 months for this construction. But we'll focus right now on what's going on (inaudible).

Okay. It looks like the CapEx was lower there in 2017, correct?

That's right; we still expect an [inter receipt] of FY2018, but the other items (inaudible) to filing we believe that we may have to refile that as well.

Okay; is there any impact to your previous equity guidance; I think it was $50 million for this year. Does the lower CapEx at NJNG impact that at all?

Naturally, that would shift.

It would. Okay thanks a lot.

Thank you.

Thank you. [Stephen Zambrisi], [Carrollton Investments Management].

Hello, guys, thank you for taking my question.

Good morning ,Steve

Still the earnings bridge you guys provided, can you bucket the $0.15 of NJRCEV, the $0.15 of depreciation, O&M, and interest; can you bucket those among those three buckets?

It's about a third, a third, a third, Stephen, in terms of additional O&M, depreciation, and interest expense.

Is that O&M MD&A from the wind farms coming on? Is that the major driver?

The major driver there is both planned and unplanned maintenance associated with the addition of wind farms.

Okay. All right; that's all I had. Thanks, guys.

Thinks Steve.

Thank you.

(Operator Instructions)

There's nothing more at the present time so I would like to return the call to Management for any closing comments.

Okay; thanks, Keith. Thank you all for joining us this morning. As a reminder, a recording of this call is available for replay on our website. We appreciate your interest and investment at NJR. Enjoy your day. Thank you.

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