New Jersey Resources Corp (NJR) 2017 Q3 法說會逐字稿

Hello, and welcome to the New Jersey Resources Third Quarter Fiscal 2017 Earnings Conference Call and Webcast.

(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, Amy, and good morning, everybody.

Welcome to New Jersey Resources Third Quarter Fiscal 2017 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 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, as found on Slide 2. These items can also be found in the Forward-looking Statements section of today's news release, furnished on Form 8-K, and in our most recent Form 10-Q and Form 10-K filed with the SEC.

These items can also 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.

Turning to Slide 3. We will be referring to certain non-GAAP financial measures, such as net financial earnings, or NFE.

We believe that NFE provides a more complete understanding of our financial performance.

However, 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.

I would also like to point out that there are slides accompanying today's discussion, which are available on our website and also 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, and good morning, everyone.

We appreciate your taking the time to be with us this morning.

As you know from our release we had another strong quarter thanks to the performance of our team.

So let's turn to Slide 4 for the details.

As you can see, we reported net financial earnings of $0.20 per share for the third quarter and that compared with $0.13 per share last year.

For the 9 months ended June 30, we reported $1.88 per share versus $1.63 per share last year.

These results have put us on track to achieve our net financial earnings guidance range of $1.65 to $1.75 per share for fiscal 2017.

And, as you saw in our release, we reaffirm that guidance this morning.

Results in New Jersey Natural Gas during the quarter were led by higher utility gross margin from higher base rates, as well as new customer additions.

Overall, we expect our customer growth rate to be a strong 1.7% this year, with a 60-40 split between new construction and conversion customers.

We continue to see new construction growth, especially in Ocean County.

Our conversion markets also remained solid, particularly from oil heat conversions in Morris County.

Also, we recently reached several important milestones on our key infrastructure projects.

On July 26, the New Jersey Pinelands Commission held a meeting to accept public comment on New Jersey Natural Gas Company's Southern Reliability Link project.

The public comment period with the Pinelands Commission closes today and a vote by the Commission on the certificate of filing is expected this fall.

PennEast was expected to receive a certificate of public convenience and necessity from the FERC in the early summer.

However, I think, as everyone knows, the lack of a quorum at FERC has delayed the process.

But once a quorum is obtained and the FERC issues the certificate, the project will move quickly to secure the remaining state permits.

PennEast expects construction to begin in 2018, with an in-service date of 2019.

At NJR Clean Energy Ventures, demand for residential solar remains strong.

In the third quarter alone, we completed more than 300 residential installations.

Demand for residential solar in New Jersey is very strong in the southern part of the state.

We expect to increase our investment in our Sunlight Advantage residential solar program to $38.5 million this year.

That will compare with $34.3 million in fiscal 2016.

Thus far this year we have spent nearly $28 million on residential solar and that compares with $16 million last year.

I'd also point out that we placed 3 commercial solar projects into service in the quarter, which added another 22.5 megawatts to our growing portfolio of solar assets that now totals nearly 127 megawatts.

Moving to Slide 5, you can see a breakdown of the expected net financial earning contributions from each of our businesses in fiscal 2017.

New Jersey Natural Gas continues to provide the majority of our total earnings.

New higher base rates and higher utility gross margin from new customers are the principal earnings drivers.

We also anticipate that NJR Midstream will contribute between 5% and 10% of net financial earnings this year.

These results will be driven by the performance of our existing assets and the recording of allowance for funds used during construction from PennEast.

In total, our regulated businesses, New Jersey Natural Gas and NJR Midstream, are currently expected to contribute 60% to 75% of net financial earnings in fiscal 2017.

We expect that NJR Clean Energy Ventures will contribute between 15% and 25% of net financial earnings this fiscal year.

Both new and existing residential and commercial solar projects and onshore wind projects will be the primary drivers.

And, finally, we expect that NJR Energy Services will perform within our guidance range and contribute between 5% and 15% of net financial earnings this year.

Longer term, we continue to target average net financial earnings growth of 5% to 9%.

And moving to Slide 6, earlier this year we increased our dividend by a very strong 6.3%, which represented the 23rd increase in the last 21 years.

Our dividend strategy targets an annual growth rate between 6% and 8% with a payout ratio of 60% to 65%.

This approach provides a competitive return to our shareowners while allowing us to reinvest earnings in the company that will support future growth and net financial earnings.

And, with that, I will turn the call over to Pat to go over the specifics of our report.

Pat?

Thanks, Larry, and good morning, everyone.

I'd like to begin on Slide 7. This morning, we reported third quarter NFE of $17.4 million, or $0.20 per share, compared with $11 million, or $0.13 per share, last year.

For the 9 months ended June 30, we reported NFE of $161.9 million, or $1.88 per share, versus $140.1 million, or $1.63 per share, last year.

The main driver of our improved performance for the quarter was NJR Clean Energy Ventures, while New Jersey Natural Gas remained the primary driver for the fiscal year.

Turning to Slide 8, you can see the specifics of our improved quarterly and year-to-date results.

For both periods, NJNG benefited from the impact of new base rates and customer growth.

NJR Midstream continued to recognize AFUDC associated with the capital spent on the PennEast project, of which NJR Midstream is a 20% owner.

We began recognizing AFUDC earlier this fiscal year and we recorded approximately $600,000 in the third quarter and $2.7 million for the fiscal year-to-date period.

For the 3 and 9 months ended June 30, the increases at NJRCEV were largely due to additional investment tax credits compared with the prior year.

NJR Energy Services recorded NFE of $933,000 in the fiscal third quarter of 2017 compared with $276,000 last year.

The higher quarterly results were due primarily to lower operations and maintenance expense.

Fiscal year-to-date, we saw lower performance from NJRES, due primarily to fewer market opportunities related to our transportation assets.

But as Larry said earlier, we're maintaining our NFE guidance range for fiscal 2017 at 5% to 15%.

Slide 9 shows our capital spending update for NJNG for the third quarter and first 9 months of fiscal 2017.

I'll highlight the progress on our infrastructure programs.

Through SAFE II, we've invested $24.7 million in the first 9 months of fiscal 2017 to replace 38 miles of bare steel pipe.

To date, under NJ RISE, NJNG has installed approximately 9,400 excess flow valves in storm-prone areas of service area.

These valves restrict the flow of natural gas when there's a change in pressure on the service line.

Our first project under NJ RISE, the secondary feed into Sea Bright in Monmouth County, was completed in April.

Our Ship Bottom regulator re-design is on track to be completed and operational in September of this year.

Turning to Slide 10, our customer growth remains strong.

For the 9 months ended June 30, we added 6,231 new customers, an increase of nearly 18% over last year.

We believe we will add about 9,000 new and converting customers in fiscal 2017, with an anticipated utility gross margin contribution of $5.2 million annually.

In total, we expect to spend approximately $107 million in capital between fiscal 2017 and 2019 to add 26,000 to 28,000 new customers, representing a growth rate of 1.7%.

About 60% of that growth will come from new construction and 40% from conversions to natural gas from other fuel sources.

Turning to our Clean Energy segment, you can see our capital spending and project status on Slide 11.

During the quarter, we placed 3 commercial projects into service totaling 22.5 megawatts.

We also have 2 other commercial projects under construction in New Jersey, representing a total investment this fiscal year of about $64 million, with an aggregate installed capacity of 27 megawatts.

By the end of fiscal 2017, our commercial solar portfolio is expected to approximate 131 megawatts.

As Larry alluded to, the warm weather this winter allowed us to add residential customers at a greater pace than planned.

As a result, we expect to invest about $3.5 million of additional capital over our original plan in the Sunlight Advantage program for a total of about $38.5 million.

We added 1,008 resident customers during the first 9 months of fiscal 2017 compared with 614 a year ago.

We now have nearly 6,100 homeowners who have taken advantage of our program.

As you know, we actively hedge our SRECs to lock in revenue for future energy years.

The results of this strategy are shown on Slide 12.

You can see on the chart that nearly 90% of our SREC sales from facilities that are currently operational or under construction are hedged for energy year 2018, at an average price of about $225 per SREC.

And 75% of energy year '19 is hedged at an average price of $190.

Slide 13 brings together our capital plan for NJR for the next 3 years.

As you can see, our investment in NJNG approximates nearly $708 million from fiscal 2017 through fiscal 2019, which equates to rate base growth of about 6% annually.

We have no material changes to the plan at this time, other than a slight increase in residential solar spending this year from our last quarter.

Moving to Slide 14, you can see that our capital plan is anchored by strong cash flows from operations, as well as our dividend reinvestment program.

We plan to issue approximately $166 million of equity over our fiscal 2017 to 2019 planning period.

We believe our cash flows and financing plans will continue to support our strong financial profile now and into the future.

I'll now turn the call back to Larry for some final thoughts.

Thanks, Pat.

And before we open the call for questions I just wanted to take a few moments to summarize our plan for creating long-term value for our shareowners.

And I'll start by saying that natural gas is and will continue to be the cornerstone of our strategy.

We expect strong and balanced customer growth at New Jersey Natural Gas and that growth should add more than $5 million in utility gross margin each year.

And we also project rate base growth of about 6% annually.

Working in partnership with our regulators, we will continue to advance the infrastructure projects, many of which we've spoken about today, including SAFE, NJ RISE and the Southern Reliability Link.

Over the next 3 years, we expect to invest more than $450 million on infrastructure projects that will provide safe, affordable and resilient service to our customers.

We've also taken a leadership position on energy efficiency in New Jersey and for almost a decade now have built a strong energy efficiency platform through our SAVEGREEN program.

Since 2009, our energy efficiency efforts have saved our customers more than $370 million.

Going forward, we will look for ways to expand our offerings for residential and commercial customers.

These offerings may include investments in smart thermostats, as well as other energy efficiency opportunities to help our customers manage their energy usage.

We're also considering the expansion of our low-interest payment program for customers to pay their energy efficiency bills through their New Jersey Natural Gas bill.

To create additional long-term shareowner value, we're looking for opportunities to invest in non-regulated, diversified energy infrastructure assets.

This strategy will allow us to serve growing customer demand for natural gas and support public policy goals for cleaner energy.

And our investments in clean energy and midstream projects ensure that we can deliver the clean, competitively priced energy in the future that our customers expect.

These investments will allow us to satisfy our customer preferences for natural gas and clean energy, and to do that at reasonable prices.

And then finally, to support our long-term net financial earnings growth goal, we will pursue a disciplined capital allocation strategy that is focused on achieving an appropriate risk-adjusted cost of capital.

We'll maintain a strong and efficient financial profile that provides access to external capital as needed.

And before we go to questions, as always, I want to say thank you to the outstanding work of our more than 1,000 employees.

These dedicated women and men are not only the foundation of our company, but they are the driving force behind all we do.

And I'm proud of all they do for our company every single day.

So again, I thank you for joining us and we would welcome your questions and comments.

(Operator Instructions) The first question is from Travis Miller at Morningstar.

On the commercial solar side, what opportunities do you see in the market to acquire along with your growth opportunities there?

And would you have any interest in acquiring growth?

Travis, are you talking acquiring companies or acquiring projects?

Either way.

Either way; just -- instead of new build just doing an acquisition of some kind.

Right.

So far we have found it better in many respects, financial and otherwise, just to focus on additional projects.

I think, as you know, part of what we do is to work with developers in the state.

And that model has worked well for us as far as getting new projects.

Steve, do you want to add something to that?

I believe there's also a little bit of a challenge with the taxes, the tax incentives associated with the projects also.

But, yes, to date, we're going to stick with developing these projects with our developers and growing the business that way.

Okay.

Are you seeing people come to you, or opportunities in the market, other kind of commercial solar businesses available for sale out there?

No, we haven't.

But to be honest, we haven't been looking for those either.

For the most part, like we said, we've been developing these projects greenfield.

Yes.

Okay.

And I just wanted to --

Travis, this is Pat Migliaccio.

I just want to remind you that the way our strategy works, we work with developers that have already brought their commercial solar projects to a point where they've already cleared the permitting phase or have power purchase agreements on them.

So in a sense -- to a certain extent, we're already doing what it is you're suggesting.

So we're acquiring the projects from developers that have taken that long lead time developmental risk.

Okay.

And then you had mentioned in the remarks there an interest in the unregulated energy assets.

I was just wondering if you could expand on that.

Travis, this is Steve Westhoven.

Yes, we continually look at midstream opportunities and both pipeline storage and anything that would fit our book.

To date, we haven't found any, but when we do, we certainly would pursue those.

Okay.

So still within the gas.

That's right.

Okay.

Very good.

The next question is from Michael Gaugler at Janney Montgomery Scott.

Just one question.

I was wondering if you'd consider participating from an investment perspective in the Massachusetts wind RFP and, if so, why you decided to pass.

So typically, Michael, it's similar to solar.

We work with developers to develop these projects and put them in place with permits and with power purchase agreements prior to us acquiring those assets.

So we would be working with developers that may participate in that process, but we wouldn't directly participate in that process.

And that's the way we've developed all of our assets to date.

Okay.

So that's still something that might be a potential opportunity for you going forward?

Yes.

Great.

That's all I had.

(Operator Instructions) Being no further questions I would like to turn the conference back over to Mr. Puma for closing remarks.

Okay.

Thank you, Amy.

I want to thank everybody for joining us this morning.

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

As always, we appreciate your interest in investing in New Jersey Resources.

Have a great day.

Thanks.

Bye.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.