New Jersey Resources Corp (NJR) 2017 Q4 法說會逐字稿

Good day, and welcome to the New Jersey Resources Fourth Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Dennis Puma, Director of Investor Relations. Please go ahead.

Thank you, Nicole, and good morning, everybody. Welcome to New Jersey Resources Fourth Quarter Fiscal 2017 Year-End Conference Call and Webcast. I'm joined here today by Larry Downes, our Chairman and CEO; Steve Westhoven, our Executive Vice President and COO; Pat Migliaccio, our Senior Vice President and 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 our 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 Forms 10-K and Qs filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any forward-looking statements referenced herein in light of future events.

Turning to Slide 3, we will be referring to certain non-GAAP 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 presentation, which are available on our website and were also 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, and good morning, everyone. As I begin this morning, I wanted to congratulate Steve Westhoven on his recent promotion to Executive Vice President and Chief Operating Officer of New Jersey Resources. I think many of you know Steve, but for almost 3 decades now, he has been a valuable member of the team. He has made significant contributions to the company, particularly on the development of our successful wholesale energy and midstream strategies, and I am confident that he will continue to deliver results for our customers, our shareowners and all of our stakeholders. As you note from our news release this morning, we reported another strong fiscal year, thanks to the performance of our employees and their hard work, their focus and their dedication.

As we look at Slide 4, we reported net financial earnings, or NFE, of $1.73 per share for fiscal 2017, and that compared with $1.61 per share last year and represented a very strong growth rate of 7.5%. Our results were in line with financial community expectations and our stated guidance range of $1.65 to $1.75 per share. I would also point out that the results from each of our businesses were within the ranges that we have provided to you at the beginning of the fiscal year. Consistent with our plans, New Jersey Natural Gas once again had a very strong year and drove our financial results. Higher utility base rates and record customer additions led to a 14.2% earnings growth rate over the prior year. Demand for solar continues to grow in New Jersey, and we remain well positioned strategically in this market. Our Clean Energy business, NJR Clean Energy Ventures, has become one of the largest residential solar providers in New Jersey. This year, we also placed 5 commercial solar projects into service, and our solar portfolio now includes almost 190 megawatts.

During the fiscal year, NJR Energy Services acquired natural gas transportation, storage and supply agreements with large industrial customers from Talen Energy for $55.7 million. This acquisition will support our wholesale energy services strategy, which is to provide physical natural gas services to customers across North America.

Our strong financial profile and performance allowed us to increase our annual dividend rate by 6.9%, and to provide our shareowners with a total return of nearly 32%. As we plan for future growth, we made progress on our key infrastructure projects, including our Southern Reliability Link, which will strengthen our system, ensuring safe, resilient and reliable service to our customers.

Moving to Slide 5. Earlier this year, we increased our dividend by 6.9%, which represented the 24th increase in our dividend in the last 22 years. Our dividend strategy targets an annual growth rate between 6% and 8% with a payout ratio of 60% to 65%. We believe that this approach should provide a competitive current return to shareowners, while reinvesting earnings in the company to support future NFE growth.

Turning to Slide 6. As we look to fiscal 2018, this morning, we announced an NFE guidance range of $1.75 to $1.85 per share. Our longer-term NFE per share goal remains in the 5% to 9% range. On November 7, Phil Murphy won the gubernatorial race here in New Jersey. During his campaign, Governor-elect Murphy stated his intentions to make New Jersey a national leader in solar energy production and job creation, and we look forward to working with his administration to help realize that vision. Just after the end of the fiscal year, we signed an agreement with Talen Generation to acquire an existing pipeline in Southeastern Pennsylvania. This project involved converting an oil pipeline to natural gas to serve customers in the Greater Philadelphia region. The investment is consistent with our strategy and is expected to benefit both customers and shareowners.

As you look at Slide 7, you can see we give a breakdown of the expected NFE contributions from each of our businesses in fiscal 2018. New Jersey Natural Gas will continue to provide the majority of our earnings. Customer growth and infrastructure investments remain the principal earnings drivers. We anticipate that NJR Midstream will contribute between 5% and 15% of NFE, which will be driven by the performance of our existing assets and recording of allowance for funds used during construction, or AFUDC, from PennEast. In total, our regulated businesses, New Jersey Natural Gas and NJR Midstream, are currently expected to contribute 55% to 75% of NFE in fiscal 2018. We expect that NJR Clean Energy Ventures will contribute between 20% and 30% of NFE this fiscal year. And finally, we expect NJRES to perform within our guidance range and contribute between 5% and 10% of NFE this year. All in all, the performance of our portfolio is meeting our expectations, and we expect another strong performance in fiscal 2018.

And with that, I'll turn the call over to Steve Westhoven. Steve?

Thanks, Larry, and good morning, everyone. I'd like to begin by discussing our midstream business and recent announcement regarding the Adelphia pipeline acquisition on Slide 8. Shortly after the end of the fiscal year, we signed an agreement to acquire an 84-mile, 18-inch pipeline, which runs from Marcus Hook, Pennsylvania, just south of Philadelphia, north to Martins Creek, Pennsylvania for $166 million. At the same time, we announced an Open Season for the Adelphia Gateway pipeline. NJR Midstream intends to convert the 50-mile southern section of the pipeline to a natural-gas-only line, and we'll bring the pipeline system under FERC jurisdiction under the new name, Adelphia Gateway. Capital costs for the conversion are expected to be in the $80 million to $130 million range.

Today, the Philadelphia market is constrained with limited access to affordable energy sources. Adelphia Gateway will serve this need, fueling economic growth and job creation as businesses and manufacturers expand their operations. The project will have minimal impact on the environment because the pipe is already in the ground. The conversion process to natural and gas involves minimum construction and utilizes brownfield locations and existing rights of way. We expect the project to be in service in 2019 and to contribute to earnings in 2020. Our other midstream pipeline project, PennEast, is expected to construct a 120-mile, FERC-regulated interstate natural gas pipeline system that will extend from Northern Pennsylvania to Western New Jersey, and is estimated to be completed and operational in 2019. PennEast is currently awaiting a FERC certificate to move the project forward.

Turning to Slide 9, New Jersey Natural Gas once again provided the majority of their earnings this year due to higher base rates, customer growth and infrastructure investments. During fiscal year 2017, we added over 9,000 new customers, representing an increase of nearly 12% over last year. These new customers will add about $5.5 million annually to utility gross margin. We expect that growth to continue and will spend approximately $120 million over the next 3 years and add up to 28,000

new customers. This equates to a growth rate of 1.7%. About 60% of that growth will come from new construction and 40% will come from conversions to natural gas from other fuels.

Our BPU-approved infrastructure programs, including SAFE II and NJ RISE, ensure the safety and reliability of our system, while providing current returns on our investment capital. The SAVEGREEN program has helped our customers make energy efficiency upgrades to their homes and businesses. Since 2009, we have invested nearly $150 million in SAVEGREEN and these investments are authorized to earn return on equity that ranges from 9.75% to 10.3%. Our BGSS incentive programs have saved our customers nearly $944 million over the life of the programs, while contributing to an average of $0.05 per share annually to New Jersey Natural Gas's earnings.

Turning to Slide 10. As you know, we have the strategy of hedging our SREC inventory to lock in revenue for future energy years. Results of this strategy are shown on Slide 10. You can see on the chart that nearly all of our SREC sales from (inaudible) facilities currently operational and under construction are hedged for energy year 2018 at an average price of $222 per SREC. And we will continue to hedge through fiscal '18. Energy years 2019 and 2020 hedging percentages should continue to rise along with prices as the market becomes more active to satisfy mandated clean energy requirements.

Now I'll turn the call over to Pat for some details on the numbers.

Thanks, Steve, and good morning, everyone. This morning, we reported our fourth quarter NFE loss of $12.5 million or $0.14 per share compared to the loss of $2.1 million or $0.02 per share in the same period last year. For the year, we reported NFE of $149.4 million or $1.73 per share compared to $138.1 million or $1.61 per share last year.

On Slide 11, you can see the drivers of the quarterly decline and the improvement in our annual results. For the fourth quarter, higher O&M expenses resulted in lower quarterly contribution from New Jersey Natural Gas. However, for the year, higher base rates and customer growth led to a $10.8 million improvement for New Jersey Natural Gas. Both our quarterly and fiscal 2017 results continued to benefit from AFUDC equity of PennEast, of which NJR Midstream is a 20% owner. We began recognizing AFUDC in the second quarter and have recorded approximately $3.6 million for the year. Results in NJRCEV were both -- were lower on both the quarterly and annual basis as a result of sale leaseback financing arrangements executed in the fourth fiscal quarter of 2017. Finally, results of NJRES were higher for the quarter as compared to the prior year, but marginally lower for the full year, which is in line with our expectations.

Turning to Slide 12, I'd like to review our recent solar sale leaseback transactions. Under this type of financing arrangement, we retained effective ownership of the solar projects because we still have all the revenue streams, including SRECs, and also responsibility for the operation and maintenance of the asset. We are, however, surrendering our rights, the investment tax credit and bonus depreciation. Since we're not a cash taxpayer for several years, this transaction structure creates additional economic value for us and the system managing our tax credit carryforward. Under this structure, there is no upfront earnings impact from the ITC. Rather, the value associated with the tax benefits is captured over time through the terms of the lease.

Slide 13 brings together our capital plan for NJR for the next several years. As you can see, our investment in New Jersey Natural Gas approximates over $1 billion from fiscal 2018 through 2021. Also, we plan to invest approximately $0.5 billion in Midstream over the next few years on our PennEast and the Adelphia Gateway projects.

The other item I'd like to highlight is our solar spending. We're estimating our residential solar customer growth rate will be in between 8% and 10% in fiscal 2018, resulting in approximately $42 million of capital investment. We also have 4 new commercial solar installations, some of which we currently estimate will be financed through the sale leaseback structure.

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 to help finance our capital investment and dividend growth targets. The balance will come from the issuance of approximately $250 million of equity over the next 2 fiscal years and also long-term debt. As we do this, we remain mindful maintaining our current credit ratings and believe our cash flows and financing plans will continue to support our strong financial profile now and into the future.

Before I turn the call back to Larry, I thought I'd cover the effect of any changes of the corporate tax rates on Slide 15. For New Jersey Natural Gas, a low corporate tax rate would result in lower bills for our customers. The current versions of the House and Senate tax reform bills exclude the utilities industry from bonus depreciation and limits on interest deductibility, thereby mitigating most of the potential downside risk from tax reform. For our nonregulated businesses, we would see a large one-time benefit as we remeasure net deferred tax liabilities associated with our clean energy investments and an ongoing benefit from a lower corporate tax rate. The lower corporate tax rate would result in a slightly longer time for us to use our tax credits, but would not likely result in a material change to our planned investments. That said, it is early in the process. As the status of any tax reform package becomes clear, we'll continue to update you on our position and future actions.

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

Thanks, Pat. Before we open up the call for questions, I want to summarize the key elements of our plan to create long-term shareowner value. Looking at Slide 16, we have illustrated our accomplishments in fiscal 2017 as well as our path to future growth. We continue to believe this path will support our long-term growth targets and provide solid returns for our shareowners. We've spent the last decade building a portfolio of energy infrastructure assets to help meet current and future energy demand. And we've used our knowledge of energy markets to offer services that help both large and small customers manage their energy needs. Our primary strategy is to invest in natural gas and clean energy, the 2 fastest-growing areas of our nation's energy supply. And we will continue to provide energy efficiency programs that help our customers use less energy and save money. As the demand for clean domestic affordable energy continues to grow, natural gas and clean energy will play leading roles in our future supply mix. Our infrastructure investments are aligned with this opportunity. Also, as advances in technology make natural gas production more accessible and efficient and as natural gas demand continues to reach record levels, we are investing in natural gas infrastructure to meet customer needs. Our solar investments will advance this transition to a cleaner energy future. Supported by state and federal policies, declining costs and growing customer demand, clean energy is currently projected to grow to 20% of our nation's energy mix by 2040. We believe that energy efficiency is another important part of our energy future. With new technologies, building codes and energy appliance standards, along with an increased interest in reducing emissions and lowering energy bills, the focus on energy efficiency continues to grow. We believe that energy efficiency benefits all of our stakeholders, including customers and investors, and it's the least cost alternative for saving money and improving the environment. We continue to be leaders and innovators in the energy efficiency space for customers who are increasingly interested in saving energy. Our collaborative relationships with our regulators has been a key element in our ability to advance energy efficiency in New Jersey. To achieve our long-term NFE growth targets, we will maintain a disciplined capital allocation strategy as focused on achieving an appropriate risk-adjusted cost of capital. We will also maintain a strong and efficient financial profile that will provide access to external capital as needed.

So before we go to questions, I want to say thank you, as always, to the outstanding work of our more than 1,000 employees. These dedicated women and men are the foundation of our company and the driving force behind all we do. And the results that we are reporting today have been achieved through their commitment to excellence and their passion for serving our customers every day.

So I want to say thank you to everyone for joining us today, have a wonderful Thanksgiving. And we will now welcome your questions.

(Operator Instructions) Our first question comes from Spencer Joyce of Hilliard Lyons.

Hopefully a couple of quick ones for me. Pat, perhaps, first to you. How quickly can the sale leaseback agreement be kind of the standard for the new solar operations? I mean, will we see kind of a 50-50 split between sale leasebacks and ITC-eligible stuff or is that perhaps too quickly to make that shift?

So, Spencer, in our long-term capital plan, we included an estimate of what we expect to sale leaseback finance in both 2018 and 2019 today. The sale leaseback structure, we actually have 90 days after the commercial operation under the asset, with one of those a service to execute that. And so it provides us with some flexibility to ramp that up during the course of the year if other businesses of ours are performing better than expected.

Okay. That's very helpful. Also, kind of sticking with the sale leaseback item. Correct me where I'm wrong here. But was there a negative contribution from ITC, specifically in the fourth quarter, perhaps as we adjust the earlier quarters for the sale leasebacks we saw in Q4 or is my math just off there?

No, I think that's accurate. Unfortunately, we have to estimate a future tax rate and take into consideration future investment tax credits. So the fact that we did not record the investment tax credits on the Pemberton (II) and Princeton solar projects in the fourth quarter resulted in the negative ITC adjustment, if you will. But I think the important number to look back -- sorry, Spencer, I think the important number to look at is the year-on-year comps.

Okay. Great, great. I just wanted to make sure I wasn't losing my mind here around the holidays at home. So versus the $29.6 million NFE IPC comp for 2017, what's the comparable 2016 number? Slightly less than that, right?

Yes, the CapEx that I have right in front of me is $85 million roughly for this year, and it was $87 million last year. So a modest decline year-on-year.

Okay. Perfect. Final question, perhaps, Steve, to you for a second. First of all, congrats on the promotion.

Thank you.

Welcome to the [calls here]. And you made a short comment about perhaps forming SRECs as we look over kind of the 2019, 2020 years. Was that more a qualitative assertion about support for clean energy from the new governor there? Or was that a comment perhaps on simply the structural dynamics of the way the curves are structured in a way that those end-use customers buy those SRECs?

I guess, you could answer that as, probably, a yes for both. I would imagine that the 2 are somewhat joined. Certainly, our new governor has expressed some lofty clean energy goals. So I think that, that has been somehow seen in the marketplace. And certainly, we've seen some uptick in SREC buying and interest, not only for '19 but also for '20. And that's translated in some increase in prices. In February, as you remember, there's a BGSS auction, generation service auction, so those load-serving providers will have to buy SRECs in order to complement their load and to adhere to the guidelines of servicing load within New Jersey. So that certainly adds upward pressure to the market. And I think all these are coming together. So not -- try not to make predictions on the forward market, but it certainly has some strong support at this point.

Our next question comes from Michael Gaugler of Janney Montgomery Scott.

I got 2 questions on the Adelphia line. First, I'm wondering how you discovered the opportunity. Was that internally sourced or brought to you externally? And then second, in terms of the size of the line, do you plan to upsize before putting it into service?

Hey, Mike, it's Steve. So basically, the way that, that came about. That asset had been on the market for quite some time. And we actually had gone through multiple bidding processes to finally achieve and win that asset. And essentially, we were able to identify constraints in the market, and we felt that, that line would have significant value due to the constraints in the market. Specifically, that Philadelphia area, south of Philadelphia area, industrialized zone, was very short on gas supply. So they need new supply down in that area. So that -- that's what really drove us to pursue this asset in the marketplace. As far as upsizing goes, we have no plans at this point to upsize that asset. That pipeline is already in the ground and it's been tested. We should be able to convert this pipeline with very minimal construction. And just some short laterals that need to be put in place to asset the market down in the Marcus Hook area. So at this point, it will stay an 18-inch pipeline and operate as such.

And I guess, one final one. Are there any other pipes like that in the area that pique your interest?

We don't have any at this point to discuss. But certainly, repurposing some certain assets is an easier way to develop gas infrastructure.

Our next question comes from Sarah Akers of Wells Fargo.

What drove wind out of the capital plan between the Q3 update and the update today?

Sarah, we have about $200 million of wind investments slated for fiscal '18 and '19. I think it's fair to say with the Adelphia Gateway announcement, we're redirecting that capital into a higher-return asset with some attractive cash flows. We will also -- so wind will shift to a more opportunistic profile over time.

Okay. Got it. And then relative to the fiscal Q1 in-service date for SRL, when do you expect to start recovering and earning a return on that investment?

SRL is currently earning AFUDC equity on the balance of the spend. The in-service dates shifted a bit for SRL, given the delays we've had in achieving the road-opening permits and the easements that we need to complete the project. But I would say, not materially moving off from what was before. We've got Mark Sperduto in the room. He might want to follow up on that as well.

Mark Kahrer.

Yes, Mark Kahrer. (inaudible) Mark, do you want to add?

Mark Kahrer has joined us probably about 6 or 7 months ago from PS (sic) [PSEG], now leads our regulatory group. So Mark, why don't you comment on that?

Yes. So right now, we're working with Craig Lynch in the operations to kind of plan out on his construction schedule. When he thinks we'll likely get through this process and then we'll begin starting the plan for the rate case. It's somewhere on the slides. But we're going to try and think that up as pretty closely as we can to when it will go in service, so there's not any regulatory lag on that asset.

Okay. And I thought I saw -- is it correct that it will go in service in fiscal Q1 of '19 and that's also when you'll file the rate case?

We may file before that if we have clear -- if we have a clear shot of being able to get that done and get in a rate [before -- once that] sets in.

Got it. And is there any plan to seek an accounting order or any special treatment to just -- to mitigate the lag between the in-service date and when you can ultimately get that in rates?

I think we'd like to. But the infrastructure clauses that would do that aren't really kind of purposed for that. We'd have to have a conversation with the board in order to do that.

Okay. And then on the Adelphia project, will you book AFUDC throughout 2019? Or should we expect that earnings contribution to be more in 2020?

Yes, Sarah, at this time, we're not expecting any AFUDC equity on that project. And it has to do with the fact that a portion of it's already in service and so that presents some challenge getting to the account conclusion on AFUDC. If that changes, we'll certainly update it.

Okay. And then the last question is just a follow-up to Spencer's questions on the ITCs. So for 2018, of the $1.80 guidance at the midpoint, what is the EPS contribution from solar tax credits? Or if you just have it on an earnings basis, not on an EPS?

I have got in the capital planning side. So we are -- hang on, one second, Sarah, sorry, not on top of mind probably right now. Here we go. All right, so for 2018, we've got roughly [$93 million] of ITC-eligible solar investment. So times the 24% investment tax credit, you're looking at close to $18 million to $21 million of ITC -- of investment tax credits in 2018. And then the balance of investment is $43.8 million of sale leaseback solar investment and that will be recognized over time.

Okay. And you said in 2017, it was close to $30 million. So there's a decent delta down into 2018 just because of this. Is it primarily to sale leaseback that's driving the ITC that you're booking down?

So in 2017, our ITC-eligible solar CapEx was $87.5 million. And that compares to a $93.5 million in 2018. So you see a slight step up in ITC-eligible solar CapEx. So leaseback, you'll also see a slight increase with $33 million roughly this year and it will be $44 million next year.

(Operator Instructions) And as we have no further questions, I would like to turn the conference back over to Dennis Puma for any closing remarks.

Okay. Thank you, Nicole. Thanks, everybody, for joining us this morning. As a reminder, a recording of the call is available for replay at our website. We always appreciate your interest in investment in New Jersey Resources. Have a great Thanksgiving. Bye.

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