New Jersey Resources Corp (NJR) 2018 Q2 法說會逐字稿

Good morning, and welcome to the New Jersey Resources Second Quarter Fiscal 2018 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, sir.

Thank you, Laura, and good morning, everyone.

Welcome to New Jersey Resources' Second Quarter Fiscal 2018 Conference Call and Webcast.

I'm joined here today by Larry Downes, our Chairman and CEO; Steve Westhoven, our Executive Vice President and Chief Operating Officer; and Pat Migliaccio, our Senior Vice President and CFO; 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, as found on Slide 1.

These items can be found in the Forward-looking Statements section of today's earnings release furnished on Form 8-K and on our most recent Forms 10-K and Q filed with the SEC.

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 2. 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 on Item 7 of our 10-K.

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, and good morning, everyone.

Thanks for being with us here this morning.

I think as you know from our news release, we had a strong second quarter.

So if you look at Slide 3, we reported net financial earnings, or NFE, for the quarter of $142.1 million or $1.62 per share and that compared with $1.21 per share for the second quarter of last year.

NJR Energy Services is having an excellent year.

It was the primary net financial earnings driver this quarter, making a significant contribution of $72.8 million, which compared with $15.7 million during the same quarter last year.

Strong demand and market volatility from the extremely cold weather we experienced in late December and early January drove those results.

New Jersey Natural Gas and our other subsidiaries performed in line with our expectations, and we reaffirmed our fiscal 2018 earnings guidance range of $2.55 a share to $2.65 per share.

Moving to Slide 4. You can see our anticipated sources of net financial earnings for fiscal 2018.

Aside from the net financial earnings related to the revaluation of deferred taxes, which is shown in the red on the pie chart, the largest contribution will come from our regulated businesses.

We expect that New Jersey Natural Gas and NJR Midstream will contribute between 40% and 55% in annual net financial earnings, and we currently anticipate that Energy Services will contribute between 20% and 30% of net financial earnings in fiscal 2018.

Moving to Slide 5. We continue to target a strong annual dividend growth rate between 6% and 8%, with a payout ratio goal of between 60% and 65%.

We believe that this performance will keep our balance sheet strong and provide a competitive current return to our shareowners.

We will reinvest earnings to support our expected growth in new natural gas and clean energy infrastructure investments and reduce our future external equity needs.

And with that, I'll turn the call over to our Chief Operating Officer, Steve Westhoven.

Steve?

Thanks, Larry, and good morning, everyone.

I'd like to begin today by updating you on progress at New Jersey Natural Gas.

Slide 6 provides details on the strong customer growth at our utility.

For the 6 months ended March 31, we recorded a 13% increase in customer additions over last year.

The majority of this customer growth was from new construction, particularly in Ocean County.

We now expect 65% of our new customer additions to come from new construction over our 3-year planning period running from fiscal 2018 through 2020.

Between now and 2020, we expect to add 26,000 to 28,000 new customers, representing an average annual growth rate of 1.7%.

Based on current rates, we estimate that this growth will add cumulative utility gross margin of approximately $16 million.

Turning to Slide 7. We're also growing through our investment in 2 BPU-approved infrastructure programs, SAFE II and New Jersey RISE.

These programs help us to ensure the safety and reliability of our system and add annual recovery mechanisms, which provide current returns on our invested capital.

SAFE II began in fiscal 2017, and we have replaced about 91 miles of unprotected steel main to date, including 22 miles in fiscal 2018.

We expect to have over 72% of our unprotected steel main replaced by the end of the fiscal year.

Moving on to NJ RISE.

We completed a secondary Natural Gas distribution main between Brick and Mantoloking, and reinforced a regulator station on Long Beach Island.

We also continue to work on a secondary Natural Gas distribution main to the Seaside Barrier Island, which is expected to be completed in June of 2018.

In addition, we have installed more than 11,400 excess flow valves in storm-prone areas of our service territory, since the program's inception.

Our last 2 RISE projects are in the permitting phase, with expected completion dates in fiscal 2019.

And on March 29, 2018, we filed our annual petition with the BPU requesting a base rate change in the amount of $6.9 million for the recovery of capital costs through June of this year.

Recently, the BPU approved new regulations for future infrastructure programs, which will pave the way for standardized regulatory process going forward.

A more detailed summary of these changes can be found in our appendix on Slide 18.

I'd like to give a brief update on the Southern Reliability Link.

We continue to progress through the easement and permitting process, and we currently anticipate SRL will be in service some time in 2019.

Moving to Slide 8. I'd like to update you on our wind assets.

In the beginning of March, we announced that we are selling our interest in the Two Dot Wind Farm for $18.5 million to Northwestern Energy.

We are waiting FERC approval and expect to record a pretax gain of about $1 million.

Over time, we found it increasingly difficult to find onshore wind projects that fit our risk-return criteria, and we have now committed to sell our remaining wind assets.

And we will update you as more information becomes available.

Our target is to complete this process in fiscal 2019.

We remain committed to clean energy, and Larry will speak later about how CEV is aligned with the state policy and Governor Murphy's clean energy agenda.

On Slide -- Slide 9 illustrates the results of our SREC hedging strategy.

You can see that all of our SREC sales from facilities currently in operation and under construction for energy year 2018 are nearly 100% hedged.

And more importantly, we have made significant increases in our hedging activities for energy years 2019 and 2020.

And we are now over 80% hedged to have an average price of a $190 per SREC for energy year 2019, and we're approaching 70% hedged for energy year 2020 at an average price of $186 per SREC.

New clean energy legislation is awaiting the Governor's signature, which supports new solar development in New Jersey.

As a result, New Jersey SREC pricing has remained strong.

I'd now like to turn the call over to Pat for some more details on the financials.

Thanks, Steve, and good morning, everyone.

I'd like to begin on Slide 10 with the NFE waterfalls.

The key drivers in net financial earnings for the 3 months ended March 31 are as follows: New Jersey Natural Gas' quarterly NFE were flat to the high utility gross margin, net of taxes, which was offset by increased O&M expenses as well as lower BGSS incentives.

Midstream was down modestly relative to the second quarter of 2017 due primarily to lower AFUDC.

We began recording AFUDC for the first time last year in the second quarter, which included a catch-up entry, and we also had a recorded true up to AFUDC this quarter, reflecting the FERC's modification of PennEast capital structure to 50-50.

The decrease at Clean Energy Ventures was due primarily to fewer tax credits recognized during the quarter as compared to last year, which is the result of our expected sale-leaseback financings for all of our commercial solar assets in 2018.

For Energy Services, the significant increase in NFE was driven by colder weather in early January, which resulted in increased demand for Natural Gas and higher volatility allowing Energy Services to capture additional margin from Natural Gas price spreads.

For the 6 months ended March 31, New Jersey Natural Gas saw an increase in gross margin net of taxes that was only partially offset by the higher O&M expenses, which is mainly over time, resulting from the colder weather.

Both our Midstream and CEV segments improved over the prior year as a result of the deferred tax revaluation associated with tax reform.

And the increase in Energy Services for the 6 months ended March 31 was also the result of the colder weather.

Turning to Slide 11.

I'll walk you through some of the factors that will have an impact on an NFE in 2018 and beyond.

The first item is on the shifts in our forecasted capital expenditures for our PennEast and Southern Reliability Link projects.

While the PennEast project continues to target an in-service date in 2019, the delay in receiving the FERC certificate has had the ripple effect of delaying land access, surveys and permit applications, all of which means that the commencement of construction may be delayed to 2019.

As such, we've adjusted our capital plan to reflect construction commencing in 2019.

Also, as Steve mentioned, SRL continues to progress on the easement, permitting process, and we expect the project to be in service in 2019.

In both these projects, NJR expects a decline in the amount of AFUDC in fiscal 2018 and fiscal 2019.

As we discussed last quarter, low corporate tax rates have and will continue to have a net positive effect on NFE in fiscal 2018, fiscal 2019 and beyond.

Additionally, as a result of the significant benefit from our deferred tax reevaluation and also NJRES' performance this year, we've taken certain actions to benefit the company and enhance returns.

To the extent we can, we will shift SREC deliveries from fiscal 2018 to fiscal 2019 to take advantage of the lower overall tax rate.

We're utilizing sale-leaseback financing for all of our commercial solar projects in 2018 and also accelerating certain O&M expenses into fiscal 2018.

As Larry mentioned, we reaffirmed guidance for fiscal 2018, and these items taken together continue to support a long-term NFE growth rate of 6% to 8%.

Moving to Slide 12, the changes to PennEast and SRL have an impact on our capital plan.

The updated capital plan on this slide reflects the latest timing assumptions for both projects, with no other substantive changes.

Moving to Slide 13.

I want to update you on our financing assumptions.

We originally forecasted about $83 million of new equity in fiscal 2018.

In the first quarter, we raised about $23 million of the equity through the waiver discount feature of our dividend reinvestment plan, or DRP.

We expect that our needs for the balance of the fiscal year will be about $15 million, which we plan on raising through the DRP.

The reduced need for equity financing is due to the outperformance of Energy Services and the benefits from tax reform.

While we're reflecting equity needs in 2019 and 2020, that will likely be impacted by the results of our potential wind asset sales.

In early March, NJR and NJNG priced a combined private placement debt offering, proceeds from the combined offerings will be used to offset upcoming maturities during 2018 and fund capital expenditures.

With both of these offerings, we've completed our external debt financing for remainder of the fiscal year.

I'll now turn the call back to Larry for some closing remarks.

Thanks, Pat.

You may recall on last quarter's call, I talked about our strategy to provide our customers with reliable, affordable and clean energy services.

To execute that strategy, we remain focused on natural gas, energy efficiency and clean energy investments.

Today, I wanted to spend just a few minutes updating you on where New Jersey is with its energy agenda and importantly, how that agenda aligns with our strategy.

In early April, the New Jersey legislature passed clean energy bills to advance solar energy, reduce greenhouse gases and expand energy efficiency in our state.

Those bills are currently awaiting Governor Murphy's signature.

The legislation sets important Clean Energy goals for New Jersey, that by 2025, 35% of the states' energy will come from renewable energy sources, and by 2030, 50% of the states' energy will come from renewables.

We believe that our cap is on the -- our state is on the path to achieve those goals.

And I think it's also important to note that New Jersey already has one of the largest solar markets in the nation, which is supported by public policy and driven by customer demand.

Governor Murphy has made clear his strategy to build a robust clean energy economy that will drive job growth and create new energy investment opportunities.

The strategy includes developing more solar and offshore wind, investing in energy efficiency, advancing energy storage, modernizing the grid and furthering the adoption of alternative fuel vehicles.

As you can see, a number of the Governor's priorities are directly aligned with the strategy that we have been pursuing for more than a decade.

So I want to make 3 points today about our states' clean energy strategy.

And the first one is the importance of energy efficiency.

New Jersey has long recognized the significant positive benefits that can come from energy efficiency, and our state's new legislative goal is more than triple the current pace of savings from energy efficiency, and we have a strong foundation to build on.

Since 2006, we have helped our customers reduce their energy usage by more than 10% and they have also saved more than $380 million.

Our SAVEGREEN Project, which has been in place since 2009 has been critical to generating these results.

In March, we advanced our energy efficiency strategy by filing a petition with the New Jersey Court of Public Utilities to invest $341 million over the next 6 years.

Through this proposal, we are looking forward to bringing the benefits of energy efficiency to more homeowners, business owners and public entities as well as small businesses, lower-to-moderate income customers and seniors.

Energy efficiency investments in our customers' and shareholders' best interests, and they also assist the state in achieving its energy policy goals.

The second point I want to focus on relates to the market potential for solar in New Jersey.

I'd remind you that the solar market began in earnest in New Jersey nearly a decade ago.

And today, solar investments have produced enough energy to power the equivalent of nearly 400,000 homes in New Jersey.

Since 2009, we've invested more than $600 million in solar, and we currently expect to invest another $500 million more over the next 4 years.

As one of New Jersey's largest providers, we believe that the solar industry represents a significant economic opportunity for our state.

In fact, according to the National Renewable Energy Laboratory, the investment for New Jersey solar market could reach $40 billion over coming decades.

And the third point that I want to focus on is the critical role that natural gas must play in the state's transition to a clean energy economy.

Today, in addition to being the fuel of choice to meet customer needs for heat and hot water, natural gas power is more than half of the electricity generated in New Jersey.

Natural gas represents the largest share of the state's generation mix and has nearly doubled the levels from the decade ago.

In the future, Natural gas will support affordable growth in renewables as we add more resources, including solar and wind to our state's generation mix.

Natural gas generation has the added benefit of adjusting quickly to the intermittent nature of renewables, which provides grid reliability as we add more solar and wind and new technologies.

I'd also like to share with you some facts about what natural gas has already done to accelerate New Jersey's transition to a cleaner energy future.

Since 2008, lower natural gas prices have saved New Jersey customers more than $5.5 billion.

And at the same time, solar and energy efficiency incentives have cost customers about $4 billion, which means that low natural gas prices have allowed us to affordably accelerate our clean energy investment strategy in the state and, at the same time, have saved New Jersey residents more than $1 billion.

Going forward, natural gas prices are expected to remain low, which should keep our energy shift affordable.

But when we consider all of these facts, I think it is very clear that natural gas will continue to be an important part of the state's transition to a cleaner energy economy.

So before we go to questions, I want to say thank you as always to our more than 1,000 employees for their outstanding work.

These dedicated women and men are the foundation of our company and the driving force behind our results.

And as always, I'm proud of everything that they do.

I -- in fact, tonight, I will have the pleasure of honoring 24 of our employees, who've worked with us for the past 25 years, at our Annual Lamplighters event.

I just can't say enough about our employees and the work that they do every day to serve our customers and grow our businesses.

I also want to invite you to visit our website and read our 2017 corporate sustainability report that highlights our commitment to environmental stewardship, economic growth and social responsibility.

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

(Operator Instructions) And our first question will come from Dennis Coleman of Bank of America Merrill Lynch.

This is actually Sammy on for Dennis.

We were actually wondering, it's such a strong quarter, but the fiscal year '18 guidance is unchanged.

Are there any offsetting factors for the year that we should be thinking about?

Or what should we look for in the next 2 quarters in terms of your expectations?

Yes, Sammy, this is Pat Migliaccio.

As you know, we don't provide quarterly guidance, but in looking at how we typically perform in the second half of the fiscal year, you can expect that New Jersey Natural Gas will post a very modest loss.

In addition, NJR Energy Services' earnings tend to be extremely weighted towards the front half of the year, whereas the storage and transportation contracts that they have tend to be rated over the last 12 months.

So a good portion of that loss in the back half of the year is attributable to NJR Energy Services.

And then finally, in the first quarter, and again on this call, I referenced certain of the opportunistic tax planning activities that contribute about $0.20 to $0.30 of that offset.

So those things taken together get us back to the midpoint of the guidance range.

Okay.

That's helpful.

And then more specifically for SRL, it looks like the in-service date is extended to 2019 from the fiscal year first quarter '19 and then most of the CapEx is also pushed to 2019.

Could you speak about what might have caused the additional delay?

Sammy, this is Steve.

So we're working through the process of obtaining the necessary permits and right of entry to the joint base, and we expect to achieve those this fiscal year with construction starting and then we'll put the pipe in the ground and have that in service in 2019.

So that's the current plan looking forward.

The next question will come from Shar Pourreza of Guggenheim Partners.

So just -- let me just focus on the clean energy standards.

It's obviously, it's a big change in direction for New Jersey, and New Jersey has somewhat been trailing other states.

Let me -- first and foremost, what's taking the Governor so long to sign the legislation?

Shar, this is Larry.

I think you'd have to ask him that question, but there are -- there's a lot of elements to the legislation, as you know.

And I would just imagine that he and his staff are going through the Deliberative Process as they evaluate the bill.

I do think what -- at least, what we focus on is his clear commitment to cleaner energy and to really do that over an extended period of time.

We actually are -- we feel that New Jersey has been a leader in the area of clean energy, and it's important to focus, not only on the statistics that I gave on the solar market, but also clean -- but also energy efficiency.

And when you look at these areas, New Jersey was not only -- has not only been a leader, but was a first mover in those areas.

And given, I think, the -- just the overall characteristics in the state as they relate to solar, the state's done a really good job there and has been responsive to the changes in the market that have come from the growth in solar to take a longer-term view to facilitate, we think, a continued path of growth in that market.

Shar, this is Pat Migliaccio.

The only thing I would add is that even though the legislation hasn't been signed, we have seen resulting strength in SREC prices in outer years.

And as Steve pointed out in his remarks, have been aggressively hedging our expected production in both energy year '19 and energy year '20 at these price levels.

Shar, it's Larry.

Just one other point, and I'm talking from the strategy point of view, when you look at the longer-term goals, they may seem aggressive, but we believe that there is a path here to achieve those goals.

It is clearly longer term, and it's going to really require improvement in technologies.

But when you look at how we're positioned and the things that have already been done, the state is off to a good start and it's -- although it's aspirational, I think it's also a realistic where the Governor is trying to drive us to.

Got it.

And then since you touched on SRECs, is there any sense whether you could see a change in that market either from a construct or administrative standpoint?

Because I think part of the mandate that the BPU has to look at as a result of these standards is whether they should see any changes in the SREC markets?

So Shar, this is Steve Westhoven.

So as the energy legislation is drafted, it does require the BPU to have a closing period on projects that are built prior to the legislation going into action and essentially that is going to make a change in the market, so you'll grandfather existing projects and then they'll have to be a new market, probably similar to the one that we see now, going forward in establishing the solar builds in the future.

So there is going to be a change, and like Pat had referenced, I think that change is reflected somewhat in your forward SREC curve being supportive that this legislation is supportive of the market going forward.

Got it.

Got it.

And then you touched a little bit on sort of the mandates, whether it's storage or offshore wind.

Do you guys have any sense on what the incentives or penalties could look like as a result of this legislation?

Like what do you see something -- what do you see that's palatable?

I think it's too early to tell how that's going to evolve and how that will transpire.

You do have some big investments that need to be made, particularly in offshore wind.

So I think it's something we have to watch and develop over time.

Got it.

And then just from a legality standpoint, do you guys have any sense on whether storage could be seen as a retail product as these mandates sort of kick in there, because I think the BPU has some flexibility there on whether storage should be seen as sort of, again, a power deregulated product or something that could be part of the retail rate structure?

I think that, that very similarly is way off in the future.

I think the technology has to evolve in order to create the situation in which the question you just asked becomes meaningful.

So I think that's something we're going to have to wait and watch that develop and see how that creates an opportunity for us.

And next we have a question from Joe Zhou of Avon Capital Advisors.

So I got a quick question on the wind side.

So now that you're planning to sell your existing wind portfolio and staging it is increasingly difficult to find a good wind project -- onshore wind project to develop, would you mind share some of your thoughts on the competition landscape on the wind side?

Is that because of the margin squeezed from other developers?

Or is it because of the margin is shrinking?

Or why you make this conclusion?

Joe, I think it's a combination of a number of those events.

Certainly, scale is important when you're developing wind assets, and we've seen some big players moving through that market.

And as these markets become developed, other risks come into play, basis risks between the point in which your wind farm is operated and where you can hedge that towards becomes an important item as well.

So when you factor all these together, we weren't able to find the projects that continue to develop this business and really pushed us to explore these other opportunities for us.

And Joe, the only thing I'd add is that I think you've seen, at least more recently, a lot more investment, both on the regulator utility side or the rate basing these wind investments and also infrastructure and pension funds have come in with lower cost of capital than some of the strategics.

And so that's also putting some pressure on it as well.

Understood.

And also when you are looking at monetizing this wind portfolio, would you share some of your thoughts on timing?

And what valuation metrics you are looking at?

Yes, we're -- so we're going through the process now, Joe.

And as information becomes available and it's appropriate to share, we will.

But we're expecting to close in 2019.

Are you going to sell as a portfolio or are you going to sell as single asset -- asset-by-asset?

As I said, we're working through the process.

So that is yet to be determined.

(Operator Instructions) And this will conclude our question-and-answer session.

I would like to turn the conference back over to Larry Downes for any closing remarks.

I'll turn it over to Dennis.

Okay.

Thank you, Laura.

Thank you, everyone, for joining us this morning.

As a reminder, a recording of this call will be available on our website.

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

Enjoy your weekend.

Have a great day.

Bye.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.