New Jersey Resources Corp (NJR) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the New Jersey Resources Third Quarter Fiscal Year 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Dennis Puma, Director of Investor Relations.

Please go ahead, sir.

Thank you, Denise, and good morning, everyone.

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

I'm joined here today by Steve Westhoven, our Executive Vice President and COO; 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 different from our expectations, as found in Slide 1.

These items can also be found in the forward-looking statements section of today's earnings release furnished on Form 8-K, and in our most recent Forms 10-K and 10-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 in 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 also furnished on Form 8-K filed this morning.

With that said, I'd like to turn the call over to Steve Westhoven, Steve?

Thanks, Dennis, and good morning, everyone.

I'll be leading today's third quarter fiscal update.

I'm standing in for our Chief Executive Officer, Larry Downes, who could not join us due to a family obligation.

In line with our expectations, we reported a net financial loss for the quarter of $9 -- $0.09 per share compared with an NFE of $0.20 per share in the prior year.

However, due to the continued outperformance in energy services, we are increasing our earnings guidance for the year by $0.05 a share to a range of $2.60 to $2.70 per share.

Moving to slide 4, you can see our anticipated sources of NFE for fiscal 2018, the largest contribution will come from our regulated businesses.

We expect New Jersey Natural Gas and Midstream to contribute between 40% to 47% in NFE in fiscal 2018, and energy services will contribute between 25% to 30% of NFE this year.;

Turning to Slide 5. We continue to see strong customer growth at New Jersey Natural Gas.

For the 9 months ended June 30, we added over 6,900 new customers, representing an 11% increase over last year.

The residential new construction market continues to see strong growth due to increased demand in the multifamily market and is exceeding our expectations.

As a result, we have increased our new customer forecast over the 3-year planning period ending in fiscal 2020.

We now expect new customer additions to be in the range of 27,000 to 29,000, which is an increase of approximately 1,000 customers over that period.

This still represents an average annual growth rate of 1.7%.

Based on current rates, this growth will add cumulative utility gross margin of approximately $16 million over our 3-year planning period.

Moving to Slide 6, I'd like to provide an update on the Southern Reliability Link.

We recently achieved a significant milestone for SRL, when we received an easement from the joint base on June 26.

And we continue to make progress obtaining the remaining road opening permits.

We expect SRL to be in service in 2019 and plan to recover the capital cost associated with the project through future rate case proceeding.

Moving to Slide 7, I'd like to update you on Clean Energy Ventures.

During the quarter, we closed on the sale of the Two Dot Wind Farm and realized a pretax gain of about $1 million.

We plan to sell our remaining wind portfolio and expect to potentially close the sale in the first quarter of fiscal 2019.

We placed 2 commercial solar projects into service during the third quarter, totaling 23 megawatts of capacity.

And 2 additional commercial solar projects are planned to go into service in the fourth quarter, totaling almost 20 megawatts of capacity.

These 4 projects represent a total capital investment of approximately $100 million this fiscal year.

And by the end of the year, total capacity for our commercial solar business will be approximately 174 megawatts.

Our residential solar program, the Sunlight Advantage continues to grow, and today, we serve nearly 7,000 customers.

Turning to Slide 9. On our last call, Larry spoke about Governor Murphy's vision to build a robust clean energy economy, that will drive job growth and create new investment opportunities here in New Jersey.

And on May 23, the Governor signed legislation that will drive his clean-energy agenda.

Among other things, the legislation creates new aggressive renewable energy standards, strengthens the solar market in the state and requires utilities to implement energy efficiency measures.

We are well positioned to support the state in its goal to reduce overall energy consumption through energy efficiency.

Since 2006, we have helped our customers reduce their energy usage by more than 10%.

And those customers have saved more than $380 million.

Earlier this year, we filed with the New Jersey Board of Public Utilities to significantly expand our energy efficiency programs.

Pending the BPU's approval, we plan to invest up to $341 million to bring customers innovated, new choices to save energy, save money and help the environment.

Today's CEV is a leading solar provider in New Jersey, and we are optimistic about how the state's policy goals will support the solar market, as we continue to grow our clean energy business.

Since 2009, we have invested approximately $700 million in New Jersey's solar market, and we currently expect to invest about $360 million more over the next 3 years.

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

Pat?

Thanks, Steve, and good morning, everyone.

I'd like to begin by following up on Steve's clean energy thoughts and discuss the results of our SREC hedging strategy on Slide 9.

The new solar legislation resulted in stronger SREC prices, and since our last call, we've significantly increased our hedges of energy years 2020 and 2021.

We are now over 90% hedged in 2019 and 2020, at an average price of about $190 for SREC.

And we continue to focus on 2021 and are close to 60% hedge for that energy year as well.

Slide 10 shows our capital spending update for New Jersey Natural Gas.

We continue to make progress on our SAFE II program.

We've invested nearly $28 million of the planned $36 million in the first 9 months of fiscal 2018.

By the end of the fiscal year, we estimate we will have replaced 390 miles of unprotected steel main, which represents more than 70% of the total in our system.

We remain on track to replace all of our unprotected steel mains by the end of fiscal 2021.

For NJ RISE, we've spent $19 million of the planned $28 million in the first 9 months of fiscal 2018.

The remaining capital for this fiscal year will be devoted to the completion of the Seaside Barrier Island project, which will provide service resiliency into this region.

We have 2 additional projects that we plan to complete in fiscal 2019.

In March 2018, we requested a base rate increase in the amount of $6.9 million for SAFE II and NJ Rise.

New base rates are expected to go into effect in October of 2018.

You can see our CEV and midstream capital spending and project status on Slide 11.

As Steve mentioned, we've made significant progress on our CEV investments.

And by the end of the fiscal year, we plan to spend about $100 million.

In our Midstream segment, we spent approximately $3.3 million related to PennEast, and $1.1 million related to Adelphia Gateway to advance those projects forward.

Moving to Slide 12, I'll explain the drivers of NFE for the 3 and 9 months ended June 30.

For the quarter, NJNG's NFE were down due to increased O&M expenses, mainly consisting of compensation, including a voluntary early retirement program.

While NFE was essentially flat on a year-to-date basis compared to last year.

The decrease of CEV was due primarily to fewer tax credits recognized during the quarter compared to last year, which is the result of our planned sale-leaseback financings of our commercial solar assets.

For energy services, the decrease in NFE for the third quarter was driven by an increase in transportation-demand fees and O&M expenses as compared to the prior year.

While the higher performance of Midstream and CEV for the first 9 months was largely due to deferred tax revaluations associated with tax reform, the increase in energy services for the 9 months ended June 30, was the result of periods of weather volatility, particularly in late December of 2017 and early January 2018.

Moving to Slide 13.

I want to update you on our equity needs.

Our original plan included about $83 million of new equity in fiscal 2018.

By the end of this fiscal year, we will have issued $58 million of equity through the waiver discount feature and normal reinvestments under the DRIP.

This is a decrease from our original plan due to the outperformance of energy services and the benefits of tax reform.

Our fiscal 2019 financing assumptions will likely be impacted by the results of our wind asset sales.

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

Thanks, Pat.

Before we go to questions, I want to thank our team for their outstanding work and contributions.

I also wanted to mention that New Jersey Natural Gas has been recognized by Cogent Reports as the most trusted branch, ranking first in the state and seventh in the nation among natural gas utilities.

We appreciate you joining us today and welcome your questions and comments.

(Operator Instructions) And your first question will be from Travis Miller of Morningstar.

I was wondering on energy services, what you've seen 9 months, I know you talked about the weather volatility helping out.

Is there anything in that business and the success you've had this year in it that would be an ongoing benefit that you could see repeat over the next few years?

Travis, this is Steve.

I really think it's the weather that we've had and some of the extremes in the weather.

We had such a cold end of December, beginning of January.

And then we had a very, very warm February.

I think April was the third-coldest April on record.

And then flip immediately to some of the warmest July and Augusts that we've ever experienced historically.

So yes, I think the storyline there is volatility is good for that business.

And those extreme changes in weather have been supportive of that business.

As far as how that would be viewed going forward, we would have to see that similar volatility to see similar performance.

Sure, sure, Okay.

And then longer term, what are your thoughts in terms of offshore winds?

And that would obviously -- I would think to partner with someone to do something like that, would you be at all interested in what's been thought about in that legislation?

We're certainly following that market, I think there -- that market is going to take -- need much more development as that evolves, I know it's going through the process.

There's certain regulations and certainly, the structure needs to be put in place.

We're certainly interested in it and we'll keep an eye on it.

Yes, we would have to partner, there are some large capital expenses.

But that's yet to be determined.

So we're going to watch that market and if we decide to move forward or do anything we'll certainly let everybody know.

(Operator Instructions) And the next question will be from Paul Zimbardo of Citadel.

Two quick questions on the wind business.

One, have you disclosed the earnings contributions from the assets you are divesting?

Paul, no, we have not previously disclosed the segment earnings contribution, what we have disclosed, though, is that the wind assets themselves contribute between $10 million to $12 million of production tax credits each year.

And for the most part, the wind assets do not generate operating profits.

So you can back into NFEPS earnings contribution from there.

Okay, great.

Very helpful.

And is the safe assumption any proceeds there would at least partially go to offset equity needs?

Yes, that's a safe assumption.

The next question will be from Michael Gaugler of Janney.

Just one on the Adelphia Gateway.

Perhaps you could provide an update in terms of the time line for the final approvals and whatnot?

So we're still waiting for our FERC certificate, we expect that to occur at the end of this calendar year sometime.

So after that, after we receive that FERC certificate, we'll be able to purchase the asset from Talen Energy and then go about making the improvements and converting that to natural gas pipeline.

Remember the 50% of the pipeline, the northern portion of the pipeline is already flowing natural gas.

So that will come immediately under FERC jurisdiction and we'll have an instant customer, if you will, in Talen Energy and the power plants that will be supplying there.

So the pipeline will be producing revenue from day one.

And Mike, this is Pat Migliaccio.

We've communicated that we don't expect the Adelphia Gateway project to contribute materially to earnings in our fiscal year 2019.

That will be -- that's more of a 2020 time line project.

(Operator Instructions) The next question will be from Dennis Coleman of Bank of America Merrill Lynch.

Just to follow up on that last about the Adelphia Gateway FERC process.

We do have a commissioner retiring here in a week.

Can you just give an update on what you think the process is with the FERC?

Is it something that -- could we see an approval come out, they've been quite active outside of their normal meeting process in the last few weeks.

So is that something we could see imminently or could it be delayed if we go into sort of 2-2 Democrat/Republican Commission?

So the same answer, as we've said before to Mike that, essentially we're expecting to receive our FERC approval, which is the normal time line in the last quarter of the calendar year.

And essentially, we still expect to receive our approval.

The pipeline is largely -- everything's in the ground already.

So we're -- at least 50% of it.

You're just converting it from state jurisdiction pipeline to a federal jurisdiction pipeline.

And then for the southern portion of the line, we do need to make some conversion and some improvements, but they are minimal.

In fact, we don't have an environmental impact statement, we just have an environmental assessment which is a much lesser bar.

So we still expect to receive it, like I said in the last quarter, moving forward and we think it's a little bit of a lower bar for FERC considering all of the pipe is already in the ground.

Okay, Okay.

And then just on the PennEast project, you -- I know there have been some back and forth about capital spend and whatnot.

Now you've sort of -- you've said you expect it to be in construction next year, but on Slide 11, we don't see any CapEx spend there for 2019.

I think that there's a little bit of a change.

Any comments there?

I mean the general comment is that we're still waiting for the legal proceeding to conclude gain access to the properties.

And then move forward with the survey of those properties and complete our New Jersey DEP permit.

And as soon as that legal proceeding concludes and we receive judgment then we'll look forward but for some of the details of the numbers I'll turn it over to Pat.

Hey Dennis, Slide 11 you referenced there does capture only the fiscal year '18 spend for Midstream, and included is an appendix of the slides, we have our expected cash flows over the next few years.

And that shows the anticipated capital spend for PennEast in 2019.

And ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Dennis Puma for his closing remarks.

All right, thank you, Denise.

Thank you, everyone for joining us this morning.

Just want to -- a quick reminder, a recording of this call is available for replay on our website.

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

Thank you, and have a good day.

Goodbye.

Thank you, sir.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.