New Jersey Resources’ (NJR) CEO Larry Downes on Q1 2016 Results – Earnings Call Transcript

By | February 3, 2016

Scalper1 News

Operator Good morning and welcome to the New Jersey Resources Corporation First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Dennis Puma, Investor Relations. Please go ahead. Dennis Puma Thank you, Gary. Good morning, everyone. Welcome to New Jersey Resources’ first quarter fiscal 2016 conference call and webcast. I am 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 Private Securities Litigation Reform Act of 1995. We wish to caution listeners of this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR’s ability to control or estimate precisely, which could cause results to materially differ from the company’s expectations. A list of these items can be found, but is not limited to items in the forward-looking statements section of today’s news release filed on Form 8-K and in our most recent 10-K filed with the SEC. Both of these items can be found at sec.gov. NJR does not, by including the statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. I would also like to point out that there are slides accompanying today’s discussion, which are available on our website and were also filed on our Form 8-K this morning. With that said, I would like to turn the call over to our Chairman and CEO, Larry Downes. Larry? Larry Downes Thanks, Dennis. Good morning, everyone and thank you for joining us. For those of you who have seen our release this morning, you know that our first fiscal quarter performance was solid. As we begin this morning I want to remind everyone that during my presentation I’ll be discussing our future and I’ll be making forward-looking statements. Our actual results will be affected by many risk factors, including those that are listed on slide two. The complete list is included in our 10-K and as always I would encourage you to please review them carefully. Also as noted on slide three, I will be referring to certain non-GAAP measures such as net financial earnings, or NFE as I am discuss our results. We believe that NFE provides 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 measures that are discussed more fully in Item 7 of our 10-K and please take the time to review that disclosure carefully as well. Moving to slide four, you can see our financial and strategic highlights for the quarter. NFE for the quarter were $0.58 per share compared with $0.65 per share in the first fiscal quarter 2015. The difference is due primarily to lower results at NJR Energy Services. Our fundamentals at New Jersey Natural Gas remained strong. We added 2,046 customers during the first fiscal quarter of 2016 and remain on track to realize a 1.6% customer growth rate during this fiscal year. We filed the base rate case in November to recover investment and operating cost incurred to improve our system and support customer growth initiatives. We also reached another important milestone during the quarter when we retired the last section of cast iron main in our distribution system. We are now the only utility in New Jersey to have a cast iron free system. Our infrastructure investment programs continued as expected. In the quarter New Jersey natural gas spent about $44 million for customer growth and to improve the reliability and resiliency of our system. Our clean energy ventures completed their third onshore wind project in December this 50.7 megawatt Alexander Wind Farm is located in Rush County, Kansas. We now have three operating wind farms that are contributing to our earnings and as you know we announced the fourth project last night. Also congress extended investment tax credits for solar and production tax credit to wind in December. That has positive implications for our distributed power business and although lower than last year NJR Energy Services is performing well despite the warm weather and their results remain in line with our expectations. Moving to slide five, this morning we announced net financial earnings of $49.6 million or $0.58 per share during the first fiscal quarter of 2016. That compared with $55.1 million or $0.65 per share last year. New Jersey Natural Gas reported strong earnings as a result of higher gross margin from customer growth, our BGSS incentives and regulatory initiatives such as the SAVEGREEN project. Although, the quarter was about 35% warmer than normal our Conservation Incentive Program, which we referred to CIP mitigated the impact on earnings. Our midstream, excuse me moving to slide six, our long-term average annual NFE growth rate remains 5% to 9% and that assumes that fiscal 2013 is the base. Today, we reaffirmed our NFE guidance for fiscal 2016 in the range of $1.55 to $1.65 per share. First and foremost I want to emphasize that the guidance assumes that New Jersey Natural Gas will remain the primary driver of our strategy and our performance. New Jersey Natural Gas will provide the majority of our earnings, our assets, our people and our capital investments. Infrastructure projects and new customer additions will continue to drive our investments. Our midstream investments will also contribute to our regulated earnings combined with New Jersey Natural Gas our regulated businesses are expected to contribute between 65% and 80% of total net financial earnings in fiscal 2016 and beyond. As I mentioned earlier, NJR clean energy ventures provide renewable electricity from our solar and wind investments. We are focused on diversifying our earnings through this business as we continue to grow our portfolio of wind projects. Clean energy ventures is expected to provide between 10% and 20% of net financial earnings in fiscal 2016 and beyond. Now I think as many of you recall extreme volatility in fiscal 2014 and 2015 created market opportunities that led to outstanding performance for NJR Energy Services. This year warm weather conditions created by El Niño patterns have resulted in less volatility than we experienced in the previous two fiscal years. And so we expect that NJRES will contribute between 5% and 15% of net financial earnings in fiscal 2016 and that number is consistent with our expectations. At the same time, our annual dividend growth goal remains at 6% to 8% with the targeted payout ratio of 60% to 65%. Turning to slide seven, in December, Congress extended both the production tax and investment tax credits essentially the legislation extended the PTC and its existing value of $23 per megawatt for wind projects that begin construction through December of 2016. The value of the PTC will gradually decline to 2019 and thereafter will be eliminated. In addition, the investment tax credit was extended at its current level of 30% for solar projects that commence construction before December 2019. The credit reduces to 26% for projects started in 2020 and to 22% in 2021 provided that these projects are in service by December of 2023. Commercial solar projects started after 2021 are eligible for a 10% ITC. And now I think as many of you know over the past several years, our strategy reflected our expectation that Congress would not extend these credits. As a result, our plan was to reduce our solar capital spending and to diversify our portfolio, which as we indicated on our Investor Day in October we were on track to achieve that. The ITC and PTC expenses now provide us with options to invest in wind and solar over the next several years and we are currently reviewing how these changes will impact our future CEV investments. In the short-term you can expect us to focus on the build out of our BPU approved grid connected solar projects in New Jersey to continue our residential solar program and to add onshore wind projects to our portfolio, but I would again emphasize that we continue to expect that CEV will contribute 10% to 20% of our NFE and that remains unchanged from previous forecast. On slide eight, last evening we announced our fourth onshore wind project a 39.9 megawatt Ringer Hill Wind project, which is located in Somerset County, Pennsylvania, that is about 60 miles from Pittsburgh. We’ll invest about $84 million in this project and we expect that we’ll come online during first quarter of fiscal 2017. When the Ringer Hill is completed we will have four wind farms with total capacity approximately 120 megawatts of renewable electricity. And before I turn the call over to Pat to discuss our quarter results, I want to review slide nine which summarizes our capital expenditure program, in the chart you can see that the majority of our capital investments will continue to be allocated to our regulated utility New Jersey Natural Gas and our midstream businesses. And so I will turn the call over to Pat who will review our financial results, but I want to remind everyone that Pat officially became our Chief Financial Officer effective January 1st so this is his first opportunity to share our financial results with you. But Glenn is in the room and he’ll keep an eye on Pat so not to worry. Pat? Patrick Migliaccio Thanks, Larry and good morning, everyone. As you can see on slide 10 NJNG’s net financial earnings were $30.6 million compared to $28.2 million in the prior quarter. The improved financial performance was driven by a significant increase in gross margin from customer growth, our BGSS incentive programs, and SAVEGREEN our energy efficiency program. Since this inception the BGSS incentive programs have saved customers approximately $800 million and also provided share owners at an average of $0.05 of NFE per share annually. Turning to Slide 11, we added 2,046 new customers in the first quarter with approximately half of those customers coming from other fuels, primarily fuel oil. Combined these new and conversion customers are expect to contribute approximately $4.4 million annually to utility gross margin. Although additions are down in the first quarter due to the timing differences we’re on track for the year and expect to add 8,150 customers to our system in fiscal 2016. This will be about 4% increase over the prior year. Through our fiscal year 2018 we expect customer growth additions of 24,000 to 28,000, representing an annual new customer growth rate of about 1.6%. Most of you are familiar with the regulatory programs that we list on slide 12. I just mentioned the impact that our BGSS incentives have had in the results, our CIP which has been in place for about 10 years significantly mitigated the impact of warm weather and a resulting lower usage levels in our first quarter. This past November-December were among the warmest in our company history. Through SAVEGREEN we invested $8.6 million in the first quarter 2016 and our VP approval to invest $220 million through June of 2017. This program supports New Jersey’s energy efficiency goals by helping both customers and share owners. Also in the first quarter we invested $7.2 million in SAFE program. SAFE is $130 million four-year infrastructure program to replace 276 miles of unprotected steel and cast iron main to ensure safety and reliability. And finally we invested $5.1 million during the quarter in our NJ RISE program, which is $102.5 million five year program consisting of six capital projects designed to improve the resiliency of our system. As Larry has mentioned we filed our base rate case on November 13th as the BPU questioned when they approved our SAFE infrastructure program in 2012. The $147.6 million rate increase request will primarily allow us to recover cost incurred to improve our system and support customer growth. As you can see we have included the details of our forecasted rate base and cost of capital on the slide. We’re currently in a discovery phase. The BPU rate case process can take up to 12 months so we expect to have new rates in the first fiscal quarter of 2017. Moving to slide 14, midstream NFE totaled $2.3 million in the first quarter of 2016 compared with $2.1 million in the prior year. The increase reflects higher revenue from the Steckman Ridge storage facility. We also have a 20% interest in the PennEast Pipeline, which filed its 7C application with FERC in September and we’re currently working through the approval process. There is contribution from NJR Midstream in fiscal 2016 is expected to remain at 5% to 10%. Turning to slide 15, Larry mentioned earlier that NJRES reported lower NFE of $10 million in the first quarter of 2016, compared with $16.4 million last year. As expected their financial margin was lower than last year due primarily to narrow price spreads resulting from lower natural gas prices. And as Larry mentioned, we expect NJRES to contribute 5% to 15% NFE in fiscal 2016 and beyond. Moving to slide 16, first quarter 2016 NFE at NJR clean energy ventures totaled $7.5 million compared with $9 million last year. The decrease quarter-over-quarter was due primarily to lower investment tax credits. Our Sunlight Advantage program added 84 residential customers or 0.7 megawatts in the first quarter. This brings the total number of residential customers to more than 4,000 and our residential solar portfolio to more than 36 megawatts. Total capacity for all LCV solar projects is now just over 118 megawatts, which produces approximately 142,000 SRECs annually. Adding new three wind projects to that total, our distributed power portfolio is nearly 199 megawatts of which approximately 40% is wind. As shown on slide 17, we’ve been actively hedging our SREC sales. When considering our expected generation, we are 92% hedged for fiscal 2016 as you can see from the chart and we’ve been actively hedging future years. The red line represents the SRECs we expect to be generated from our existing portfolio. We believe that the increasing number of SRECs, the expectation of continued strength in SREC prices, the impact of our hedging program and expected earnings from our wind investments, support our forecast of 10% to 20% of our total NFE coming from CEV in fiscal 2016 and beyond. I will now turn the call back to Larry, for his closing comments. Larry Downes Thanks, Pat. I want to conclude our call today with a review of our path to future growth which includes a summary of our key initiatives for fiscal 2016, ‘17 and ‘18. I think many of you may recall that the format on slide 18 was originally introduced at our 2014 investor conference and really what it’s designed to do is to summarize the key initiatives each year that support our annual 5% to 9% NFE and 6% to 8% dividend growth target. And so when you look at the slide you will see details for fiscal 2016 and then as you move into fiscal ‘17 and ‘18 you will see it will be the initiatives from ‘16 plus the additional initiatives that you see in ‘17 and ‘18. So I just want to take a moment to summarize that. The growth plan through fiscal ‘18 is based upon strong customer growth, infrastructure investments, regulatory initiatives at New Jersey Natural Gas that will benefit both customers and share owners. We continue to work collaboratively with our regulators on our initiatives that benefit not only our share owners, but also our customers. We also expect to benefit from consistent revenues from our midstream investments; we’re focusing on diversifying CEVs distributed power portfolio combined with improvements in the SREC market fundamentals and the extension in both investment tax credits and production tax credits. And finally we will continue to take advantage of expected natural gas demand growth and price volatility at NJR Energy Services while at the same time providing producer an asset management services. When we look at our strategy, and we look at our fundamentals they remain strong and we think they provide the opportunities for future growth. But as always as I close I want to say thank you to our nearly 1,000 employees for their continued dedication and commitment to our company and our customers. Without their efforts we would not have achieved the excellent results we reported this morning, without everything that they do every day we would not have the strong fundamentals that we have for the future. Our employees are the foundation of our company and I am grateful for what they do every day. So, thank you for your time today and we are ready to take your questions and comments. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Barnett with Morningstar. Please go ahead. Mark Barnett Hey, good morning everybody. Larry Downes Good morning, Mark. Mark Barnett Congratulations Pat and Glenn first of all get that out of the way. Patrick Migliaccio Thank you, Mark. Dennis Puma Thank you. Mark Barnett Just a couple of quick things here, one on the just the minor item on the rate case, but you had a number of ways to kind of generate incentive extra margin from the utility. Do you think that any of that is set to change following a new rate regime or should we generally be expecting about a steady performance there? Larry Downes Mark, we don’t expect any of that to change. Mark Sperduto was in the room. Do you want to add anything to that? Mark R. Sperduto No, I think what you might be referring to are the BGSS incentives as well as our CIP. Those two regulatory initiatives have been decided and they are continuing right through the right case without any change. There are recent decisions in both of those areas. Mark Barnett Right. I just kind of from a bigger picture just wanted to get your sense of how that would change with a new fixed rate. But that sounds like no problem there. Couple of quick questions on the Ringer Hill projects, you mentioned that it was hedged for 15 years with an industrial uptick or so two things, one, generally how fixed do you view the revenue contribution from that project? And then two, how do you view your own sort of cost of capital and hurdle rate with an industrial offtake or versus a utility offtake there? Larry Downes Mark can we ask Pat to respond to that and we also have with us Stan Kosierowski who heads up CEV. So they will take your question. Pat? Patrick Migliaccio Good morning, Mark. So we hedged the majority of the output on that project. The Ringer Hill project through that agreement. And so while we didn’t disclosed a specific number rest assured the majority of the power is hedged. In terms of the cost of capital assumptions relative to the industrial partner the counter party choose not to be named on our press release, industrial partner was as close as we could come to describing their line of business. But we don’t consider the credit quality of the counter party in our return calculations and there are credit protections in the agreements with the counter party. So the credit quality deteriorated. I don’t know if Stan has anything to add. Mark Barnett Okay. Just this is sort of a growing trend with some of the more distributed generations I was just curious to see your kind of framework for analyzing this kind of a project when your offtake was not sort of fully regulated utility. But appreciate that guys. Thanks. Operator The next question comes from Brian Russo with Ladenburg Thalmann. Please go ahead. Brian Russo Hi, good morning. Larry Downes Good morning, Brian. Brian Russo So just to clarify the wind farm announced last night that was assumed in your capital forecast, CapEx forecast, correct? Patrick Migliaccio Yeah, Brian. This is Pat Migliaccio. That’s correct. Brian Russo Okay. And with the PGC and ITC extension clearly there is upside opportunities and upside CapEx opportunity. How much incremental CapEx do you think you can handle without needing significant amount of equity to funding? Larry Downes Brian, this is Larry. I think at this point what we are doing is as you know just as I said we had really assumed that we would not have the ITC and the PTC and that with the CapEx numbers that we were putting out there in the forecast. Now that this is in place what we’ll be doing is a complete let’s see at the portfolio and the distribution between wind and solar. There may be some changes there, but what will not change is the 10% to 20%. Brian Russo Got you, okay. And the SREC hedges slide and average price it looks like the hedges percentage basis increased and so did the average prices maybe you could just talk a little bit more about what you are seeing in that market in terms of pricing et cetera? Patrick Migliaccio Sure Brian. This is Pat Migliaccio again. We’ve seen over the course of the last several weeks certainly strengthen in the SREC market reflecting the BGS auctions and the purchasing behavior that leads up to the BGS options in the state of New Jersey. So to put things in perspective energy years ‘16 and ‘17 are trading in a bid ask between say 285 and 295 over the course of the last several weeks. So as you might imagine we’ve been aggressively hedging given those market prices. Because they are near 90% of the SACP, which is the penalty rate the PLSCs pay if they don’t acquire those SRECs. Larry Downes Brian we also and we guided to this in a lot of detail at the October Investor Meeting. We spend a lot of time internally understanding the market and where it is relative to the renewable portfolio standards. So as we said our expectation was that there would be some improvement in the SREC market fundamentals and we’re seeing a little bit of that right now. But internally when we’re making our hedging decisions we’re not looking take an enormous [ph] amount of risk on the movement of SREC prices and you can see that reflected in some of the hedging strategies and decisions that we’ve made. Brian Russo Okay. And you mentioned PennEast the FERC filing is it still considered on schedule? Larry Downes Yeah as we’ve disclosed right now, we’re going through the FERC process and expecting to get the FERC certificate. So there is no change to the schedule right now. Brian Russo And then lastly with the decline in natural gas, what kind of offset do you think there is to the $147 million base rate increase, which on a percentage basis is fairly large? Larry Downes I’m going to ask Mark Sperduto to talk about that. Mark R. Sperduto Well the system that for gas cost each June and coming up in this June we’ll do a forecast of our gas cost. And that forecast will coincide approximately with the timing of our base rate case increase. So until that time, as mentioned gas prices have been historically low and those types of prices would be reflected contemporaneously with the change in our base rate case increase this coming October-November timeframe. Larry Downes So Brian I think at this point it’s impossible to really predict that with the specificity right now. Brian Russo Okay. And then lastly I noticed midstream first quarter ‘16 was up year-over-year, but yet you sold Iroquois. I think you mentioned Steckman Ridge growth. Maybe you could just add a little bit more color to that. Larry Downes Yeah Brian, Pat gave without – Steckman Ridge provided – more than offset the decline of revenue that we saw from the difference in dividend income on our Dominion Midstream units versus the income from Iroquois and principally the same fundamentals that we see that drive the solid performance of NJRS are driving the performance of Steckman Ridge. So you’ve got some spreads in the Marcellus area that are leading to higher hub services and storage revenue at least in the short-term in Steckman Ridge. Brian Russo Great, thank you. Larry Downes Yeah. Operator [Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dennis Puma for any closing remarks. Dennis Puma Thank you, Gary. I want to thank everyone for joining us again today. As a reminder, a recording of the call is available for replay on our website. Again we appreciate your interest and investment in New Jersey Resources. Thanks have a great day. Bye. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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