Earnings Call: Q1 2018

Feb 8, 2018

Good morning, everyone, and welcome to the New Jersey Resources First Quarter Fiscal 2018 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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, Stephen, and good morning, everybody. Welcome to New Jersey Resources' Q1 fiscal 2018 conference call and webcast. I'm joined here today by Larry Downes, our Chairman and CEO Steve Westhoven, our Chief Operating Officer and Pat Migliaccio, our Chief Financial Officer as well as other members of our senior management team. As you know, certain statements in today's call contain estimates and other forward looking statements within the meaning of the securities laws. We wish to caution listeners of 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 news release first on Form 8 ks and in our most recent Forms 10 ks and Qs as filed with the SEC. We do not, by including this statement, assume any obligation to revise or review or revise any particular forward looking statement referenced herein light of future events. Turning to Slide 2, we will be referring to certain non GAAP measures such as NFE or net financial earnings. We believe that NFE provides a more complete understanding of our financial performance. However, it is not intended to be a substitute for GAAP. Our non GAAP measures are discussed more fully in Item 7 of our 10 ks. We'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 our 8 ks filed this morning. With that said, I'd like to turn the call over to Larry Downes, our Chairman and CEO. Larry? Thanks, Dennis, and good morning, everyone. I think as you know from our news release, we have good news to share with you this morning. So I'll start with Slide 3. We reported net financial earnings or NFE for the quarter of $1.56 per share and that compared with $0.47 per share during the Q1 last year. As you can also see, tax reform is very positive for both our business and for our customers. Energy Services is having an excellent year and made a significant NFE contribution this quarter of $20,300,000 Our team at NJRS worked very hard with customers day and night to meet the increased demand for natural gas that was caused by extremely cold weather. As you know, we have a diverse portfolio of assets and many of the states where Energy Services operates a meaningful incremental boost to NFE in the first quarter. A meaningful incremental boost to NFE in the Q1. We also expect that it will positively impact results throughout fiscal 2018 beyond. Our plan is to reinvest those earnings in our business to reduce our external equity needs as we advance our infrastructure growth strategy. Tax reform will also help New Jersey natural gas customers who will benefit from lower energy bills. Our regulatory team will be working through that process with the New Jersey Board of Public Utilities. As a result of all this activity, we have raised our fiscal 2018 earnings guidance to a range of $2.55 per share to $2.65 per share $5 per share and that compared with our previously announced range of $1.75 per share to $1.85 per share. We also adjusted our annual growth rate to 6% to 8% from 5% to 9%. Our decision to adjust our annual long term growth rate was based on several factors. First of all, we increased the lower end of the range based on the new lower corporate tax rate and our confidence about delivering steady results in the future. 2nd, we lowered the top end of the range to more accurately reflect the outperformance from Energy Services that was due to weather as it did this quarter and will for fiscal 2018. The midpoint of the annual growth range remains at 7%, and our goal is to achieve that 7% target going forward. In addition to the benefits from tax reform and the performance of Energy Services this year, our business fundamentals remain strong and our goal remains to achieve consistent long term NFV growth. On Slide 4, we illustrate where we expect to be this year and also shows the impact of the lower tax rate going forward. New Jersey Natural Gas and Clean Energy Ventures are adding customers at a steady rate and solar continues to be an attractive energy choice for New Jersey homeowners and businesses. We're also making significant progress on our key natural gas projects, the Southern Reliability Link, PennEast and Adelphia Gateway. Moving to Slide 5, you can see our revised guidance for the anticipated sources of NFE for fiscal 2018. Aside from incremental NFE due to tax reform, which we show in red on the pie chart, the largest increase is coming from Energy Services. We currently anticipate that Energy Services will contribute between 20% to 30% of our total NFV in fiscal 2018, and you can see that that is up 5% to 15% in prior guidance. And we also expect our regulated businesses to contribute to between 40% 55% in annual NFE. Moving to Slide 6, we continue to target a strong annual dividend growth rate of between 6% 8% with a payout ratio goal of between 60% 65%. This performance will provide a competitive return to our shareholders and keep our balance sheet strong. We'll continue to reinvest earnings in the company to reduce our external equity needs in the future while supporting future growth with our substantial capital investments in new natural gas and clean energy infrastructure. And with that, I will turn the call over to Steve Westhoven, our Chief Operating Officer. Thanks, Larry, and good morning, everyone. During the quarter, New Jersey Natural Gas continued to experience excellent customer growth and we have made progress on our infrastructure programs. The big story was the extreme cold weather, which led to some of the highest throughput days in New Jersey Natural Gas' history. In fact, 4 of the 10 highest throughput days over the past 11 years were in fiscal 2018. Our system met the challenge and these extreme weather events further emphasized the need for infrastructure investments as we continue to strengthen and maintain our natural gas delivery system. We will invest approximately $300,000,000 over the next few years to accomplish this task. These projects include the Southern Reliability Link, SAFE II and NJ RISE. Our Energy Service business is a provider of physical natural gas assets producers, utilities, power generators and industrial customers across North America. Energy Services' portfolio today includes nearly 50 Bcf of storage capacity and 1.5 Bcf of daily pipeline capacity. These assets are strategically located throughout the United States and Canada. Slide 8 illustrates the temperature departure from normal during the Arctic blast that began in December. It also shows the areas throughout the country where Energy Services has contracts for storage and pipeline capacity. It is in these areas where we saw strong price volatility during the Arctic blast. Our portfolio has effectively supported our performance and we expect to nearly double planned results from Energy Services for this fiscal year. This equates to an expected $0.30 to $0.40 per share contribution in fiscal 2018. Moving to Slide 9. The PennEast Pipeline project was approved by the Federal Energy Regulatory Commission on January 19. It is now moving to complete land surveys and permit applications. PennEast is estimated to begin operation in 2019. As you know, we are a 20% owner of PennEast, which will help bring low cost natural gas from the Marcellus to markets in New Jersey. It is nearly fully subscribed and 6 of the shippers are utilities. During the recent Arctic blast, natural gas traded in New Jersey for $150 per dekatherm. And in less than 50 miles away in Pennsylvania, it traded for $6 per dekatherm. The need for more pipeline capacity could not be more clear. If PennEast had been in service, our region could have saved an estimated $300,000,000 in recent weeks. On Slide 10, I'd like to update you on our Adelphia Gateway project. As you know, in October, we signed an agreement to acquire an 84 mile 18 inches pipeline for $166,000,000 This pipeline runs from Marcus Hook, Pennsylvania, which is just south of Philadelphia, north to Martins Creek, Pennsylvania. We intend to convert the 50 mile southern section of this pipeline to natural gas and bring it under FERC jurisdiction. Today, the Philadelphia market is constrained with limited access to affordable natural gas. The project will have minimal impact on the environment because the pipe is already in the ground. The conversion process to natural gas involves minimal construction and utilizes existing rights of way. This provides for a clear path to project completion. On December 15, we completed a successful open season that exceeded twice our available capacity with contract terms up to 20 years. And most recently, on January 12, we filed with the Federal Energy Regulatory Commission for a certificate of public convenience and necessity. And shortly thereafter, we received a notice from FERC that our filings had been accepted. We expect the project to be in service in 2019 and contribute material to earnings in 2020. Moving on to our Clean Energy business. This slide shows the results of our SREC hedging strategy. As you can see on the chart, nearly all of our SREC sales from facilities currently in operation and under construction are hedged for energy years 2018, twenty 19. Last time we spoke, we had roughly 30% of our SRECs hedge for energy year 2020. Since that time, we've made some additional sales and are now 50% hedged for energy year 2020. With the BGS auction currently underway, we will continue to hedge our forward exposure. Now I'll turn the call over to Pat for some details on the numbers. Thanks, Steve. I'd like to begin with Slide 12, discussing the effects of tax reform. You've seen this slide in the past. However, with the final legislation, we were able to quantify the impacts. The lower corporate tax rate will provide between $0.05 $0.10 of ongoing NF EPS benefit to our non regulated businesses, including the BGSS incentives. For New Jersey Natural Gas, a lower corporate tax rate will result in lower bills for our customers. We currently estimate about $228,000,000 to be returned to customers associated with the revaluation of deferred tax liabilities. In addition, the lower corporate tax rate also results in reduction in customer bills going forward. We're working with the NGBPU to determine the timing and methodology of the decreases in customer bills. The revaluation of net deferred tax liabilities for our non regulated subsidiaries results in a significant benefit that we currently estimate to be between $0.60 $0.65 As Laurie indicated in his opening remarks, we've increased our NFPPS guidance for fiscal 2018. The major components of the increase are the revaluation of deferred tax liabilities, NGR Energy Services performance and the impact of a lower corporate tax rate on our fiscal 2018 results. In addition, tax reform has provided us with the opportunity to create additional economic value for New Jersey resources. We use sale leaseback financing for all of our planned commercial solar investments, an increase of $52,000,000 over our plan and a reduction of ITCs for fiscal 2018, equating to approximately $0.15 of NFE PS. In fiscal year 2018, our statutory tax rate is 24.5%, a blend of the old and new. Fiscal year 2019 is when we get the full benefit of the lower rate. To the extent we can, we'll move SREC sales from fiscal 2018 to fiscal 2019 to take advantage of the lower corporate tax rate. Additionally, we'll be pulling forward certain expenses into 2019. These items in total are reflected in the chart on Slide 13. We expect that these actions will create between $0.03 $0.07 of NFPPS benefit in fiscal 2019. On Slide 14, we show the quarter over quarter comparisons for each segment, excluding the deferred tax revaluation. As you can see, each of our segments' underlying business fundamentals are strong and that resulted in quarter over quarter improvements for each. Moving to Slide 15, 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 investments and dividend growth targets. We originally forecasted about $83,000,000 of new equity in fiscal 2018. In the Q1, we raised about $23,000,000 of new equity and expect that our needs for the balance of the fiscal year will be about $15,000,000 which we plan on raising through our dividend reinvestment plan. This is a decrease from our original plan due to the outperformance of Energy Services and the benefits from tax reform. I'll now turn the call back to Larry for some closing remarks. Thanks, Pat. So before we open up the call for questions, I wanted to summarize our outlook for fiscal 2018. So I think you can see clearly that we are off to an excellent start, and we expect fiscal 2018 to be a strong year due to tax reform, higher NFE contributions from Energy Services and steady performance from our core businesses. Our regulated business segments, including New Jersey Natural Gas, are expected to contribute to between 40% 55% in annual NFE. Our long term strategy remains to build a safer, cleaner and more affordable energy future for our customers and our infrastructure investment strategy is focused around natural gas, clean energy and energy efficiency. The fundamentals for New Jersey Natural Gas remain strong. Steady customer growth, strong regulatory relationships and infrastructure investment opportunities will continue to drive consistent NFV growth at New Jersey Natural Gas. We have collaborative regulatory relationships, which help us with not only our regulators, but also public policy leaders that are important as we work together to support New Jersey's energy goals. We're looking forward to working with Governor Murphy and his administration to advance his energy agenda while supporting economic development growth activities in New Jersey. In fact, we've invested nearly $600,000,000 in solar and we currently plan to invest nearly $500,000,000 in solar through 2021. We've also invested more than $150,000,000 Save Green, our energy efficiency program, which has generated over $370,000,000 in local economic activity. And through our conserve to preserve program, we've saved our customers almost $380,000,000 since 2,006 by helping them reduce their energy usage. Our team works every day to meet the needs of our growing customer base to improve the environment and to create more affordable clean energy choices for our customers. Now to achieve our long term NFE growth rate of 6% to 8%, we continue to maintain a disciplined capital allocation strategy that focuses on appropriate risk adjusted return on capital to support our growth. We'll also maintain a strong and efficient financial profile that will provide access external capital as we need it. Tax reform combined with our expectations of financial performance this year give us the ability to maintain a strong balance sheet without issuing significant amounts of new external equity. And our infrastructure investments will support customer needs for safe, reliable, resilient and affordable service. The projects that we are pursuing will support our long term growth strategy and will help us meet our customers' energy needs for decades to come. So now before we go to questions, as always, I want to say thank you to more than our more than 1,000 employees for the work that they are doing. Results that we are presenting to you today are really show the work that our dedicated women and men do every day. They are truly the foundation of our company and the driving force behind our performance. I'm also pleased to tell you that our team won another J. D. Power award for the outstanding service that we are providing to our business customers. That makes it 12 awards since 2002. And clearly, as you can see, I'm very proud of what they do. So with that, I want to say thank you for joining us here today and we would welcome your questions and comments. Thank you. We will now begin the question and answer session. And our first question comes from Travis Miller with Morningstar. Please go ahead. Good morning. Thank you. Good morning, Travis. How are you? Good. I was wondering, you compared the cold weather over the last couple of months to the 2014, 2015 period. Obviously, a lot of regulatory discussions since then. Obviously, you guys have made a lot of investments since then. I was wondering if you could characterize the system integrity, for lack of better term, between then and what you saw this winter and how those investments and regulatory changes might have impacted that? So Travis, this is Steve Westhoven. Yes, I mean, certainly the investments that we've made in the utility have strengthened the system. The cold weather that we experienced end of December, beginning of January was actually colder than what we experienced in 2014 during the Arctic blast. And our system performed very well, but it does reinforce that as growing gas needs happen and we continue to need to reinforce and reinforce the reliability of our system. So everything performed well and everything worked well through that extreme period. Travis, Larry, one point that you should be interested in since 2,008, we've invested over $1,000,000,000 into our infrastructure. You hear us talk about the accelerated infrastructure plans that we have with here in the state with the Board of Public Utilities. And I think as Steve correctly points out, the performance of the system clearly has shown the benefits of those programs. Did you see any part where regulatory changes might improve anything having gone through these two periods? Was it is there anything that came out where aside from just more investment in system integrity that regulators could change anything or promote anything? No, I think this is Larry again. I think our regulators have capital resources, but the human resources as well. And clearly, the weather that we experienced recently was a test of all of that. But when I use the word collaboration in describing our relationship with the regulators, it is truly that and the steps that we're able to take and the programs we're able to pursue put us in the best possible position to be able to serve our customers on the most extreme conditions. Okay, great. And another completely different topic, the solar business, you've been in it obviously for a long time. What do you think about the tariffs coming into play? So the tariffs that were just instituted, which raised the cost of solar panels, currently, we don't expect that to have a material impact on our business. And in fact for the projects that we have scheduled for this year, a lot of those panels have already been purchased. So as we move forward, we expect that those costs will be absorbed by everybody in the value chain and we should continue to move forward and make those investments. Travis, this is Pat Bigliaccio. The only other thing I would add is that it doesn't meaningfully impact the project economics because at least for most of our projects, the panels are the smallest portion. And let's not forget that we do get 30% of that increase in cost back by virtue of the investment tax credit. Okay, great. I appreciate the thoughts. Our next question comes from Michael Gadler with Janney Montgomery Scott. Please go ahead. Good morning, everyone. Good morning, Mike. Good morning, Mike. Let's start with the Adelphi Gateway. You had mentioned you received interest twice the capacity during open season. So wondering if there are any thoughts on upsizing with more compression or if that line will be maxed out when it's put in service? So Mike, this is Steve. At this point, we're going to keep the initial phase at 250,000 dekatherms. We're working through the contracts with those counterparties and hope to have them contracted relatively soon. And we don't plan on expanding that line beyond its current pipeline that's in the ground. So we do have a second expansion that we're capable of, but that'll happen a year down the road. Okay. Would that be similar size? Just kind of thinking about that or? That would just be compression that we would add. Okay. And then Energy Services, great quarter obviously. Wondering if you could kind of highlight the differences between what you saw on the polar vortex and this current cold weather and how that impacted the segment's performance? I think the key differences between the polar vortex and what we just experienced was the polar vortex was much longer in duration, but it didn't have temperatures which were as extreme. So if you recall back last time in 2014, I think high prices were around $100 somewhere around there. I think the highest price that we saw during this period was $175 was a high print. So I think it was really characterized as a much shorter duration, but a more extreme duration. So you had your volatility somewhat compressed during that period. But we had the right assets in the right place. The team performed very well and we're able to capitalize on some of the volatility in market. Okay. That's all I had. Thank you. Thanks, And I'm showing no further questions at this time. So I'd like to turn the conference back over to Dennis Puma for any closing remarks. All right, Stephen. Thank you all for joining us this morning. As a reminder, a recording of this call is available for replay on our website. As always, we appreciate your interest and investment in New Jersey Resources. Have a great day. Goodbye. The conference has now concluded. Thank you for attending today's presentation. 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