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New Jersey Resources Corporation (NYSE: NJR ) Q3 2015 Earnings Conference Call July 31, 2015 09:00 a.m. ET Executives Larry Downes – Chairman, Chief Executive Officer Glenn Lockwood – Chief Financial Officer Dennis Puma – Investor Relations Analysts Spencer Joyce – Hilliard Lyons Operator Good day and welcome to the New Jersey Resources Corporation, Third Quarter Fiscal 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Dennis Puma with Investor Relations. Please go ahead. Dennis Puma Thank you Rocco and good morning everyone. Welcome to New Jersey Resources’ third quarter fiscal ‘15 conference call and webcast. I’m joined today by Larry Downes, our Chairman and CEO; Glenn Lockwood, 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 Private Securities Litigation Reform Act of 1995. We wish to caution listeners on the call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR’s ability to estimate or control 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 on our Form 10-Q to be filed on Monday August 3. Both of these items can be found at sec.gov. NJR does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. I’d also like to point out that there are slides accompanying today’s discussion that are available on our website and were also filed on our Form 8-K this morning. With that said, I’d like to turn the call over to our Chairman and CEO, Larry Downes. Larry. Larry Downes Thanks, Dennis. Good morning everyone and thank you for joining us today. For those of you who have seen this morning’s earnings release you know that we are continuing to perform well during fiscal 2015. And through my presentation this morning I will be discussing our future and I will be making forward looking statements. Our actually results will be effected by many different factors, including those that we’ve listed on slide one. The complete list is included in our 10-K and I would ask you to please take the time to review those carefully. Also as noted on slide two, I will be referring to certain non-GAAP measures such as net financial earnings or NFE, as I discuss our results. We believe that NFE provides a 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 are discussed more fully in item 7 of the 10-K and also I would ask you to take your time to review those disclosures carefully as well. Moving to slide three, this morning we announced net financial earnings of $2.5 million, which was $0.03 per share for the third fiscal quarter of 2015. That compared with $4.5 million or $0.05 per share last year. For the nine months NFE totaled nearly $157 million or $1.84 per share and that compared with $196.3 million or $2.33 per share for the first nine months of fiscal 2014. Glenn will review our segment results in more detail, but in looking at our results this year you can see that our primary businesses are performing either in line with or exceeding our original expectations. Our better fiscal 2015 NFE performance was driven by steady growth from our two regulated businesses, New Jersey Natural Gas and NJR Midstream, improved performance by NJR Energy Services compared with our original NFE guidance and although they are lower than last year, NJRES is having another excellent year. And finally, we continue to seek solid contributions from Clean Energy Ventures. Moving to slide four, this morning we also increased our fiscal 2015 NFE guidance range to $1.70 to $1.80 per share from $1.65 to $1.75 per share. As you may recall we raised guidance twice earlier in the year as a result of NJRES performance, which has been better than expected because of our team’s ability to take advantage of opportunities that were created by cold weather. In fiscal 2015 we currently expect our regulated utility and mid-stream businesses to contribute between 55% and 70% of total NFE and then return to 65% to 80% in fiscal 2016 and beyond, and we currently expect NJRES to contribute 20% to 30% of NFE in fiscal 2015 and also return to 5% to 15% in fiscal 2016 and beyond. On slide five, I just want to summarize our long term growth strategy. First and foremost New Jersey Natural Gas will remain the primary driver of our strategy and our performance. We will comprise the majority of our earnings, assets, people and capital investment. Infrastructure projects such as SAFE and new customer additions will drive our rate base growth. Our mid-stream investments will also contribute to our regulated earnings. Combined our regulated businesses are currently expected to represent 65% to 80% of total NFE is fiscal 2016 and beyond. NJR Energy Services will continue to provide fiscal and producer natural gas services and is currently expected to contribute between 5% and 15% of total NFE in fiscal 2016 and beyond. Continuing on slide six, with Clean Energy Ventures we will provide renewable electricity from our solar and wind investments. We are diversifying our earnings within this business, mainly through wind investments as well as stable SREC fundamentals. We currently expect NJR Clean Energy Ventures to provide 10% to 20% of NFE in fiscal 2016 and beyond. In home services we continue to provide steady earnings accounting for between 2% to 5% of total NFE. At the same time our annual dividend growth goal remains at 6% to 8% with a targeted payout ratio of 60% to 65%. And with that summary, I will now turn it over to Glenn and he will review the quarterly results. Glenn. Glenn Lockwood Thanks, Larry, and good morning everybody. Moving to slide seven, quarterly results at New Jersey Natural Gas reflect continued customer growth, increases in our BGSS incentives and regulatory initiatives such as the SAVEGREEN Project and SAFE. [RISE’s] [ph] better than expected results reflect lower transportation and storage demand fees. Clean Energy Ventures weaker comparisons were due primary to last year’s results, including the one-time $9.9 million credit support payment related to a change in ownership at one if its commercial solar projects. This year we added one grid-connected and one net-metered system during this fiscal third quarter and placed 196 residential systems into service through our Sunlight Advantage program for a total of 6.2 megawatts. Increased revenue from Steckman Ridge was the primarily responsible for the higher Midstream earnings. Weaker results from Home Services’ reflected lower equipment sales and installations. On slide eight we invested $26 million to add 5,750 new customs to our system during the first nine months of fiscal 2015 and we are on target to add about 7,800 customers for the year. We remain focused on the safety and reliably of our system and have invested about $50 million on system maintenance so far this year. At the same time we have invested more than $27 million in our SAFE program, which allows us to accelerate the replacement of our cast iron and bare steel. Though June 30 we have replaced approximately 192 miles of the 276 miles of pipe that were approved by the BPU in 2012. Final preparations are being made to open our first NGV station and we are on track to open all three stations by the end of the fiscal year. Through our NJ RISE program we will invest over $100 million over the next four years for storm preparation and mitigation projects in the most storm prone portions of our service territory and we have begun modest spending on the program this year. And our Liquefaction project in Howell, New Jersey will give us the ability to liquefy pipeline gas at our storage site for our peak date needs and create benefits for both our customers and share owners. Through June we have invested $11 million on site preparation and equipment manufacturing for this facility. We have two petitions pending with the BPU regarding our Southern Reliability Link project. That will add a second interstate pipeline connection to our service territory in Ocean County to further support safety, reliability and resiliency. And finally through our SAVEGREEN energy efficiency program, which was recently extended through July 2017, a total of 38,000 customers have upgraded to high efficiency equipment since its inception in 2009. And very importantly, I’d like to remind everybody that about half of these capital expenditures are currently earning a return. Moving to slide nine, NJNG added 5,750 customers in the first nine months, more than 11% above last year. 2,793 of these new customers were related to new construction compared with 2,463 in the same period last year. Approximately half of the new customers converted from other fuels, primarily oil. Our conversion market continues to do very well as evidenced by a 10% increase over last year. These new customers are expected to contribute approximately $3.4 million annually to utility gross margin, and going forward we expect to add between 15,000 and 17,000 new customers over the next two years, representing an annual growth rate of about 1.6%. As you can see on slide 10 we continue to prepare for our base rate case which will be filed in November 2015. The filing was required by the BPU as part of the SAFE approvals. We believe the profits will take approximately nine months and conclude in early fiscal 2017. To-date we have retained consultants for our cost of capital, depreciation and cost of service studies and begun our test year, which will be July 1, 2015 through June 30, 2016. Moving to slide 11, while lower than last year when we experienced extremely cold winter weather, NJRES’ results this year have significantly exceeded original projections. Our team has done an excellent job meeting our customers’ needs during periods of extreme weather and has developed a portfolio of competitively priced storage and transportation assets. According to Natural Gas Intelligence, we are now the 16 th largest gas market in North America. Our better than expected year-to-date results were driven primarily by colder than normal weather that created short term increases in natural gas demand, as well as price volatility, which in turn generated higher than expected gross margin for RES. As previously noted, we currently forecast RES’ contributions to NSE to return to a range of 5% to 15% in fiscal 2016 and beyond. Okay, turning to NJR Clean Energy Ventures on slide 12, we continue to build out of our inventory of solar projects, while we construct our third wind project. Our strategy is focused on diversification of our investments across this business. We have built a strong portfolio of solar in New Jersey, with over 100 mega watts of capacity now in service. During the first nine months of fiscal 2015 we placed $53.3 million of ground mounted solar projects totaling 20.5 megawatts into service. The six megawatt grid connected system is under construction and is expected to be placed into service in our fourth fiscal quarter. On the residential side our Sunlight Advantage program remains a popular choice for consumers and we remain among the largest providers in the state. In the first nine months of fiscal 2015 we added 468 customers totaling 4.5 megawatts capacity, bringing the total number of customers since inception to more than 3,600. We have advanced our diversification into onshore wind with projects in Montana, Iowa and Kansas. Wind assets now total almost 30 megawatts worth 22% of our total portfolio as Carroll Area, our second wind project came online in late January. The third project, the 48 megawatt Alexander Wind Farm is currently under construction. Turning to slide 13, you can see that monthly solar capacity additions in the state have declined significantly from their peak in early 2012, which combined with the annual increase and the renewable portfolio standards have supported [indiscernible] increase in SREC prices shown on the graph on the right. Recently we have seen SREC prices over $235 and we believe these fundamentals will continue. In addition, as shown on slide 14, we have been actively hedging our expected SREC sales. The red line on the chart represents SRECs expected to be generated from our existing portfolio. As you can see, 100% of our SRECs for fiscal 2016 are hedged and we have been actively hedging [future years] [ph] as well. We believe that increases in the number of SRECs to be generated, our hedging program, expectation of continued strength in SREC prices and expected earnings from our wind investments, all support our forecast of 10% to 20% of our total NFE coming from CEV in fiscal 2016 and beyond. Now on slide 15, it shows we’ve provided an update of our capital expenditures for CEV. We have spent about $110 million through June 30, 2015 on the solar and wind projects I detailed a few slides ago. Construction continues at our third wind project, the Alexander Wind Farm in Kansas, which is expected to come online during the first fiscal quarter of 2016. When Alexander is completed, we will have about 78 megawatts of wind assets. I also wanted to reiterate our strategy to mitigate the anticipated reduction in ITCs from 30% to 10% in 2017. As I just demonstrated on the previous slides, we are committed to diversifying our clean energy portfolio, mainly the onshore wind investments. This combined with growing SREC revenue and expected contributions from our other business segments will enable us to continue to grow through this transition. In looking at our cash flow forecast on slide 17 you can see the future benefit of the higher than expected earnings that we have been generating in ’14 and ’15. We believe now that our capital program can be properly financed over the next two years with a modest amount of new equity, while maintaining appropriate credit metrics for our rating. Now I’ll turn it back to Larry for some closing thoughts. Larry Downes Thanks Glenn. I’d like to conclude our call today by reviewing slide 18, which summarizes our key strategic initiatives through fiscal 2018. These initiatives support our annual 5% to 9% NFE and 6% to 8% dividend growth targets. So you can see the primary components of our growth plan through fiscal 2018, our strong customer growth, infrastructure investments and regulatory initiatives that will benefit both our customers and our share owners. It will extend our mid stream strategy including PennEast and we intend to diversify clean energy ventures distributed power portfolio combined with stable SREC market fundamentals to provide steady income streams and will take advantage of expected natural gas demand growth and price volatility in NJRES, while providing producer and asset management services. I think as you can see, our fundamentals remain strong and we provide the opportunities for future growth. So as I close today, I want to thank our nearly 1,000 employees for their continued hard work and dedication. I just want to point out because of our employees Jersey Natural Gas was once again named the most trusted brand in the east region by Cogent Reports and that was among all natural gas utilities. Without the efforts of our employees, we could not have achieved the excellent results that we’ve recorded thus far for fiscal 2015 and the strong fundamentals we have for the future. Our employees are the foundation of our company and as always I’m grateful for everything they do every day. And so thank you all for your time today and we will look forward to your questions and comments. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from Spencer Joyce of Hilliard Lyons. Please go ahead. Spencer Joyce Hey, good morning guys. Congrats. Good, solid quarter here and another beaten raise. Is that three times? Glenn Lockwood Third time this year, yes it is. Spencer Joyce Yes listen, just a couple of quick ones from me. It seems like a pretty simple quarter here, but did I hear correctly that Alexander is still online to be completed this year. So looking at fiscal, or first quarter of fiscal ’16 for some financial impact there. Glenn Lockwood Yes, it’s actually – Spencer, this is Glenn. It’s in the fourth quarter of calendar ’16, but it will be first quarter of calendar ’15, our first quarter fiscal ’16 that it comes online. Spencer Joyce Okay, perfect, so that’s on schedule. The other item, I know we are looking for a little less solar CapEx next year and I notice the pipeline under construction is about as low as we’ve seen over the past seven, eight quarters. Has there been any change in like the pipeline of available projects out there. I mean has there been any shift in market dynamics or does that really just reflect kind of your guys’ belief that you want to do a little bit less next year. Glenn Lockwood Well, that’s part of the overall strategy. Remember the majority of that solar spending is related to this grid connected projects. The residential market is fairly steady year-over-year. The grid connected CapEx is really a tie to the schedule of those particular projects getting put into service and we’ll just have more of those projects put in this year than we expect to have next year. Spencer Joyce Okay, perfect. Again, good quarter and we’ll talk soon. Glenn Lockwood Thanks Spencer. Operator [Operator Instructions]. Seeing no further questions, I’d like to turn the conference back over to management team for any final remarks. Larry Downes Okay, thank you Rocco. Thanks everybody for joining us today. As a reminder, a recording of the call will be available on our website. Again, we appreciate your interest and investment in New Jersey Resources and enjoy the rest of your day. Good-bye. Operator And thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. 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