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New Jersey Resources Corporation (NYSE:NJR)
Q4 2018 Earnings Conference Call
Nov. 20, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the New Jersey Resources' fourth quarter fiscal year 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchtone phone. To withdraw your question, please press * then 2. Please note, today's event is being recorded. I would now like to turn the conference over to Dennis Puma, Director of Investor Relations. Please go ahead, sir.

Dennis Puma -- Director of Investor Relations

Thank you, Rocco, and good morning, everyone. Welcome to New Jersey Resources' fourth 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 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 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 Q as 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 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 our Form 8-K filed this morning. With that said, I'd like to turn the call over to our President and COO, Steve Westhoven, Steve?

Stephen D. Westhoven -- President and Chief Operating Officer

Thank you, Dennis, and good morning, everyone. As you know from our earnings release, we delivered another strong fiscal year. Looking at Slide 3, we reported net financial earnings of $2.74 per share for fiscal 2018, compared with $1.73 per share last year. Our higher results were primarily due to tax reform and increased performance by Energy Services. We added nearly 9,600 new customers at New Jersey Natural Gas, which exceeded our expectations. As a result, we increased our customer growth rate to 1.8% for 2019 through 2021.

The safety and reliability of our system remains one of our top priorities. Since the start of our infrastructure programs, with the support of the New Jersey Board of Public Utilities, we have strengthened our system by replacing all of our cast iron, removing over 400 miles of unprotected steel pipe, and eliminating all low-pressure mains from our system. Today, we have the most environmentally sound natural gas system in New Jersey.

In fiscal 2018, Clean Energy Ventures added three new commercial solar projects and 910 residential solar customers. We now have approximately 7,300 residential solar customers across New Jersey. Our combined commercial and residential installed solar capacity now totals 231 megawatts. These assets are equal to removing the emissions from over 46,000 cars from our roads annually.

Our strong financial performance continues to provide an attractive total return to our shareholders. This morning, we also announced our fiscal 2019 net financial earnings guidance range of $1.95 to $2.05 per share. Slide 4 illustrates our NFE over the last four years. We target an NFE annual growth rate of 6% to 8%, which compares favorably to our peers.

On Slide 5, you can see a breakdown of the expected future NFE contributions from each of our business segments. Our regulated businesses will continue to provide the majority of our total earnings. Looking at the pie chart to the left, we expect New Jersey Natural Gas to contribute between 45% to 50% to NFE, and the midstream business to contribute between 5% to 15% to NFE. Infrastructure environments and customer growth will remain the principle drivers of our regulated businesses.

This year, CEV is expected to contribute between 25% to 35% to NFE, which is higher than prior years. There are two reasons for this. First, to take advantage of the lower tax rate, we were able to align the timing of some of our SREC sales to 2019. Second, we expect to recognize the ITCs associated with our commercial solar projects placed into service this year. As indicated on the chart to the right, we expect CEV to return to a more normalized range of 10% to 20% in fiscal 2020 and beyond. Lastly, we expect Energy Services to contribute between 5% to 15% to NFE going forward.

Moving to Slide 6, we increased our dividend by 7.3%, representing the 25th increase in the last 23 years. Our dividend strategy targets an annual growth rate between 6% to 8% with a target payout ratio of 60% to 65%. However, this may be affected by Energy Services outperformance, as we saw in 2018. This approach allows for a competitive return to shareholders, while reinvesting earnings in the company to support future NFE growth.

Turning to Slide 7, we continue to see strong customer growth at New Jersey Natural Gas. Expectations were exceeded by adding approximately 9,600 customers this year, a 5% increase over 2017. The strength of the residential construction market, particularly in Ocean County, remains the driving factor behind our growth. Today, we expect 65% of our customer growth to come from new construction. We have increased our forecast over the next three years to be between 28,000 to 30,000 new customers. This is an increase of approximately 1,000 customers from our prior estimates. Based on current rates, this will add cumulative utility gross margin of approximately $16.5 million over our three-year planning period.

Moving to Slide 8, I'd like to provide an update on the Southern Reliability Link. We are excited to report that we have completed the bidding process and will begin construction of Phase 1 of this project in first quarter of fiscal 2019. We expect SRL to be in service in 2019, and plan to recover the capital costs associated with the project through a future rate case.

I'd like to update you on the Adelphia Gateway Project on Slide 9. As you know, we signed an agreement to acquire the Pennsylvania pipeline for $166 million. We intend to convert the 50-mile southern section to natural gas, and we also plan to bring the entire project under FERC jurisdiction. On October 19, 2018, we received a Notice of Schedule for the environmental review from FERC. This is an important step forward in the process. FERC's schedule states that it expects to issue the environmental assessment for the project in January of 2019. We are optimistic that Adelphia will move quickly through the FERC approval process, since the project will have minimal environmental impacts, as it relies on existing infrastructure, brownfield locations, and established rights-of-way. We expect Adelphia Gateway will be in service in fiscal 2019, and contribute materially to earnings in fiscal 2020.

Turning to Slide 10, I'd like to take a moment to discuss the performance of Energy Services during the fiscal year. As you can see from the chart, Energy Services had an excellent year. We substantially exceeded expectations due to extreme market volatility experienced in the first half of fiscal 2018. This allowed us to take advantage of favorable pricing spreads in the physical natural gas market. We are forecasting Energy Services NFE contribution to return to a normal range of 5% to 15%. While there is an opportunity for additional earnings in the event of extreme market conditions, we do not factor this into our earnings guidance.

On Slide 11, I'd like to update you on Clean Energy Ventures. During fiscal 2018, we made a total capital investment of about $100 million for projects placed into service. This year, we have already placed two projects into service and expect to complete another two projects before the end of the fiscal year, three of which are currently in the permitting process. The fourth project has been identified, and we expect to have it contracted in the first quarter of fiscal 2019. These six installations total over 50 megawatts of capacity and represent an investment of $131 million of ITC-eligible capital for fiscal 2019.

We serve approximately 7,300 residential customers through our Sunlight Advantage Program. This year, we plan to add another 1,000 residential solar customers. As you know, New Jersey passed the Clean Energy Act in May of 2018, and the BPU has been tasked with developing and implementing an incentive program for the new projects. We continue to work closely with the BPU, the Governor's Office, and legislators to help ensure solar remains viable for future investment while contributing to the state's clean energy goals.

Finally, I'd like to mention that we remain on track to close the sale of our remaining wind assets in the first quarter of fiscal 2019. I'd like to turn the call over to Pat now for some details on the financials.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Thanks, Steve, and good morning, everyone. Building on Steve's comments, we actively hedge our SREC production to lock in revenue for future energy years, the results of which are shown on Slide 12. As you can see, about 90% of our SREC sales from facilities currently operational and those under construction are hedged for energy years 2019 and 2020, at average price of $192 per SREC. For energy year 2021, the hedged amount is 58% at $192 as well. We will continue to hedge through fiscal 2019, with a focus on increasing our hedge ratios in the outer years.

As we close out fiscal 2018, I provided a breakdown of the changes from year to year in each of our principal subsidiaries. You can see that tax reform had a major impact on all of our businesses, but you can also clearly see the outperformance of Energy Services. On Slide 14, I'd like to highlight a couple elements of our capital spending plan. For New Jersey Natural Gas, we expect to spend $475 million in fiscal 2019. The increase in spending this year is attributed to SRL construction, meter exchanges, new facilities, and information technology investments. For midstream, we expect to spend over $300 million in fiscal 2019, as we anticipate bringing the Adelphia Gateway project on line.

As you can see on Slide 15, the majority of our financing in fiscal 2019 will come from long-term debt and the sale of our wind assets. We expect to raise about $60 million in incremental equity above our dividend reinvestment program. Strong cash flows in fiscal 2020 and 2021 support over a billion dollars of investment, with relatively small equity needs. We believe our cash flows and financing plans will continue to support our strong financial profile now and in the future. I'll now turn the call back to Steve for some final thoughts.

Stephen D. Westhoven -- President and Chief Operating Officer

Thanks, Pat. Before I open the call for questions, I want to summarize what's ahead for fiscal 2019. For New Jersey Natural Gas, we have an upcoming infrastructure filing in a rate case, which is due by November 2019. We expect SRL to be in service this year, and plan to add 9,600 new customers from construction and conversions. In our midstream segment, we anticipate Adelphia Gateway be in service in 2019, a significant milestone for our company. This will result in meaningful contribution to earnings in 2020, and increase our total regulated NFE.

At Clean Energy Ventures, we expect to place six commercial solar projects into service, increasing our total solar capacity to more than 290 megawatts. We also expect to close on the sale of the remaining wind portfolio assets, which helps reduce our external financing needs. I'm optimistic for the year ahead. We have a great team of employees who are dedicated to executing our strategy, and I want to recognize their hard work that drives our performance. Thank you for joining us today, and now I'd like to open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. Once again, ladies and gentlemen, couldn't * then 1 if you'd like to ask a question. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Dennis Coleman of Bank of America Merrill Lynch. Please go ahead.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. Just a couple quick ones for me. On the SRL, so construction will start, is it already started? I guess you're saying it'll start this quarter?

Stephen D. Westhoven -- President and Chief Operating Officer

It's going to start this quarter; that's right.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. So all the permits are in place, all the road opening, everything that we've been waiting for?

Stephen D. Westhoven -- President and Chief Operating Officer

We're still waiting for the Burlington County road opening permit, but couldn't moving forward in process and we expect to receive that soon.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. So, I'm sorry to press it. I guess then the construction, this will be on the base? Is that's where the construction will start?

Stephen D. Westhoven -- President and Chief Operating Officer

That's correct.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Got it, perfect. Then just one quick one. On the O&M expense in the Energy Services segment, pretty volatile I guess with earnings. Is that compensation-related stuff? Is that how we should think about that?

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Dennis, this is Pat Migliaccio. Certainly elements of it is compensation related. Most of those accruals or incentive payments are accrued in the third and fourth quarters as we get line of sight on what the actual result is going to be. But also remember that Energy Services demand charges that they pay for both transportation and storage contracts are generally flat, while we earn margin on a volatile basis more in the winter than in the summer. So those are the two contributing factors.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Stephen D. Westhoven -- President and Chief Operating Officer

Thanks, Dennis.

Operator

And ladies and gentlemen, once more, if you'd like to ask a question, please press * then 1 at this time. Once again, we will pause momentarily to assemble our roster. And our next question comes from Michael Gaugler of Janney Montgomery Scott. Please go ahead.

Michael Gaugler -- Janney Montgomery Scott -- Analyst

Good morning, everyone.

Stephen D. Westhoven -- President and Chief Operating Officer

Good morning, Mike.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Good morning, Mike.

Michael Gaugler -- Janney Montgomery Scott -- Analyst

Just looking at the weather forecast in this quarter here in your guidance. Just wondering if you'd factored that into the quarter the outlook and the annual outlook, given we're looking at some very cold weather here, particularly as it pertains to Energy Services?

Stephen D. Westhoven -- President and Chief Operating Officer

Mike, just a quick comment on that. It's certainly been cold this fall, but it's way too early in the fiscal year to start changing or making adjustments to our guidance range right now. But certainly the market has had some decent volatility and it's been constructive.

Michael Gaugler -- Janney Montgomery Scott -- Analyst

Okay. I guess couldn't the most I'm going to get out of you?

Stephen D. Westhoven -- President and Chief Operating Officer

Absolutely.

Michael Gaugler -- Janney Montgomery Scott -- Analyst

All right, Steve. Thanks.

Operator

And ladies and gentlemen, as a final reminder, if you would like to ask a question, please press * then 1 at this time. Once more, we will pause momentarily to assemble our roster. And this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Stephen D. Westhoven -- President and Chief Operating Officer

All right, Rocco. Thank you very much. Thank you all for joining us this morning. I just want a reminder that a recording of this call is available on our website for replay. As always, we appreciate your interest and investment in New Jersey Resources. Have a great Thanksgiving, everyone. Bye.

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you, sir. This concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Duration: 18 minutes

Call participants:

Stephen D. Westhoven -- President and Chief Operating Officer

Patrick Migliaccio -- Senior Vice President and Chief Financial Officer

Dennis Puma -- Director of Investor Relations

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Michael Gaugler -- Janney Montgomery Scott -- Analyst

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