Dennis Puma - IR Larry Downes - Chairman, President, CEO Pat Migliaccio - SVP, CFO Steve Westhoven - SVP, NJR Energy Services Company.

Mark Levin - BB&T Michael Gaugler - Janney Montgomery Scott.

Good day and welcome to the New Jersey Resources Corporation Second Quarter Fiscal 2016 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, Investor Relations. Please go ahead..

Thank you, Watson. Good morning, everyone. And welcome to this quarter's conference call and webcast. I'm 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 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.

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 first 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.

We do 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 Web site and were furnished on our Form 8-K filed this morning.

With that said, I would like to turn the call over to our Chairman and CEO, Larry Downes.

Larry?.

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 reported solid second quarter earnings that exceeded financial community consensus estimates.

Our year-to-date earnings were also strong and we remain on target to achieve our earnings guidance range for fiscal 2016. As I begin this morning, I want to remind everyone that during my presentation, I will be discussing our future, and I will be making forward-looking statements.

Our actual results maybe affected by many risk factors including those that are listed on Slide 2. I would also remind you that the complete list is in our 10-K and as always I would encourage you to review them very carefully. Also as noted on Slide 3, I will be referring to certain non-GAAP measures such as net financial earnings or NFE.

Now, 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 are discussed more fully in item 7 of our 10-K and I would ask you to please review that disclosure as well.

Moving to Slide 4, I want to review some of our financial highlights from the second quarter. Net financial earnings in the quarter were $0.91 per share compared with a $1.16 in the second quarter of 2015. The difference is primarily due to low results in NJR Energy Services.

We did, however, exceed the financial community consensus estimate of $0.89 per share. New Jersey Natural Gas had a solid quarter and its fundamentals remain strong. We added more than 1600 customers during the second fiscal quarter of 2016 and nearly 3700 for the first six months of the fiscal year.

This performance keeps us on track to achieve a 1.6% new customer growth rate in fiscal 2015. Although, its results were lower than last year, NJRE assets performing well despite the warm weather, which underscores our teams' ability to adapt to changing market conditions.

I think it's also important to note that the results are inline with our guidance range. NJR Clean Energy Ventures results were inline with our expectations; CEV increased its residential customer base by 207 customers with Sunlight Advantage Program and now serves over 4250 customers.

In the commercial market, we have five grids connected solar projects under construction and four of those should be completed by the end of fiscal 2016. Moving to Slide 5, reports that our base rate case is progressing at the Board of Public Utilities.

I think it's very important to point out that the BPU recently approved our Southern Reliability Link, which we referred to as our SRL project. This morning, we filed supplementary testimony in the rate case regarding the status of the SRLs approval process and in that testimony we noted that the project will not be completed by December 31, 2016.

As a result, we are seeking to modify the rate treatment in the pending rate case to include SRL spending through September 30, 2016 and have any additional spending including rates on a quarterly basis until the project is complete.

The base rate petition that we filed last November sort include the total estimated cost of the SRL upon the effective date of the rate case. Turning to our distributive power business, NJR Clean Energy Ventures as you know in December Congress extended the Federal tax credits for solar and wind investments.

Over the past several years, we have been working on a portfolio diversification strategy to prepare for the possible exploration of the investment tax credits that strategy consisted primarily of making investments in onshore wind projects and continued investment into residential solar.

We are not changing our fiscal 2016 capital plan as a result of the tax credit extension as I noted, we currently have five commercial solar projects under construction and our residential solar program is strong and growing.

In addition, construction is continuing at Ringer Hill, which is our fourth onshore wind project when completed at the end of our first quarter of fiscal 2017; we will have more than 120 megawatts of installed wind capacity. However, the tax credit extensions for both solar and wind do give us additional options for our future investment strategy.

We now have flexibility in fiscal 2017 with regard to the timing of our projects to consider additional commercial solar investments that will be eligible for a 30% investment tax credit. As we previously communicated, our residential solar spending will continue beyond fiscal 2016 and now there could be additional opportunities.

I want to mention one more highlight, in March; the FERC issued its notice of scheduling for environmental review the PennEast pipeline, which indicated that they are moving forward with a full review. This action established December 16, 2016 for the completion of the environmental review.

We view this as a positive step toward obtaining the approvals that are needed to begin construction. But, what this does is to move the preliminary and service date to the last quarter of fiscal 2018, which will be the first quarter of our fiscal 2019.

On Slide 6, you can see our long-term average annual net financial earnings growth goal remains 5% to 9% and that is using fiscal 2013 as the base. We are not changing our expected earnings contributions from our business segments. Now, I just want to make a few comments about our guidance.

First and foremost, our guidance range assumes that New Jersey Natural Gas will remain the primary driver of our strategy and our performance. It will continue to comprise the majority of our earnings, our assets, our people and our capital investments. Infrastructure projects and new customer additions will continue to drive our capital plan.

Our current midstream investments including Steckman Ridge and the units that we own in Dominion Midstream will also continue to contribute to our regulated earnings. When you combine that with New Jersey Natural Gas, our regulated businesses are expected to contribute between 65% and 80% of our total net financial earnings in fiscal 2016 and beyond.

Clean Energy Ventures is expected to provide between 10% and 20% of our net financial earnings in fiscal 2016 and beyond. Although, our portfolio mix may change, our long-term guidance range for CEV will not change.

Turning to NJRES, as you know in both fiscal 2014 and 2015, extreme market volatility created market opportunities that led to outstanding performance that among other things allowed us to increase our earnings retention rate.

This year, warm weather conditions created by El Niño patterns have resulted in lower volatility than we experienced in 2014 and 2015. NJRES is currently expected to contribute between 5% and 15% of net financial earnings in fiscal 2016 and beyond and that is consistent with our guidance range.

At the same time, our annual dividend growth goal remains at a range of 6% to 8% with a targeted payout ratio of 60% to 65%. On Slide 7, we list several regulatory programs that benefit our customers and our share owners, but they also underscore the excellent relationships that we have with our regulators.

Since inception, our BGSS incentives have not only had a positive impact on our margins, but it also saved our customers approximately $842 million a Conservation Senate Program, which has been in place since 2006 has protected nearly $850 million of New Jersey Natural Gas Company's margin.

Through SAVEGREEN we invested $13.5 million in the second quarter of fiscal 2016 and we have BPU approval to invest $220 million through June of 2017. This program supports New Jersey's energy efficiency goals while helping both our customers and our share owners.

In the fiscal second quarter, we invested $6.1 million in our SAFE program, SAFE is $130 million four year infrastructure program that its designed to replace 276 miles of unprotected steel main and associated services to ensure safety and reliability.

I'd also point out that in December of 2015; New Jersey Natural Gas became the first energy utility in New Jersey to eliminate all cast iron main from its distribution system.

And finally, we invested $2.4 million in the quarter in our NJ RISE program, which is a $102.5 million five year program consisting of six capital projects that is designed to improve and strengthen the safety and the resiliency of our system.

And on Slide 8, I wanted to give you a look ahead at some of our programs after the conclusion of the base rate case. First of all, we expect that customer growth will remain strong also as part of our pending base rate case filing; we requested $200 million of additional SAFE spending.

Our regulatory programs including our BGSS incentives the CIP and SAVEGREEN are expected to continue providing benefits for both our customers and our share owners. And in addition, our $102.5 million NJ RISE program will continue through 2019.

We believe that additional utility margin from these programs combined with our continued customer growth offer the opportunity for future regulated growth. And with that, I want to turn it over to Pat and he will review our financial results..

Thanks Larry. This morning we announced net financial earnings of $77.9 million or $0.91 per share for the second quarter of 2016. That compares with $99.1 million or $1.16 per share last year. We also reaffirmed NFE guidance for fiscal 2016 in the range of $1.55 to $1.65 per share.

Moving to Slide 10, NJNG's current operating assets produced net financial earnings of $49 million compared with $48.6 million in the prior quarter. The improved financial performance was driven by an increase in utility gross margin from customer growth, our BGSS incentive programs and SAVEGREEN, our energy efficiency program.

Although the quarter was about 12% warmer than normal, our conservation incentive program, which we referred to as CIP mitigated the impact earnings. And as Larry discussed, our future growth at NJNG will be based on continued customer growth, new rates and regulatory program such as our BGSS incentives.

The chart on Slide 11 shows the changes in utility gross margin in the past 12 months and as you can see customer growth is the largest contributor to this increase. Other significant contributors were BGSS incentive programs and regulatory initiatives such as SAVEGREEN.

Since its inception, the BGSS incentive programs have saved customers approximately $842 million and also provided share owners an average of $0.05 of NFE per share annually. Turning to Slide 12, we added 3655 new customers in the first six months of fiscal 2016.

Approximately half of those customers were running from other fuels primarily fuel oil, combined this new and conversion customers are expected to contribute approximately $3 million annually to utility gross margin.

Although additions were down for the first half due to timing differences, we're on track for the fiscal year to add 8150 customers to our system in fiscal 2016. This will be about a 4% increase over the prior year. Fiscal 2018, we expect customer growth additions of 24,000 to 28,000 representing an annual new customer growth rate of about 1.6%.

Slide 13 reviews NJNG's capital spending for the first half of fiscal 2016. Customer growth and expenditures to maintain our system represent the majority of the spending. We've invested $13.3 million in our SAFE program in the first six months of fiscal 2016.

SAFE is $130 million four-year infrastructure program, replaced 276 miles of unprotected steel and cast iron main to ensure safety and reliability. As Larry mentioned we have a SAFE extension pending with the BPU, which would allow us to invest an initial of $200 million to complete the replacement of all of our unprotected steel pipe.

We also invested $7.5 million in our NJ RISE program, which is a $102.5 million five-year program consisting of six capital projects designed to approve the safety and the resiliency of our system. Our liquefaction plant is expected to be in service this summer and we've invested about $5.6 million towards its completion.

And last, we've invested $1.4 million for SRL project and as Larry also mentioned we recently received the VP approval to construct SRL. Moving to Slide 14, midstream assets produced NFE $2.2 million in the second fiscal quarter of 2016 compared with $2.6 million in the second quarter of 2015.

Our Steckman Ridge's results were consistent with second quarter fiscal 2015 NFE included our interest in Iroquois, which we exchanged for $1.8 million of Dominion Midstream Partners in September of 2015. We have a 20% interest in the PennEast Pipeline as Larry mentioned FERC issued its notice of scheduling for its environmental review in March.

This moves the preliminary and service date to the first fiscal quarter of 2019. Moving to Slide 15, NJR Clean Energy Ventures current portfolio yield NFE in the second quarter of $11.8 million compared with $13 million for the same period last year.

The decrease quarter-over-quarter was due primarily to a lower math and investment tax credits being recognized. NFE also reflects higher depreciation O&M costs which were partially offset by higher revenues in receipt of the commercial operation of its wind farms.

Our Sunlight Advantage program added 207 residential customers or 1.8 megawatts in the second fiscal quarter. This brings the total number of residential customers to almost 4250 and the residential solar portfolio to almost 39 megawatts.

Total solar capacity for all of CEV's projects is now 120.2 megawatts, which produces approximately 150,000 [indiscernible] annually. Slide 16 shows our three operating wind farms. Our fourth wind project Ringer Hill is under construction and when completed in early fiscal 2017, we will have approximately 120.3 megawatts of wind generation.

Adding the three operating wind farm start current solar portfolio raises our distributive power portfolio to more than 200 megawatts of which 40% is wind.

On Slide 17, you can see the monthly solar capacity additions have declined significantly from the peak of early 2012, which combined with the annual increase in the renewable portfolio standard and supported a corresponding increase in SREC prices shown in the graph on the right.

In addition SREC prices, we've added new line to this chart showing the solar alternative compliance payment which is currently $323 for energy year 2016. You can see that we have current SREC prices trading at $200 to $285 range they're nearing almost 90% of the penalty rate.

Accordingly as shown on Slide 18, we've been actively hedging our SREC sales. When considering our expected generation, we are 95% hedge for fiscal 2016 and have been actively hedging future years. The red line represents the SRECs expected to be generated from our existing portfolio.

We believe that the increasing number of SRECs, the expectation of continued strength in SREC prices and the impact of our hedging program combined with the 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.

Turning to Slide 19, Larry mentioned earlier that NJRES reported lower NFE in the second fiscal quarter of 2016 compared with the same period last year. As expected their financial margin was lower than last year due primarily with narrow price spreads resulting from lower natural gas prices.

And to reiterate, we expect NJRES to contribute 5% to 15% to NFE in fiscal 2016 and beyond. I'll now turn the call back to Larry for his closing comments..

Thanks Pat. I want to conclude our call today by summarizing our total return performance, but first I'd like to say that I believe the results we're reporting today show that we are on track with the execution of our strategic plan and have the framework in place to support future growth.

So as you can see on Slide 20, we continue to reward our share owners with strong total returns over both the short and long-term and that really reflects the outstanding work over more than 1000 employees because as I've said to you many times and as I comment on every call without their efforts we could have achieved the excellent results that we're reporting this morning.

Our employee is the foundation of our company and as always I am very grateful for what they do every single day. So, we thank you for your time today, we thank you for being part of the call and now we would be ready for your questions and comments..

[Operator Instructions] And our first question comes from Mark Levin with BB&T. Please go ahead..

Hey, gentlemen, congratulations on a good quarter. Couple of quick questions particularly around PennEast and then ITC PTC changes on your capital program.

Obviously you guys aren't ready to change the capital program yet or your expectations but may be some guidance as to how you're thinking about not necessarily 2016 but 2017, 2018 and beyond from a capital perspective given the ITC PTC change, and then, also the timeline for PennEast?.

Okay. Let's start with PennEast. And I'll ask Steve Westhoven to talk about that.

Steve?.

So, we received our FERC environmental schedule and we're moving forward, it appears that its going to be -- we should receive our final FERC certificate sometime second quarter of 2017 that's going to move us forward into the permitting phase in the State of New Jersey and moving forward through that.

So, right now, we're on schedule to meet the 2018 in service state or fiscal 2019 and capital expenses will obviously push forward a little bit because they'll line up with construction as it pushes a little bit further out in the project timeline..

Mark, do you want to follow-up on that before we talk about the ITC and the PTC? That sounds like no..

No, no, no. That's fine. Yes. I'm sorry. Go ahead..

So, just a comment I think its when we talk about the ITC and the PTC, I think its important to really remind everyone that we undertook a strategy going back three or so years ago when we recognized that there was the possibility that there would be a cliff that the ITC was not extended and that led to a really a portfolio diversification strategy, which we successfully have executed that and you hear that this morning when you hear the wind, we now have in our portfolio.

Of course, the ITC and the PTC were extended and from our perspective what that has done is to give us additional options in the capital budget because we had again we were prepared to continue to grow that business to grow CEV with more of an emphasis on wind.

So what we're doing right now is looking carefully at the potential solar opportunities to balance the portfolio and maybe additional commercial opportunities that we will have.

But, certainly on the residential side where we have been very successful working with our partners here in New Jersey there could also be the possibility of increasing that as well. So I think the basic portfolio diversification strategy has worked for us. We will continue to be focused on that. But, we now have another option to consider.

And as I said and Mark as you pointed out, there is no plan right now to change the fiscal 2016 capital budget. But, as we move forward with our internal process that will culminate with presentation of the capital budget from fiscal 2017 to our Board, we would certainly reflect any changes and let everyone know that.

So I don't know Pat, if you want to add anything to that..

No. The only thing I will add Mark, of course, is that the plan, the capital expenditures that we had already communicated for residential $40 million in fiscal year 2017 and also 2018. Of course with that much more profitable and a 30% ITC environment than in the 10% ITC environment..

Fair enough. And then, just more near-term when you think about the fiscal 2016 guidance $1.55 to $1.65 as you kind of sit here through the first six months of the year.

Do you feel maybe more comfortable toward the lower end of the range, the higher end of the range or kind of in the middle, how was the year progressing? And then, maybe thoughts about what would leave you closer to the lower or the higher end of the range?.

Nobody is volunteering for that. Mark, I will just say we are comfortable with that -- comfortable with that range. I think it would be early to pinpoint higher or lower obviously, we have six months left to go in the utility as well as NJRES. But, for the moment I would prefer to stay just with the guidance range of $1.55 to $1.65..

Great. Thanks guys. I appreciate now..

Somehow I suspect that will be your first question on the third quarter call..

Absolutely 100% guaranteed. Thanks guys.

Thank you..

Our next question comes from Michael Gaugler with Janney Montgomery Scott. Please go ahead..

Good morning, everyone..

Hey, Mike..

Good morning, Mike..

One of my question was already answered and that was on PennEast, but just as an inside here on the -- in the energy services business as we certainly had some interruptions in the gas flows into the northeast with the Texas Eastern incident about a week or so ago. I was wondering if that created any opportunities for the energy services business..

Mike, I'm going to ask Steve Westhoven to comment on that. I just wanted to make a comment that our team at New Jersey Natural Gas did a great job responding to that incident and making sure that our supplied picture was not affected because I think that might be on people's minds. But, as far as the impact itself I will ask Steve to comment on that..

Hey, Mike. It certainly impacted gas flows to the northeast and we've got quite a bit of capacity on Texas Eastern pipeline. So it impacted our deliveries and certainly the business that we have. As far as commenting on how it's impacting our businesses; our business certainly there was some lost revenue and some of the capacity not being able to flow.

But, we did have some offsets from storage and some other things. So, all in all, I think it's relatively neutral and certainly not going to change any of our forward guidance numbers from this incident..

Okay. That's exactly what I was fishing for. So thanks..

Thanks Mike..

[Operator Instructions] At this time, I'm showing no further questions. So I would like to turn the conference back over to Dennis Puma for any closing remarks..

All right. Thanks Austin. Thanks everyone for joining us this morning. As a reminder, a recording of the call is available for replay on our Web site. Again, we appreciate your interest and investment in New Jersey Resources. Have a great day. Thanks. Bye..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..