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New Jersey Resources Corporation (NYSE:NJR)

F1Q2013 Results Earnings Call

February 7, 2013 12:30 PM ET

Executives

Dennis Puma - Director Investor Relations

Laurence Downes - Chairman and CEO

Glenn Lockwood - Chief Financial Officer

Stan Kosierowski - President, NJR Clean Energy Ventures and Home Services

Kathy Ellis - EVP and COO of New Jersey Natural Gas.

Mariellen Dugan - SVP and General Counsel.

Steve Westhoven - SVP, NJR Energy Services.

Mark Sperduto - SVP, Regulatory and External Affairs

Craig Lynch - VP, Energy Delivery New Jersey Natural Gas

Bill Foley - Treasurer.

Patrick Migliaccio - Corporate Controller

Analysts

Laurence Downes

Okay. I think we'll get started. We are doing things a little differently today and that we announced our quarterly numbers this morning I think as everyone knows, but we'll be webcasting this. So, we'll have people participating via computers as well. So I've got to read an opening here which I don't like to do that, but good afternoon, you'll figure that out.

Welcome to our meeting today. It is being conducting in conjunction with our quarterly earnings telecast and webcast since we are combining this with the earnings call. All of the telephone participants who remain in the listen-only mode for the entire event, but for those joining us by webcast, they will have the opportunity to submit questions via the web. If you want to do that, you must login to the webcast play, which is available at www.njresources.com. Okay, so that's for the people on the phone welcome and welcome to all of you here today. Thank you for joining us.

You'll see that we gave you a gift, that's a little different than usual. Normally, it's like a pen while the last time it was [taffy], but this time we've given you a little bit of lantern which has a little bit of a story. We had originally purchased these as our gift for our shareowners at our annual meeting which was two weeks ago, today. They got put to a use that we did not expect on October 29. So we didn't have enough for today. We quickly had to reorder them.

But our shareowners who many of them fatefully come to the annual meeting every year, the median age is about 75 they loved these, but we started getting a lot of calls because they couldn't turn them on, okay, seriously. The batteries they were saying were dead. So I have as much technical ability as I guess they do. There is this little piece of plastic on one of the batteries. So you got to take that off before they actually go on. So a little different than what we've done in the past.

I want to take a moment and introduce to you members of our leadership team who are with me here today. Glenn Lockwood, our CFO. Stan Kosierowski, whereas Stan who heads up NJR Clean Energy Ventures and Home Services. Kathy Ellis, our Chief Operating Officer of New Jersey Natural Gas. Kathy is celebrating her fifth anniversary in that position with the company. Mariellen Dugan, who is our General Counsel. Steve Westhoven, who leads NJR Energy Services. Mark Sperduto, Head of Regulatory Affairs. We promoted Mark very deservedly to Senior Vice President in December. Craig Lynch, who heads up our operations area and who is really the leader internally of what was a very successful response to superstorm Sandy. Bill Foley, our Treasurer. [Patrick Migliaccio], who is our Corporate Controller and of course Dennis Puma, our Head of Investor Relations.

So I have a number of objectives today. First of all, we want to talk about the quarterly numbers and explain those in detail to you. Secondly, I want to talk about Sandy, because there's been a lot written about that and I view this really as an opportunity to tell you with clarity exactly what has gone on with Sandy not only from an operational point of you, but also from a financial point of you. So that everyone has a clear picture on the impact of Sandy on the company.

And then finally, and perhaps most importantly, to give you some insight about 2013 in total and to also talk about our strategy going forward. As I do that I'll be making reference to forward-looking statements, because I'll be talking about the future. Here is a list of all the items that could affect the future. If you think we missed anybody, Dennis will take that afterwards. And I will also be referring to certain non-GAAP measures, the largest one being net financial earnings. Those are not meant to be a substitute for GAAP. This is discussed more in Item 7 of our annual report and I would encourage you to take a look at that as well.

But I think with everything that has gone on since I last was with you here in New York, particularly with Sandy, I think it's important to start out with just a reminder of our story and who New Jersey Resources really is. And as you look through what our team has been able to accomplish, what you see is the consistent team of performance and consistent growth over a long period of time.

We are company that has improved financial performance for the last 21 years, that's the longest streak in the industry. We have increased the dividend 19 times in the last 17 years. When you look at our payout ratio, it is lower than our peer group, meaning that we are not only increasing the dividend but we are also reinvesting in the company to maintain the strong financial profile.

When you look at our bond ratings with both S&P and Moody's, you can see the strength of our financial profile, which is obviously important given our capital needs. When you look at our returns over a long period of time, really over any period over the last 21 years, a strong return annually of more than 10%.

And finally, looking at our consolidated return on equity based upon net financial earnings, our return on equity of 13.5% in each of the last eight years, taking together a strong story of performance.

Now I want to talk very clearly about our financial goals and where we are trying to be in the longer term. From an earnings point of view, we are looking for growth in the range of 4% to 6%. We're looking for most of that to come from New Jersey Natural Gas and I will talk about the fundamentals of New Jersey Natural Gas that we think really supports that goal.

We are looking for minimum annual dividend growth of 5% and we think that our earnings performance combined with the overall strength of our financial profile positions us to do just that.

The payout ratio, which you will see right now, is in the high 50%. We want to make sure that that's lower than our peer group because we recognize it's important not only to be consistent with dividend increases but also as I said to reinvest in the company.

And then finally maintaining a strong financial profile, a minimum equity ratio of 50% to make sure that we've got access that we need to the capital that's going to be required to support our capital investment plans going forward.

Now let me start out talking about Sandy, I am going to talk very clearly about the financial impact of Sandy, but I have to start out by telling you that in my 28 years with the company and I believe in the history of the company over 60 years, this was the company's finest hour.

We were hit by Sandy there was no doubt about that and we had to shut down two areas of our service territory affecting about 32,000 customers, but within an 8-week period our team was able to conduct more than a 120,000 assessments, [64,000] anomalies go through the process of restoring those 32,000 customers and doing all that within 8 weeks. That is a job that was done, it was absolutely outstanding.

It was difficult at first because we had troubled getting access to those areas that were affected by the storm, and that quite frankly as we try to give information out to you about what had happened with the storm, the information kept changing and we wanted to be as transparent as possible and making sure that everyone understood exactly what had happened there.

I think many of you probably saw some of the pictures from the barrier islands to a less extent from Long Beach Island, but our team was able to respond to that and restore service to all customers who were able to have service about 32,000 and do that in a period of 8 weeks absolutely outstanding.

Now from a financial point of view, the impact was lower than what we had originally estimated. And as we were actually doing the work on the barrier islands and on Long Beach Island, we were getting more and more information and we were trying to update everyone on a regular basis as I said. So, you can understand exactly what was the situation with Sandy.

Right now we expect that the total capital associated with this will be between $30 million and $40 million. Most of that will be this year, the rest of it will be come over the next three fiscal years. But the important point is that capital will be treated as addition to our rate base.

From an O&M point of view, we expect that the incremental O&M associated with the storm is in the range of $15 million to $20 million. We have deferred those costs for recovery in our next base rate case. So when we look at the capital and the O&M associated with the storm that will not have a direct impact on our fiscal 2013 earnings. And my feeling is having spoken to people externally is that there was a fear that there would be an impact this year because of that capital and O&M that is not the case.

Now, both of those we will seek recovery of the capital and the O&M will be sought in a future base rate case and I will talk about this as to timing of that, but that has to be filed before November of 2015. So that is where we are from a financial point of view. Because of the company's strong financial profile, the impact of this in terms of access to capital because I will be talking about our capital budgets, quite frankly is something that we can handle. And I think one of the things that it underscores is the company's long-term strategy of maintaining a strong balance sheet to make sure that we have appropriate access to capital.

The bottom line with regard to Sandy is the expenditures, were they unexpected? Absolutely. Is it the level that we can handle? Absolutely. Is it going to affect this year? No, it is not.

Now, let me move on and talk about the first quarter, which we announced today and we were down $0.85 a share versus $1.09. And let me just talk to some of the major items here. New Jersey Natural Gas, you can see is basically flat despite the storm. We did lose some customers for the first quarter. They are now, the majority of those are back online.

NJR Energy Services had board transportation values in the first quarter. Our expectation for the balance of the year is an NJRES will be higher than last year. NJR Clean Energy ventures, you may remember last year in the first quarter we had a very high level of capital spending. You may recall the McGraw-Hill project, which came on almost $60 million that was in the first quarter of last year. This year, as I will talk about more in just a few minutes, the spending level in Clean Energy ventures will be between $70 million and $90 million.

So the result is that we were down for the quarter, however and importantly over the balance of the fiscal year we think it's going to be higher in fiscal 2012. And let me just give a few extra comments on that. First of all, we expect that New Jersey Natural Gas is going to have another strong year. Our customer growth is strong. In fact, we have increased our estimate for the next two years. We continue to have accelerated infrastructure opportunities. In fact, we have one approved recently that I will talk about and we expect the result over the balance of this year to be higher than fiscal 2012.

We continue to make good progress on Clean Energy and Retail, both of those businesses. We've seen some improvement in SREC prices and I will talk to you about some of the important developments that have gone on in that business since the last time we spoke. That will cause a decline in our expected tax rate as additional projects come on and NJR Home Services because of what has gone on with the storm. We had seen an upswing in our installation business. As you might imagine our generator business is very robust right now. And then finally, both NJRES and our midstream assets, we think that the full year net financial earnings will be higher than fiscal 2012.

The point of all of that is that the focus should be on what the company expects will happen for the entire fiscal year. We put our guidance out just about two weeks ago. We think that's in the range of $2.55 to $2.75. We get a sense of where that's coming from, the majority from New Jersey Natural Gas, but if you look more broadly, you can see that we expect a 90% of those earnings will come from our infrastructure-related businesses.

If we go back just few years, I talked about more than 20 consecutive years of improved financial performance. If we are able to get to the higher point of the guidance that would be our 22nd consecutive year of improved financial performance. So we expect that despite what we experienced in the first quarter that we are going to have another solid year financial performance in fiscal 2013.

From a dividend point of view, you can see some of our history where we are right now at a $1.60 per share which was the 19th increase in the last 17 years, but I feel strongly and part of our strategy is that we've got to focus not only what that dividend rate is but what sustainability on a long-term basis.

So if you look at our payout ratio right now, we've set a goal, a long-term goal of 60% to 65% but compared with our peer group is already approaching the mid-60s. And I think you can see that when you look at the dividend growth rate of the company relative to the peers reflecting the overall financial strength and performance of the company.

Now let me talk a little bit about our business model and then we'll talk about the amount of capital that we expect that's going to be invested in these businesses. The foundation of our company, our main business New Jersey Natural Gas natural gas distribution, some of the attributes, they are strong customer growth, continuation of infrastructure investments as well as regulatory incentives driving growth going forward.

Clean Energy, where our focus right now is primarily on residential and commercial solar, but we also announced that investment in September in onshore wind and we're trying to learn more about the Combined Heat and Power market in New Jersey which is from a policy point of view the state has placed focus on CHP.

Our Wholesale Energy Services which is successfully transitioning from to a much different market environment providing producer services, managing storage and capacity assets as well as our midstream. And then finally Retail Energy Services with service contracts, our installation business and repair services. So, that's the way the business model is constructed right now.

Let's look at the capital budget for fiscal 2013. Total of about $211 million, almost a $130 million of that will be from New Jersey Natural Gas including Sandy which is about $25 million. The balance right now we see coming from Clean Energy and Ventures a range of $70 million to $90 million less than last year and you saw the impact on earnings in the first quarter.

Now, where is the money for that going to come from? We expect cash flow from operations right now to be about $243 million this year. Here is the break out of the spending totaling to the $211 million. For purposes of this chart we've assumed the midpoint of Clean Energy Ventures about $80 million. And then finally, our external financing activities, we will issue about $7.5 million of new equity through our dividend reinvestment plan. We will pay dividends of about $67 million and the net proceeds from the insurance of new debt about $27.1 million which given the strength of our balance sheet, we will do that without any problems at all and continue to we think support our current credit rating.

So, you can see the total of all of that. We've got a strong capital budget that is really the nature of our business, but we continue to have healthy internal cash generation to support that as well as a relatively small need for new external capital, all done in a way that we maintain a strong balance sheet.

Let me move into some of the different segments right now and talk about the attributes and where we see growth coming from starting with New Jersey Natural Gas. As many of you know because some of your customers, you see the areas that we serve Morris and the areas of Monmouth and Ocean counties. Growth in that customer base continues primarily residential and small commercial.

Our net plant, property and equipment right now about a $1.2 billion, that number is obviously going to continue to increase as we see capital budgets that continue to exceed over a $100 million. An important part of our strategy has been our ability to work collaboratively with our regulators, understanding and balancing the needs between the different stakeholders, our shareowners, our customers obviously and the overall impact of what we do on public policy in New Jersey.

And then finally, a very high customer satisfaction rate by really any metric a public or internally. We have the highest customer satisfaction rate clearly in this state and by some metrics also in the entire northeast and that is an important part of our overall strategy. But New Jersey Natural Gas, as I pointed out, will continue to provide the majority of our earnings going forward.

Let me focus on the customer growth goal a little bit more deeply into that. In the first quarter we added about 1,960 new customers with 62 existing customer heat conversions. This continued strength in the conversion market as you know might imagine, most of that is coming from oil almost two-thirds. If you look at the two pie charts you can see in the first quarter about 57% of the new customers came from conversions, which was about the same as we saw in all of fiscal 2012.

From a gross margin contribution most of it coming from residential about 68% of the majority, the balance coming from commercial and small size, but an important part is the amount coming from existing customers who are converting to heat. But as we look forward the expectation is continued strong growth. We think that new customer growth will add about $3.5 million to our gross margin annually. As we look out over the next two years and we have increased these estimates, we think we are looking at a range between 12,500 and 14,500 over the next two years.

So let's look a little bit more deeply as to why we think that we will be able to continue the growth and why we did increase that estimate. First of all, if you look at where the customers are right now basically and even split between Monmouth and Ocean Counties and is priced up in Morris County as well. But if you examine population growth that's expected in the state going forward for all of new jersey it's been 4.5% between 2000 and 2010. When you look at the average of our service territory in total its 7.3% and if you look into that number Ocean County by itself is about 12.8%.

So, that expectation of continued population growth is really fuelling feeling our expectation continue customer growth. In fact when we look at the customer growth numbers we think about half of that is going to comes from Ocean County. So, as we update these charts going forward you'll see that Ocean County becomes a larger percentage of the total. Compared with our peer group and the peer group averages nationwide still a very healthy customer growth rate going forward.

Conversions as I said have played an important part in our overall customer growth over the last several years. And not surprisingly we've all seen what the natural gas price have done. Give us a sense of how, and that gives you a sense of how natural gas compares with the competing fuels out there, fuel oil, propane and electricity that's a clear price advantage. In fact when you look at the impact of lower natural gas prices over the last several years we have been able to save our customers about 30% on a bills which has been certainly well received by them.

But we think that we will continue to experience continued strength in the conversion market and that will be helped by the clear price advantage that we have versus other alternatives. When we look to the future two pie charts here first looking at new construction, you can see that what we expect in terms of build out and particularly over the next four years. That's just the piece of the new customer growth that's coming from new construction.

And conversion, a very healthy inventory and a diverse inventory as well. As far as the types of conversion, but you can see we see a total potential of over 200,000 new customers going forward. This is supported about by a lot of work that we do internally to understand what's going on in service territory, utilizing outside sources and I think as we look back over the last several years and you look at where our performance has been, we've pretty much been able to meet our goals. Obviously the conversion market will continue to play a key role going forward.

I mentioned upfront the important of working with our regulators and understanding the needs of various stakeholders and achieving balance. That is extremely important in any regulatory strategy. Here I want to talk about two programs; first, our conservation incentive program which is in place through September of 2013 the end of our fiscal year.

You may recall when that was first put in place going back to 2006. It had two main objectives to protect the Company from declining usage and weather, the weather normalization component goes back almost 20 years now, but also encouraging customer conservation. I think in many ways this particular program has been a model nationwide and I think the results have worked, customers have saved almost $0.25 billion because of our efforts to help them reduce their usage and at the same time our bottom-line has been helped as well by taking out the variability of the weather.

Our accelerated infrastructure programs actually go back now almost four years to 2009 with two main objectives, was first of all system reliability, but also to help the state's economic to support job growth and both of those objectives have been meet. Currently turn on investment on those on the AIP investments includes 10.3% ROE and through October we had invested about $131 million in 23 different projects. But what's important here and what is underscored is the importance of working together with our regulators with an eye towards public policy, as well as with an eye towards satisfying our customer's main objective of safety and reliability.

More recently we had approved in October our safe program, safety acceleration facility enhancement. That's a four-year program, it includes about $130 million of investment and it is focused on unprotected steel and cast iron. The overall cost recovery is at a weighted average cost to capital of 6.9% and from a jobs point of view it should be, it should enable us to create more than 1,300 jobs. And what we do is we work with [directors] to come up with a model that will estimate the economic impact of these investments, but we must file as part of that agreement a base rate case no later than November of 2015, which I had mentioned before when I was speaking about Sandy.

I think when we are talking about any type of accelerated infrastructure program as well as talking about capital budgets it is equally important to look at how is the system performance being impacted and this is an important one. And you can see going back to 1996, so basically the last 16 years. The substantial improvement that we have had in the performance of our system is measured by both pending leaks and leaks per mile and when we think, when we talk about all of the capital that we have invested. I think what we can show is that the performance of our system has been improved measurably, because of those investments and I think that looking at those outcomes are important when we are talking about any type of accelerated infrastructure investments.

We have got a number of filings before the Board of Public Utilities right now. Our SAVEGREEN project, which we have had in place for several years right now again supporting our overall efforts in energy efficiency. You probably read recently that we reached an agreement with the Board to extend the existing programs through the end of June. Our Board will continue to look at the SAVEGREEN filing, but again when we are looking at these programs we have to look at performance.

We've invested more than $30 million in incentives and rebates. We have gotten almost 1,400 contractors into the program which has clearly helped economic development in the service territory. And importantly that has created about a $144 million in the economic activity for the State. So we will continue to go through that process with the BPO and as I mentioned earlier and talking about Sandy, seeking deferral for the incremental O&M related to Sandy we filed with the Board on November 19th to seek deferred accounting. There is some precedent in the state with Atlantic City Electric in hurricane Irene as well as PSE&G. So what we are doing right now is we will defer the cost on the balance sheet and then they will be part of the next base rate case, which has to happen before November 2015.

Another interesting regulatory filing that is actually in process of implementation right now is on NGV advantage, which was approved in June. It's basically our effort to support the use of natural gas in the transportation market in New Jersey where we will invest up to $10 million install on and maintain the infrastructure and as I said try to support growth in the transportation market.

We've received interest from delivery fleets, it's been good so far, hopefully there will be a few announcements forth coming about specific customers. But it's also important to think about this program in the context of the Energy Master Plan. As we have spoken about publicly natural gas is a part of the most recent energy master plan with a recognition of the need for infrastructure to help support the state's energy goals going forward, with reference to the transportation market as well. We believe that this program is an important initial step in trying to increase the usage of natural gas in the transportation market.

Then finally our BGSS incentives, which have now been in place. Hard to believe almost 20 years, you can see the different types of incentives that we have. They have actually evolved overtime as markets have evolved. But the real bottom line here is what has been produced in terms of results for customers and share owners. Our customers have saved over $600 million since inception that's about 5% a year from these incentives. And our share owners have realized earnings, total earnings of $1.93 per share and it equates right now to about $0.09 annually. So I don't like using phrases like win-win, but this is one that actually fits that definition and has done so over a long period of time.

So as you can see the fundamentals of New Jersey Natural Gas are very, very strong. We are comfortable with the growth prospects, we are comfortable with the opportunities to invest new capital appropriately and we are comfortable with our ability to work with our regulators.

Let me move into our non-utility ventures starting with Clean Energy, and as you know this is a relatively new business for us. And it is a business that has been in transition and has continued evolve over the past several years. Since the last time we spoke with you there have been a number of important developments that have affected that that I want to share with you this afternoon.

First of all, let me just kind of level set where we are. Through December 31, 2012, we had about 47.5 megawatts of capacity and we are currently generating about 50,000 SRECs each year. This has done a number of things for us. First of all with regard to customers, we've been able to save the money on their electric bills, they obviously like that. We have seen a strong commitment from legislators in New Jersey, which goes to the overall policy commitment for renewables in New Jersey, which is also very important. For us it is an opportunity to grow earnings and this year as you saw from the pie chart, we think that number will be between 10% and 15%. So we've got an opportunity here to create shareholder value and help customers at the same time.

Let me talk about SRECs, because as you know SREC prices have been a little bit of a rollercoaster coming down, I don't want to give you some context on all of that. New Jersey has clearly demonstrated its commitment to solar and they've done that really over a long period of time. And when you look at what actually happened, the program worked too well. When it came out combination of high SREC prices some of the other incentives that are out there including tax credits, bonus depreciations, federal grants, brought a lot of capital into that market and that put pressure on SREC prices.

The legislature recognized that and after a lot of discussion back and forth and a lot of proposals, because there were lot of different points of view that were expressed they signed legislation in 2012 with the objective of trying to bring long-term stability to the solar market in New Jersey. It increases the renewable portfolio standards starting in June of 2013. It mandates that the Board of Public Utilities create an approval process for gird, connected projects and extends the SREC life to 5 years which has also been important for us.

What has happened now with SREC prices coming down the market has slowed and what we are seeing is an improvement in SREC prices. Today they were in the range of $120, but since – during this fiscal year so far they've increased about 75%.

So let me dig a little deeper on some of these. Starting with the renewable portfolio standard because that is obviously extremely important and the long-term commitment to that is extremely important, because it creates the core of demand going forward. So here is what it was when the original legislation was passed. And you can see that it ramps up and a lot of it was actually put back loaded if you will out into the 2020s.

What happened in the new legislation is you can see a lot of that was move forward. Now I gave you some of the reasons why SREC prices had gone down. And if you look here you can see, if you look here in 2012-2013, the amount of supply for that demand created by the RPS was higher which has brought the SREC prices down. Now what we are seeing is the RPS has been moved forward and we are also seeing a slowing of monthly installation. So you can see where we are small print here, but going out through December you can see the amount of installations have actually come down and we are seeing a corresponding impact on SREC prices.

I think another important point here as we are talking about SRECs and incentives in general is what is happening to solar costs and how is that changing over the long-term, because that will be important when we talk about longer term sustainability. As you can see now this chart goes back to 1998, but you can see where average costs were going to 2012, but importantly you can see what Clean Energy Ventures was and the result of that is solar is becoming more competitive. So the market today that you can see we're seeing some improvement in SRECs, you can see what is done to the legislation that the renewable portfolio standard has been accelerated and you can see what's happening with costs going forward.

Let me give you some details on our different programs starting with the Sunlight Advantage, which is a residential program. We've got over a 100 homes added this year. We deployed about $3 million in capital, that number will increase is as we go through the rest of the fiscal year. We are up to about 1,300 customers in total. From an economic development point of view we work with local contractors. So this has been a tool of capital that we are investing has also been a tool to support job creation and customers have saved about $630,000 on their electric bills.

On the commercial side, we've got three projects right now already done, about $55 million of capital committed for fiscal 2013. As I said to you our goal for the year is between $70 million and $90 million, but the pipeline of potential projects is about $130 million and we've got new projects coming into that really on a regular basis.

So we're seeing again a market that is in transition, but I think one that in terms of where we were when we last saw you in June with a much firmer foundation for growth going forward starting with what had happened with the legislation, and we're seeing the reaction to SREC prices which is being driven by the amount of installations that are coming down.

Now we announced in September an investment in onshore wind, company called Own Energy, about $9 million. What will happen here is Own will actually develop the actual projects. We will get shovel ready investment opportunities for consideration. We do not have to accept them. We've laid out some of the criteria for those projects. But what we try to do a couple of objectives here is reducing our reliance on SRECs and investment tax credits and certainly the production tax credit was helpful for the future and the economics of these projects. But again the objective here is to diversify our portfolio of clean energy investments.

NJR Energy Services again I think has done a tremendous job transitioning of business model in the face of a market environment that has really changed dramatically over the last several years. In the first quarter they contributed $3 million of net financial earnings. I'll jump right down to the bottom to tell you that we expect their earnings for the entire year will be higher based upon the activity that we have seen to date. NJRES has been consistent in the strategic approach of that it takes and that has helped us, because I think as most of you in this room know there has been a lot of people that have either; a, not been successful in this business or b, have been dropping out altogether.

We have been consistent with our focus on our long option strategy and just as importantly maintaining a disciplined approach to risk management inside the other company. Very much focused on energy solutions for our customers a diverse base right now, and one of the things that we have taken advantage of in a very different supply environment is to provide services to producers to help manage their assets and we have built that business to a point where now 30% of our gross margin is coming from fee based transactions, which obviously is telling you that it is not tied to volatility. So we think this year as I said and NJRES will be somewhere between 10% and 15%, but certainly higher than last year.

Our midstream assets again consistent performance contributing little less than $2 million in fiscal – the first quarter of this year. Those assets are Steckman Ridge and Iroquois. We think that they will be somewhere between 5% and 10% for the entire year. But a lot of those assets to our contracted services so that we think we have got a pretty good sense of where those earnings will come from for the year.

And then finally, Home Services. Again Home Services had some challenges in the storm in responding to customers, but also some opportunities and that as I mentioned we've seen a pickup in the installation business.

Serving now about 128,000 customers and what we've done over the last several years is to expand the services that we are offering and we are looking to diversify outside of New Jersey Natural Gas Company Service territory looking in different counties, Sussex, Warren and Hunterdon counties and we think that those numbers will be coming somewhere between 2% and 5% based upon the activity we've seen so far this year.

So how we wrap all that up, first of all I want to emphasis again the impact of Sandy. The main message is the dollars that we have had to spend capital and O&M are not going to affect our results this year, I make that point very clearly and very forcefully. We expect that our financial performance in fiscal 2013 will be solid and it will be strong. We expect that we will be able to increase the dividend without impacting in any way or overall financial profile and we've communicated that to you using through the goals that I laid out to you earlier.

New Jersey Natural Gas will continue to provide the majority of our earnings that will be driven by customer growth, our infrastructure investment opportunities as well as our regulatory incentives. Clean Energy, we'll spend less money than they did last year, it would be consistent with our tax appetite about $70 million to $90 million this year and we're seeing improvement in the SREC market and we think that the fundamentals are supporting that improvement going forward.

And then finally we think that NJRES on midstream assets and home services will also contribute positively to our earnings. When we put all that together and go all the way back to beginning when I talked to you about NJRES story, we continue to believe that the company's fundamentals will position our company for continue consistency and growth in our performance.

And I think I have to reach something else now to the people on the phone right? Yes, okay.

We will now move to the question-and-answer portion of this meeting. Please remember that this event is being virtually broadcast and recorded and so for those of you joining us virtually questions can be submitted via the webcast player only. The webcast player is available at www.njresources.com. And I hope the people on the phone understand what all that means because I sure don't. This is for all of you. A quick reminder please wait for my microphone before starting your question so that everybody on phone can hear this and if there are questions from the audience they're going to send them via email and so then I'll read them to you, right.

Question-and-Answer Session

Dennis Puma

I will read those questions.

Laurence Downes

Okay, got it. Thanks. Questions comments Paul?

Unidentified Analyst

I have is a question on your natural gas infrastructure build for vehicles, which seems like natural gas vehicles should be taken off but I'm just wondering, if you're seeing because you said some of the customer are talking to you about doing that are they waiting for potential incentives from the government to get them to utilize or I'm trying to look that how you lay it out and what's happening in the industry, because there's a all money can spend solar and electric cars and seems like natural gas is where it should be going, and absolutely huge for you.

Laurence Downes

And the issue has been, when the -- I wish it was as simple as the price of natural gas had come down that should stimulate the market, but the missing ingredients has been infrastructure. And that's the purpose of the filing is to create that infrastructure and create those incentives to begin to grow the market. So there is a process of education, negotiation that's going on with them right now but Kathy you may want to add something to that as well.

Kathy Ellis

Yeah, we're very close with two customers on an agreement to build those stations. And we're pretty confident that we'll be able to spend $10 million that we're able to spend via that filing on between five and seven stations in the next year.

Laurence Downes

But the objective is to make sure we're addressing the infrastructure side of the question to begin to develop the infrastructure that will stimulate that market.

Kathleen Ellis

And Paul, sorry Paul, I don't know how detailed do you want to get but to do that what the filing does is requires the host to take 20% of the take from that station and make it open to the public. So it should stimulate both business and individual customer use.

Laurence Downes

Sure guy, you need to now give that back, yeah.

Unidentified Analyst

Just curious on the government side in terms of getting vehicles in trucks to convert, are you seeing any incentives coming down the pipe there, which would obviously really expand both the marketplace. And then secondarily is there any, going to be any natural gas tax on the - because it's very cheap compared to fuel right now and I'm just wondering if that comes in, what impact that might have?

Laurence Downes

I have [dialed] into second question first, I'm not aware of any natural gas tax certainly in New Jersey there's a lot of discussion going on about a lot of things at the federal level. But for your first question is what we're trying to do here is really step one is to let's start with this infrastructure right now, let's see how customers react to that and I think that will then give us some insight about the broader market potential in New Jersey.

Unidentified Analyst

Related to that and also more importantly I think to the conversion process, what would be the difference in the prices - the attraction to the people who are converting and should be an attraction to people of putting in CNG into their fleets because it's cheaper than gas ware.

Laurence Downes

Right.

Unidentified Analyst

What's the profitability to you on an immediate basis and on a long run basis if that differed?

Laurence Downes

Well we on a natural gas side we'll earn on that investment that we're making in infrastructure on NGV side. On the conversion side a lot of that is broken equipment where people actually they've got to make that conversion. And once again the amount that money that we earn is ultimately a function of the investment, but also that's increased sales to us as well.

Unidentified Analyst

You're selling the equipment?

Laurence Downes

New Jersey Natural Gas is not selling equipment, Home Services may be selling the equipment but the biggest pieces what New Jersey Natural Gas will make on the -- will make on that and that will.

Unidentified Analyst

If you (Inaudible) gas.

Laurence Downes

Well the sale of the gas and actually, certainly going down to it's the infrastructure itself and if you look at the number that I gave earlier that will be part of the $3.5 million that we expect from all of our customer growth going forward.

Unidentified Analyst

Okay.

Laurence Downes

Now did I - if I'm not making that good?

Unidentified Analyst

No, I'm a little bit confused. The, I don't live in your service area, okay, I'm the President of my condominium here in the city of New York, and we've got 200 and some odd units in the condominium, and we have found someone who was willing to do the conversion of (Inaudible)

Laurence Downes

Right.

Unidentified Analyst

Oil to gas.

Laurence Downes

Right.

Unidentified Analyst

Based on the savings that we have over period of years and that taking 95% of those savings of the year to repay themselves and 5% to the billing to - incent us to doing it. Now, whether that's a good deal or bad deal I don't know, we'll have to see what savings, but I'm just thinking about, these individual customers you're talking about primarily about residential or in terms of commercial?

Laurence Downes

Majority, yes.

Unidentified Analyst

And so what is the impact on the individual customer, they have to go and buy the equipment and do the conversion in that way and spend thousands of dollars for what they will then see as a payback over a period of year.

Laurence Downes

It will be the investment that New Jersey Natural Gas has to make and then there will be the investment in the equipment if you go back to the slide where I was comparing natural gas versus the others, that's was really going to effect the payback period then.

Unidentified Analyst

Okay.

Laurence Downes

But from what we get New Jersey Natural Gas in this context, it will be that increase throughput to support that infrastructure going forward and those economics are very good for us.

Unidentified Analyst

And the follow up, to this gentleman's question. You say New Jersey Natural Gas has to make an investment, but isn't that just connecting the street line into the house?

Laurence Downes

Absolutely, when street line is here, absolutely, that's what I'm saying, those are profitable for us and when you look at the pie chart, that's why we've got it broke, we've got those slices or showing you exactly where those conversions are relative to for example (Inaudible). Craig, you may want to add something to that. It's Craig Lynch, our Head of Operations.

Craig Lynch

No Larry is saying, you hit it on nail on the head, when we have infrastructure out on the street we're converting those types of conversions are very unprofitable. Not a lot of heavy investment in the underground infrastructure.

Unidentified Analyst

I don't live in your area, I live in Westchester County, I'm a Cognac customer, on that Cognac and then the [state] I think are coming up with credits if you convert I think Cognac has won, I am a natural gas customer anyway so I am not a potential convert. But getting back to the service area, if you have like 100 customers in your services just throughout a number and 30% on natural gas does that mean you have a potential conversion of the other 70% that have propane, electricity, fuel oil what are the numbers there I mean is there room for tremendous improvement as long as natural gas prices stay where they are?

Laurence Downes

Let me just -- first of all I think the, let me just go back to that side, it will be a lot easier to explain it. Okay here we go, that's obviously the relative cost, but here's the conversion market, okay and you can see the total there, right. As we continue to develop our system, okay and as we expand our mains and all that we would expect that some of the pieces in the near the main and the off the main would become a potential conversions for us which is why we feel optimistic about the longer term potential for that market.

The focus right now is on a non-heat okay and these are customers who have natural gas services not for heat as for non-heat but also those on the main and we're trying to convert those as quickly economically as possible. And clearly, the decision to do that will be influenced by this relationship but it will also be influenced by equipment that has broken now and has to be replaced and on that basis this is actually this makes a very clear with the customer ship dealership there.

Unidentified Analyst

Thank you.

Laurence Downes

You're welcome thanks. I knew we should've brought them the marketing guy with, we'll come right back to you.

Unidentified Analyst

[Gaspard Barnet from Morningstar] Just couple of quick questions on the regulatory front, you might have mentioned it over earlier but I missed it when would you be filing for or have you already filed for renewal of the CIP program?

Laurence Downes

That will happen later this year.

Unidentified Analyst

Okay. And secondly do you have a time table on the O&M deferral filing that you've made it part of your-

Laurence Downes

That will be the part of the next step base rate filing and is there's not a plan to do that right now. We have to do that by November 2015, but when we look at the company's overall our profile its performance and all that we don't have a plan to file a case right now.

Unidentified Analyst

May those taken that you're waiting for a approval to use that accounting treatment.

Laurence Downes

That we've tried, we have filed right now for the approval to differ those costs. We are comfortable base upon passed into New Jersey that we can defer those that's why I motioned the ACE and NTS. But then the ones those are deferred that will go into the analysis of when to actually file the case. Mark, do you want to add something to that, Mark Sperduto.

Mark Sperduto

Larry, hit it on the head, basically we requested the filing the strong precedent in New Jersey to defer a storm-related cost, even though it's unusual for a gas company to do so via CNG, in its recent approval offered Sandy related cost and some gas cost associated with. So we're comfortable that the asset is good and it will be subject to review and recovering the future rate case.

Laurence Downes

So it will be part of the overall review of what then drives this and but when we figure out the timing of when the base rate case will be filed but no later than November 2015, so little over that three years. Gentleman, up here.

Unidentified Analyst

This is as much a compliment as a question but--

Laurence Downes

I'll take those.

Unidentified Analyst

And famous Sherlock Holmes novel, you know, the dog that didn't bark but should have, was the [quote] and we've heard a lot of barking from the governor of New York and mayor of New York about various entities that they felt didn't perform their function as well as should have been performed, I won't mention them by name everybody knows who they are. I don't recall hearing your company -- actually my company, I'm the shareholder being criticized. So is that part of the reason you're standing with such confidence now talking about the rate case and other forth coming elements that you really do feel you have a good relationship with the regulators and political factors, governor et cetera in New Jersey.

Laurence Downes

The reason on the Superstorm, I'm not supposed to call a hurricane. But Superstorm sandy side is what our people actually did this is tough, very tough. The decision to shut down those areas was a very tough decision. But, the way our people responded absolutely inspirational. One of the thing that we did when we putting our strategy together, is that we are going to communicate with the Governor's office with our regulators, with the local mayors of every one in those towns and the media every single day, which is what we did. So I think there is more to response.

You may have read, and for those of you who live in the service territory, there were estimates out there as to how long this was going to take had no idea where this is coming from. The bottom-line -- and quite frankly when it first started we didn't know because we had not have the opportunity to actually get on to the Barrier Islands, and to get into Long Beach island and see what that was. But our team got this done and exceeded expectations and I think that was - we weren't mentioned. But the credit for that goes to our employees because they did that.

You detect the passion in how I'm talking about this today because when you look at our stock, we went with the whole Group we went down after the fiscal year. And I think, there were many reasons for that , you know, fiscal cliff, than dividend taxes for that. But we have underperformed since the hurricane and as we got into -- we got to a 52 weak low on November 16 and feedback that we've been getting is because of a fear of what's going to happen with the hurricane.

And the passion that you were seeing from me here today, is I don't agree with that statement and what I was trying to do today is to get the message out very clearly from our operational point of view our team did a tremendous job. From the financial point view its manageable. And here the numbers and here how its fits into our rate case strategy. I think, if was saying to you, yeah, we've got to file a rate case now in the next three months, it'd be different story, this isn't going to affect strategy and there's lot of reasons for that strength of the balance sheet all of that, that I went through today. But that's where the passion is coming from because, I don't like it when we underperform the way we have, and as I said the message today is the sandy is not something from the financial point of view that anybody should be concerned about. We managed that, was it tough, yeah, it was very tough to do that.

But the second message just as important is the fundamentals of this company as it is -- are as strong as they were, on October 28, before that even came along. Roger?

Unidentified Analyst

My question is evolving the energy services area.

And the broader pictures of implications of what's happening with additional load and additional opportunities, a number of us remember not that long ago, energy services was a significant driver of the bottom-line for the company and that's not in our in our forebrains right now, but NJ is picking up additional load the conversions the new, this is happening in other places in the North East.

We have nuclear and coal capacity which is scheduled for shutting down that may be something we should start focusing on. I guess are you seeing in the cold snap like last month, is there buoyancy in pricing and capacity values which could reopen the opportunity that was so interesting a few years go?

Laurence Downes

Let me make couple of points. When you back 2, 3 years. First of all the team manager areas has done a tremendous job of the face of market that has changed dramatically. In you slide deck you can see we put a slide n there that goes through how we have benefit from lower natural gas prices. And what our team has been able to do is to remain profitable in that difficult environment which is something that a lot of people have not able to do that, we've seen a lot of changes. But they've also being able to expand that business model to produce the services and all that, that's number one, team-driven, and have done a great job with that.

Second, when you go back to 2008 NJRES had a tremendous year but the utility was also going through the regulatory cycle, New Jersey Natural Gas have been out of a rate case from 1994 to 2008, the relationship between the two the regulated and the unregulated earnings it changed. And you've seen since that once we come out of that regulatory cycle, that's gone back.

Looking longer term and I'm going to ask Steve Westhoven to talk in just a moment. We are looking very carefully as to what the dynamics are showing. There is still new infrastructure that's coming on there. There is demand. We had a very good January, you know it did react to weather and I'm communicating that through expressing my view where those earnings are going to be relative to last year, but Steve why don't you add couple of points to that.

Steve Westhoven

Just to answer your question yes, I think that the cold weather that we've experienced recently, in sharp contrast what we experienced last year you know when it was very warm. And over that period we saw a tremendous price action in the market and certainly a real need for services in the natural gas market. And I think some of that growth that you just mentioned by the retirement of nuclear plants, retirement of coal is really coming through the market.

And that was essentially demonstrated by that price action. And looking forward we continue to see growth in production and I think that there is going to be tremendous growth to use that production within the U.S in the electric gen market and the industrial market and the needs and the services that that market needs to do well. We're going to well positioned to take care of that, so we're encouraged looking forward.

Laurence Downes

Okay.

Kathy Ellis

Larry, we have one question, those attending by webcast. (Inaudible) first of all he apologizes he would like to have been here couldn't make it today. And then he adds thanks for getting us CVE revenue breakup between SREC sales and energy and other, that's very helpful. My question pertains to Q1, what would enter the decision to make the 25,000 of SREC sales, was most of that sold forward?

Laurence Downes

I will let Glenn take that.

Glenn Lockwood

Yeah, on Q1 sales, the vast majority of those sales were forward sales of SREC that we had hedged the year before and that's why the Q1 sales which we are getting about 25,000 is a lot of more than you would expect when you have about 50,000 a year being generated. So yes, a lot of that was due to some hedging we had done the prior fiscal year.

Laurence Downes

Thanks, Glenn. (Inaudible)

Kathy Ellis

That's it.

Laurence Downes

Okay. I think we are done. Thank you so much for joining us here today and for your support. We appreciate it.

Operator

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your telephone lines.

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