New Jersey Resources' CEO Hosts NYC Analyst Meeting (Transcript)

| About: New Jersey (NJR)

New Jersey Resources Corporation (NYSE:NJR)

NYC Analyst Meeting

October 23, 2013 12:30 PM ET

Executives

Larry Downes - Chairman of the Board and CEO New Jersey Resources

Craig Lynch - VP - Energy Delivery New Jersey Natural Gas

Analysts

Larry Downes

Okay good afternoon very. I think we’ll get our presentation started while lunch is still being served. First of all, I want to say thank you to everyone for joining us, joining us here today. I think that many of you know our presentation is going to be a webcast, so I have to read a little disclaimer here. Webcast participants will remain in listen only mode for the entire presentation. For everyone else in the room, please ensure that questions are broadcast over the in-room microphones which we will distribute during the Q&A. It seems like shorter than when I had to read less. But thank you all for being here. We appreciate you taking the time to join us to listen to our story.

I want to start out by introducing the members of our leadership team who are listening here today starting with Glenn Lockwood, our Executive Vice President and Chief Financial Officer; Kathy Ellis who is our Executive Vice President and Chief Operating Officer of New Jersey Natural Gas Company; Stan Kosierowski who is our President of NJR Home Services; Mark Sperduto, our Senior Vice President of Regulatory and External Affairs of New Jersey Natural Gas; Craig Lynch, our Vice President of Energy Delivery of New Jersey Natural Gas; Tom Massaro, our Vice President of Marketing of New Jersey Natural Gas; Mariellen Dugan, who is our Senior Vice President and General Counsel of New Jersey Resources; Steve Westhoven, who is Senior Vice President of NJR Energy Services; Rick Gardner, who is Vice President of Clean Energy Ventures; Pat Migliacciom, who I think many of you know Pat was recently appointed as Treasurer of New Jersey Resource, he is also our controller; one of the newest members of our team Joanne Fairechio who is our Director of Investor Relations. I am over to the other side now and Dennis Puma who is our Manager of Investor Relations. So I thank you all for joining us here today.

Before I get started I want to talk to you about two important things. I will be talking today mostly about our future and as I talk about our future that will include a lot of statements about what may happen in the future and what we’ve done here is to give you a list of all of those things. The list has gotten longer and print has actually gotten smaller, if that was possible, but I have something different here today. I have got like 60 inch screen here, so I can actually read this, but I’m not going to do that, but I would ask you to please take a few moments there listed out in our 10-K, please take a look at them. And also just to talk about the presentation itself, one of the key metrics that I will use is net financial earnings, but I want to stress that, that is not meant to in any way be a substitute for GAAP, in the 10-K we also talked about how we define NFE, why we use that and also emphasizing that as I said is not meant to be a substitute for GAAP in any way.

With that I will get started and I think as many of you may recall the last time I was here was in February, February 7th would exact. And as you know, our Company was dealing with a major challenge and that’s Hurricane Sandy and I think it was a lot of concerns at the time as to what Hurricane Sandy had done or could do to our company. Today almost eight months later, I am here to tell you that our team has done just an outstanding job responding to Hurricane Sandy.

The financial impact of that has been immaterial and we’re strong as ever because of the efforts of our team in responding to Sandy. It was not easy but I think once again one of the things that you’ve heard and we talked about over and over again; the real strength of any organization is its people and our people have responded. But today I am here for different reason. Today, I am here to talk to you about our growth prospects for the future. And as you know, over the course of the past several months we have made a series of announcement about what that future maybe for us the focus that we have both on the regulated side and the non-regulated side of the business.

As of today, I want to go into detail about how we see the future going forward. And when you look at our growth initiatives it’s really three key areas that I am going to focus on, infrastructure growth and our plans to nearly double, our plan investment by fiscal 2017, customer and margin growth where we are both diversifying improving the sustainability of our gross margin in New Jersey Natural Gas. On the non-regulated side, our long-term plan to diversify the investments in our Clean Energy portfolio and by doing that to gradually reduce our reliance on investment tax credits between now and 2017.

And we if do all of that properly, we believe the result from a shareholder perspective and investor perspective will be above average growth in terms of not only our earnings but also our dividends. And that is what today is all about to take you through those areas in detail so that you can see our plans for achieving those objectives. From an earning’s point of view the goal is 4% to 7% average long term annual NFE growth with 65% to 80% of that coming from our regulated businesses. I’m going to start out talking about New Jersey Natural Gas Company and then we’ll talk about the non-regulated businesses.

But there's really four key elements to the regulated business strategy and to grow that in the future. First of all, is the significant increase in New Jersey Natural Gas Company's infrastructure and I will give you today a very clear picture of the areas where that investment will actually occur. Things that are already in place and things that we have planned for the year for the future. I will also talk about the success that our team has had in diversifying our sources of utility gross margins and where we expect that grow to by 2017.

We are currently planning a base rate filing in November of 2015 as one of our accelerated infrastructure programs are safe program. We agree to file a rate case by November 2015. We think that is correlated very well with our spending plan quite honestly and then finally I want to talk to you little about our plans for targeted growth from our regulated midstream asset and then we’ll get to non-regulated businesses a little bit later on. Customer growth remains a real strength of New Jersey Natural Gas Company and we had an outstanding year in fiscal 2013. You can see the numbers here and 11% increase in the number of new customers. Good balance between new construction customers and conversion customers.

We also have a good inventory within our existing customer base which we are converting on an annual basis more than 600,000 of those and what we have done because our optimism about the future customer growth, we’ve actually increased our estimates for the next few years to a range of 14,000 to 16,000. We expect that that customer growth each and every year will add about $3.9 million of new margin and when you look at the estimated capital associated with adding those customers a little over $200 million, that $3.9 million each year and increasing each year will support that investment of more than $200 million.

We've also pointed out here our maintenance capital which we have over a long period of time consistently invested in our system to improve its basis through liability and in the wake of Hurricane Sandy its resiliency and you can see between now and 2017 we expected that investment will be $415 million for a total capital investment from those two areas, customer growth and maintenance of more than $600 million.

And I would point out here two things, first of all the base that we’re working off is our last base rate increase with goes back in 2008, but historically in making this presentation that $618 million that would be it as far as capital investment, it would be new customers growth and it would reinvestment through maintenance.

We have as you will see in just a few moments; we have been able to expand that base dramatically. So let me talk about some of key trends that our fueling our optimism with regard to our customer growth. And starting with the demographic when you look at population growth not only in New Jersey about 4.5% but specifically within our service territory if you look at Ocean County, almost 2.5 times the state average at almost 13%, so we feel very good that based upon that population growth, we will consider -- we’ll continue to see strong overall growth in the service territory but most of that happening in Ocean County.

I think everybody in the room is very familiar with what is going on with natural gas prices and in addition to all of the other benefits of natural gas, [indiscernible] and all of that we now have a substantial price advantage in the conversion markets and you can see how large that differential is right now.

But we also are mindful of what does the long term look like and what are the prospects for growing the company going out well beyond the two years that I mentioned earlier and you can see both with new construction and conversions, the inventory that we have of potential new customers in both areas going out over a long period of time is very-very strong and you could see on the conversion side, not only is that inventory about a 130,000 in total but good diversity between the types of different conversions which is being supported by the active marketing efforts that we have in place to bring those customers on. So we think that looking at the overall picture, it supports continued, consistent customer growth.

Now, I want to switch now to another element of our infrastructure programs and that is current programs that we have already. The first line there is AIC phase and I’ll talk a little bit about AIC which is largely completed. Now that was our accelerated infrastructure programs, so back to March 2009 those were very successful when compared with the original objectives.

One that we have right now is our SAFE program, an acronym which utility is a very good for as you all know. Safety Acceleration and Facility Enhancement program, that’s about a $130 million over four years where we replacing 276 miles about 50% of our cast iron and unprotected steel main and that’s going on right now. you can see that those expenditures including the AIC expenditure since the last rate base will be more than $300 million.

We talked a lot at the last meeting about Sandy. We expect that the capital associated with Sandy will be somewhere between $35 million and $40 million over three years and that will be part of our next base rate case filings in November of 2015.

And then finally our NGV advantage which was approved by the Board of Public Utilities back in June of 2012, additional capital of about $10 million as you can we spend about 6 million to 8 million of that so far and that was really an example of our team trying to work with the Board of Public Utilities to take the energy master plans which was last approved by the state in December 2011 and try to take the objectives of that and put in place programs and the NGV’s advantage is in the process of doing just that.

Now let me talk a little bit about some of our planned infrastructure capital projects, starting with NJ RISE-another acronym Reinvestment in System Enhancement, someday we are going to run out of acronyms, I don't know if that’s going to happen anytime soon but that is a filing that we made with the Board of Public Utility back in September and it’s a response to Hurricane Sandy and what I want to do to is to take you through that because it’s focused on a number of different elements, the two major ones being pipe investments as well as excess rolled out.

Now, let me share with you a picture here that many of you may have seen, this is somewhat of an iconic picture, it’s of the house damaged by Sandy and it’s up here in the Northern part of Monmouth County, so what the plan actually calls for is us to put in a secondary sea, this is the Sea Bright area and this is [indiscernible] so what we would do is put in a secondary pipeline feed from the main land onto the island.

The second area and here is another picture, this is Mantoloking, New Jersey and if you look at it, I can’t point to it but I can’t reach it but if you look at this here that’s the Mantoloking bridge right there and as you can see what Sandy actually did is it cut a new inlet, this has all been repaired but it actually cut a new inlet there and put all of that area under water. For those of you who are even remotely familiar with the area that’s route 35 down by the beach there.

So, here what we are going to do, this is the Mantoloking area okay and that’s what you are looking at right there, first thing we will do is we are going to move some facilities, some regulators back on from the island onto the mainland and we also built a secondary pipeline here from Mantoloking going in to -- going to Mantoloking along the barrier islands there.

Down in the southern part of the seaside peninsula, we've got a number of pipeline feeds under consideration there and you can see they would potentially go to [indiscernible] sea side or sea side parts.

And then the third area is Long Beach Island which some of you may be familiar with Long Beach Island Southern Ocean County again hit by the hurricane not as severely as sea-side peninsula but we are looking at again two options for potential sea to Long Beach Island. Now the other element of NJ RISE is the excess flow valve and what that would able us to do if you think about what was the damage that we had [indiscernible] storm was actually separating facilities from the houses which was causing air to blow and was one the reasons quite frankly why we had to shut down those parts of our system. So what we have included in the filing is the installation of about 35,000 excess flow valves over the period of the next several years.

This is not new for New Jersey Natural Gas it's actually been installing and going back to the early 90s and we’ve got a lot customer base of about 500,000 about a 150,000 of our customers right now they have excess flow valves.

No was question that we frequently get is what is an excess flow valve? So I drew one for you. This is -- that’s an excess flow valve, this costs like about $50 or so. Not supposed to correct. But to give you -- and I doing fine too, explain to you.

If you go back to that analogy that I was talking about where the facilities will separate from the home and I’m not calling on new again would separate from the home and going out to the main with the excess flow valves would do, would actually shut down the gas and given example of that here is the excess flow valves in a piece of plastic pie and you can see exactly how that would work and we’ve got about 150,000 of these as I said and the plan in NJ RISE calls for another 35,000 doing that systematically over the course of the next several years. But you can see NJ RISE total spending between now and 2017 of about $42 million.

Second are I wanted to talk to you about in terms of planned capital expenditures is Liquefaction. We have an LNG facility in [indiscernible] New Jersey which is right here, this is [indiscernible] and what the plan is to build a capability to liquefy natural gas from that plant. And what that will do for us, a number of things, the cost of the capital both to debt and equity to build that is actually cheaper than buying the LNG from somebody else and bringing it to New Jersey.

So, not only is it’s creating another investment opportunity, it’s also helping us lower prices through customers and in addition to that it’s keeping all of those trucks off the road which the local communities certainly don’t mind about that either. That is a project you’ll see that will begin in fiscal 2014 and ultimately involving investment of about $36 million of new capital.

And then finally our Southern Reliability Link, I talked to you about our expectation of growth in Ocean County and our Southern Reliability Link will help us address that growth and be in a position to serve that growth properly. And so going back to this map here, our main supplier right now is Texas Eastern and they come in right here in Jamesburg and then they come down and they serve our entire service territory with the Southern Reliability Link would be down here and would give us a link from another pipeline supplier to bring another feed of natural gas down into Ocean County that’s actually down here into Ocean County which would help us not only be prepared to serve that growth that we expect based upon those demographics but would also diversify our suppliers as well.

So when we see the three of those, you can see that that total capital will be about $207 million and the point that I want to leave you with here today is that each one of these investments has an important strategic element to the company in executing its overall strategy.

So, if we bring all of that together as this chart does, this is where you can see where we expect to doubling of our investment base between now and 2017, starting with the time period from the last rate case in the dollars that have already been invested and coming across year-by-year so you can see the different components and how they will ultimately add up more than a $1 billion of investment.

Now one thing I would point out on this slide is [indiscernible] down at the bottom and that is our energy efficiency program which I am going to talk about that in a few minutes but our team was successful in getting an extension and an expansion of that program that will involve a lot of incremental spending ultimately against since the time of the last rate case more than $200 million and I will share with you what the margin implications of that are as well. But if you bring that all the way down to the bottom almost a billion for other investment they’re going back to time of the last rate case to 2017 and as I said to you earlier we will be filing as we expect right now in November 2017 and we would expect a resolution sometime during the fiscal 2017.

So, now the question is when we talk about our growth initiatives and how are we going to continue to grow earnings and even have the opportunity to continue to grow earnings at that and 4% and 7%. Well, what this pie chart does is it takes all of that investment and it divides it into two pieces. Those investments that are already earning a return and you can see that number more than $700 million and those that will earn a return in the future about $650 million and it’s the fact that more than 50% of those infrastructure investments are currently earning a return, we believe will give us the opportunity to continue to increase our earnings while we’re going through a rate case and avoid the significant regulatory lag that's typically associated with this type of strategy. So and I think it also says a lot about our regulatory team and what they have been to accomplish consistently over a long period of time linking the work with the regulators to the needs of our systems and the opportunity to grow the company.

Let me switch basis here now and get a little bit more deeply into the margin that we expect from each one those -- the areas that you talk about. Starting with customer growth, as I said the annual growth rate we expect 1.5% to 1.6% we think that's supported by the areas that I talked to you about, the overall trends and demographics, the price of natural gas and the inventory that we see going forward. We continue to see improvement in new construction and conversions.

Just about 50-50 last year little bit more conversions from a percentage point of view. To put that in perspective for you, if you go back to the early 2000s, that relationship was probably two-thirds new construction and one-third conversion. So you can see with the changes in the economy, the impact on the housing market, how that changed dramatically and now what we're seeing and expected to continue is an improvement in the new construction market. So that relationship will begin to change as well.

And I should point out also that because the natural gas the decoupled rates or our conservation incentive program has been in place now for just about seven years. That has truly been a win-win not only for our share owners, for our customers you will remember that there were a number of unique elements that were part of that structure, we encourage our customers to use less and our team through a variety of programs including our conserve to preserve program, that really helped customers use less gas and the dollars that they have saved are quantifiable. So this works very, very well for us.

Now the actual numbers, the way you see this increasing of the base from fiscal '13 obviously each and every year the amount of customers that we add will repeat that margin every year. So we get up to more than $22 million which as you will see is more than the total margin growth that we expect between now and 2017.

The SAVEGREEN project, I talked to you about that from the investment of dollars that we expect, this has been another real success story for our company, and it has achieved a lot of different objectives, starting with alignment with state policies and the state's commitment as well as our support of environmental stewardship.

This is basically taking that policy initiative of helping customers use less and putting programs and dollars in place that can make that happen. And so we refer to it generically as our energy efficiency programs, but there are a host of programs behind SAVEGREEN that have really had a meaningful impact. It's also bit important for economic development, because we've been able to add jobs, we've been able to partner with local contractors and so the state has benefited from that as well.

An important development happened in June when the Board of Public Utilities approved a large increase in that program and we expect to spend that $85 million over the next two years and you can also see the significant margin improvement that's going to happen as we go out from 2013 and getting out to fiscal 2017 where we see those margins increasing to more than $10.5 million. But again good example of regulatory collaboration underscoring importance of making sure that we are providing benefits to both customers and shareowners.

The NGV advantage again the $10 million I talked about we've invested about $6 million to $8 million of that. A lot of interesting elements, there is a lot written about the natural gas and the transportation market, we looked at all of those alternatives and decided that the best way for us to participate at this point was to do it through New Jersey Natural Gas Company, we had this program approved, interest is growing, we have certainly learned a lot. That would probably be an understatement, we expect to invest up to the $10 million and on that we earn our allowed return on equity of 10.3%.

So if you can see the way that grows, and you can see the distribution between the margin we expect from infrastructure as well as the margin from throughput growing up to $2.5 million a bit more than that between now and 2017.

And then I would like to spend just a minute just on BGSS, our basic gas supply service incentives which has been in place now since 1992. These were an growth of third quarter 636 many, many years ago, our team was able to work with our regulators and that continues to this day. To come up with a series of incentives using the expertise that we have as a company and obviously need in the area of gas procurement.

And what we have been able to do is keep in place a series of incentives that have been really quite significant, not only for our customers, savings of more than $600 million over the last two decades, but providing $0.08 a share in earnings for the company as well. Now if you see as we go out to 2017 we're looking at we expect those margins could go down depending upon market conditions and that is reflective of some of the impact on capacity values with some of the changes that have been gone on in the market place for natural gas.

And so we bring all of the margin together and bring that out to 2017 you can see from where we are today from those main areas about $14 million and then increasing up to more than $40 million just about tripling that between now and fiscal '17. So again going beyond the areas that has been the key drivers in the past and coming up with programs that benefit a broad range of stakeholders and putting in place a program that we think makes lot of sense.

I will talk a little bit about our regulated midstream assets, currently the two investments that we have, our Steckman Ridge, our storage project with Spectra Energy and really a legacy investment that being year [core] pipeline. Those provide between 5% and 10% of our net financial earnings. We think the location in the Marcellus enhances their strategic value. And what we’re trying to do is to leverage some of the customer relationships that we have as we pursue additional midstream investments. We cannot and will not compete with MLPs and net cost of capital but we do believe that as a result of some of those relationships that we’ve developed there are potential opportunities for us to invest in [indiscernible] that’s what we’re doing right now. But this gives you a sense of where we are right now.

So let me shift gears now and go to the non-regulated side of the house, and discuss with you the role and the strategy that we intend to pursue and the amount of earnings that we expect from those investments and more importantly where is that going to come from between now and fiscal 2017. We’ve got four main areas that we are focusing on in the non-regulated businesses. First of all is to diversify the clean energy portfolio, and I will be very specific with you about how we intend to pursue that. An important element of that transition will be prudently pursuing onshore wind investments. And as I think everyone knows we announced our first wind investment today. So that we are able to give you a specific example of how that strategy will work going forward.

We expect steady contribution from NJR Energy Services. And as you know there are many companies in our industry that have exited that business. And I want to give you a clear understanding about not only how we’ve continued in the business but because of the expertise of our team in NJRES how we’ve been able to continue to grow in a very changing market environment.

And then finally although a smaller part of our overall earnings profile what we’re going to do with retail investments and why that is part of the mix as well.

So let’s talk about the portfolio strategy. And I would remind everyone although this is part of our electric strategy but the presence of the renewable portfolio standard that provides a growing source of demand. We currently have an inventory of solar projects with more than 60 megawatt [rig] connected projects which we can develop that over the next several years. We also have our Sunlight Advantage program which has been very successful bringing sunlight -- solar to the residential market and it’s had a number of advantage -- other advantages from a policy perspective again working with local contractors supporting state policy.

However, because ITCs are expected to decline when we get to January 1st of 2017, we’re working on a transition right now that would reduce that spending between now and 2017. And that brings up the obvious question well okay if you do that, how is the company going to grow? Well, first of all, we expect that revenue from SREC and that is the financial value of the environmental benefit associated with these investments that has continued to grow and will continue to grow as a result of the investments that we’ve made.

So we expect that the volume will be higher. We also think when you take a careful look at the market dynamics for SREC and comparing that with where the renewable portfolio of standard is, some of the changes have been made there, that is reasonable to project that prices will increase over time.

Secondly is our investment in onshore wind projects and other clean energy investments including combined heat and power? I will tell you the CHP market is still evolving. It is hard to tell exactly what the potential of their market is right now. We are following it as closely as anyone else and if opportunities present themselves we will be in a position to take advantage of that.

And then finally all of what I just explained to you on the utility side we expect that there will be a growing contribution from the regulated side of the business that will be part of our overall gross strategy.

So let’s talk little bit about SREC because as I said the performance of the SRECs is going to influence the non-existing non-regulated strategy. So first of all just to go back in July of 2012 Governor Christie singed new legislation and that included among other things an acceleration of the renewable portfolio standard which actually started in July of 2013.

As we were going through that process because the market was overbuilt SREC prices came down, in fact I think they got as low as $70. But what we have seen is those prices has actually doubled over the last year and we expect that our inventory of SRECs is going to go from 65,000 to about 174,000 in fiscal 2017. The other chart here is we’re comparing SREC prices with the level of construction activity, which has come down dramatically. And we think in part that is influencing what has happened with SRECs. And again bearing in mind, we’re going to start to see acceleration of the renewable portfolio standard which came out of that legislation about 15 months ago.

Now it’s [about] strategy of onshore wind and why are we doing this, okay, first of all it supports our overall electric strategy. Secondly, we believe that there is an earnings growth opportunity here that will be supported by long term power purchase agreements that should provide us with annuity like return. When we look at the renewable portfolio standard I tried to give you a sense of where it is in New Jersey but there are 29 states in the District of Columbia that also have renewable portfolio standards and could provide opportunities for us for onshore wind.

And then finally with regard to tax credits associated with onshore winds, those are production based tax credits as opposed to the investment tax credits associated with solar. So we think that that overall structure makes sense for growing earnings consistently out of that portfolio over a period of time.

Last year you may recall back in September, little over a year ago, we entered into a strategic partnership by taking an ownership interest in a company called OwnEnergy, we own about 19% of that now and what Own does is they develop mid-size projects. We did not want to be in the development business and our investment in Own gave us an opportunity to -- or access if you will to a portfolio of projects that had already gone through the development cycle. That current pipeline project to develop 1300 megawatt.

Now part of the agreement is that those investments have to generate a minimum unlevered return of 8.75%. And based upon our capital structure assumptions would imply require return on equity of about 15%. We do not have an obligation to purchase projects. We have the right to do that, to look at those projects. And what we will do depending upon the size and nature of the project, we will evaluate project financing on those as well.

Now before, today, the discussion has not been on anything specific because we have not announced any projects. This morning we announced our investment in the Two Dot Wind Farm located in Montana. And one of the questions that comes to mind is where did Two Dot come from? Has anybody have been there before? I didn’t think so.

But if you take a look at, there is the Two Dot. If you take a look at; I just say a prominent citizen in that area back in 1860s, his cattle brand was Two Dot, and that’s how it got named. A little trivia there for you. But you can see the size of the project, about 10 megawatts, about a $22 million investment. And importantly a 25 year power purchase agreement in place with NorthWestern Energy. I know many of you are familiar with that company.

We expect that it will start up next summer. And just wanted to give you a sense of the partners that we have here; GE, Mortenson Constructions; are all very well-known and experienced names in the development of wind projects. So when we get to 2015 and the project is up and running and it will contribute for a full year, we expect that contribution to range up to a $0.02 to $0.04 this year.

This is exactly the type of structure that we are looking at and again going back to our focus, not only our electric strategy but also on a renewable portfolio standards, we think those opportunities are out there. So here is a real life example as to how the wind projects will actually work.

Let me switch gears now and talk about NJR energy services and as I said to you at the beginning, this is a business that has gone through a lot of change particularly over the last several years in response to the changing dynamics in the market, in natural gas market. And a lot of companies have gone out of this business, not been able to manage that change.

Our team has been able to restructure our portfolio and position us to take advantage of conditions in that market. And it's very simple what we are trying to do here. We are trying to take advantage of growth opportunities for physical natural gas services and producer services. Because when you think about the dynamics for natural gas and we are all familiar with what those positive attributes are.

We believe that over time there is going to be an increase in demand for those physical natural gas services and obviously the challenge became how do you position your portfolio to take advantage of that? That’s what our team has been able to do. And remain profitable and taking advantage of those opportunities as they have emerged.

We work with customers not only in the Marcellus but also in natural gas regions; we have given you some sense of the size of the company’s portfolio, where we are. And so we think that over time that business will continue to be a steady contributor to our overall profitability and we think that we have positioned it properly from a strategy point of view. I would make a differentiation between providing the physical natural gas services and the producer services.

The producer services now is us using our understanding of the market’s ability to manage storage, manage capacity on behalf of producers because one of the things that we have seen in doing business in those areas is that producers want to do just that. They want to produce natural gas.

And that has created opportunities for companies like our own to provide other services of managing that production for them, making sure that they can get it to market and obviously doing that profitably. And that has become over time an increasing percentage of NJR’s margin. So going forward we expect that to be between 5% and 50% of our total net financial earnings.

And then finally NJR Home Services, which we expect will contribute about 2% to 5%, but provides an important customer service primarily, you know a service territory. Over the course of the past several we have been able to offer customers a wider array of broader range of services; not only service contracts but installations. You would not be surprised to hear that our generator business is doing quite well in the wake of what happened about a year ago. Air-conditioning has been an important diversification for us as well.

We are thinking about expanding beyond our service territory. But I think that’s probably a longer term opportunity for us. Right now our inventory of service contracts is north of 120,000 and we are continually not only marketing to grow that part of the business by offering new service contracts the opportunity. And as I said we expect that that will be 2% to 5% of our total NFE and when you see their numbers you will see that from a strict percentage basis the team at home services has done a very nice job growing that business as well.

So let me come back to now some of the financial numbers starting with our net financial earnings, you can see our track record over a long period of time. Our guidance for this year we have been narrowing that overtime, narrowing the 270 to 275 if we are able to hit the midpoint of that that would be 22 years in a row of improved financial performance something that we are quite proud of.

Our guidance for 2014 which I am going to dig into that more in just a moment, the initial guidance is $2.70 to $2.95 a share, you can see that growth rate and then if you look out and you factor in some of the fundamentals of the strategy that I have been sharing with you here this afternoon we could see earnings in the range of 3.21 to 3.49 and basically hit that target range of 4% to 7%.

Now let’s look at 2014 and where we think the guidance where we think the contribution according to that guidance is actually going come from. if you look at our regulated assets we think that that will contribute as you can see 65% to 80% with the overwhelming majority of that coming from New Jersey Natural Gas. The balance right now we expect to come from clean energy ventures 10% to 20% NGR energy services 5% to 15% and then home services 2% to 5% but again our regulated business as we expect will contribute the majority of our net financial earnings and we think the fundamentals that we finally have here today supports that estimate based on what we know right now.

From a dividend point of view our goal is to continue a growth rate of 5%. Going forward you can see our track record we increased the dividend earlier this year to an annual of a $1.68. our payout ratio which in 2012 was about 57% probably in the 60% range right now. We think the appropriate range for us given the level of capital requirements that we have is in that 60% to 65% range and you can see where we compare with our peers about 63% I think the key difference is when you look at our growth rate that is higher than our peer group average and I think we would take that a step back and you look at our net financial earnings prospects going forward supported by our strategy we think that based on what we know right now we think that this is this.

So let me wrap up with a reminder of our long term goals and how we are trying to link this strategy to shareholder value. First of all achieving that long term net financial earnings growth of 4% to 7% that’s going to be driven by significant capital investments and I have gone through that in detail with you. The diversification and growth of margins from a variety of different sources and the filings of that base rate case as we expect right now in November 2015 that we think will allow us to provide annual dividend growth of at least 5% and then most of that will come from the -- from our regulated business.

So that is our story. As you can see a lot of changes since the last time, Sandy is in the past, team did a great job with that but we are comfortable saying to you today that our fundamentals are very, very strong.

And with that I would like to open it for questions.

Question-and-Answer Session

Unidentified Analyst

Okay Larry could you spend a minute maybe elaborating on your electric strategy [indiscernible] is an extension of what you are currently doing or particularly given your service territory and the well-publicized electric [indiscernible] an opportunity for gas business longer term?

Larry Downes

Well I think when we talk about the electric strategy it’s something that we have really been pursuing since the late 90s and it goes all the way back to the restructuring of the electric industry in New Jersey. And at the time and some of you may even recall this we were pursuing fuel cells and we had a relationship with core power was supported by General Electric. The reality is that was a perfect example of a good idea but the product wasn’t there. And so overtime what we did was we said okay what other opportunities are out there recognizing that it was not going to be a traditional opportunity for us and once the new legislation new back in 1999 came out we saw opportunities in the renewable area before the states commitment.

But it took probably from 2000 to 2006 to get to a point where that business plan that was sensible and then we had to go through our internal strategic project engaging it for then all that and we've invested in that as you know since 2010.

I think right now that we are looking at that continuing to invest in solar but bringing that down between now and 2017, that makes the most sense for us right now. We are like everyone else. We look for opportunity for gas fire generation [indiscernible] at this point. And we think that the -- as you know on the solar side, we have been able to take advantage of the renewable portfolio standard [indiscernible] that’s really the strategy right now.

We would love it, but there was a gas application and again if you will -- that would effectively take us through strategy and it worked so well with our BGSS and bring that behind us, that would be -- but we just don't seek that much.

Unidentified Analyst

And from the regulated perspective Larry pretty much hit the areas as far as the customer growth looking for micro CHP or some sort of generation product, time to meet or would lead to growth in the future, but that product does not -- it's just not economically available or rather it isn’t reality right.

Larry Downes

It’s a political question actually.

Unidentified Analyst

Thank you for your presentation by the way, it’s very clear. You obviously consulted with the government and others, were you at any time advising [indiscernible]?

Larry Downes

No we weren’t advising, we were -- remember when our -- we had to shut down [indiscernible] long beach island. Our focus was on getting all of the houses that were able to take it getting them back on and then in case of the long beach island we handled that first the damage on [indiscernible] it will get that done by Thanksgiving and significantly by the Christmas Holiday, so I wouldn’t say that we were advising based on [indiscernible].

Unidentified Analyst

Were municipalities selling you things, whether certain blocks were vulnerable?

Larry Downes

I think that and as we’ll come back in a second, I think Craig Lynch would tell you that we were telling them the quality of the infrastructure and the challenges that were there and whether or not have it back on, so Craig you go first. Craig Lynch really led our effort internally as far as the restoration.

Craig Lynch

Yes, Larry I hit it, you were re-partnered with the municipalities at the time and of this and what we did is give advisory on our infrastructure.

Unidentified Analyst

I want to ask you about SREC pricing, eventually that what’s your sale growth expectations are, but what are your price expectations, you expecting to go higher and how might that impact your EPS outlook, so what’s the variability if outlook [indiscernible] what happened to SREC? And does that effect on you either, elaborate a little more on that. Also I like to plan on equity financing also about that what we might need to sort of look into on that?

Larry Downes

Sure, I will take from the strategy point of view the way we look at the SREC. I think to understand our view on SREC price, you’ve got to look at where we started and started with a lot of investment in New Jersey over shot the renewable portfolio standard, which putdown SREC prices. And quite frankly in many ways of course a cleansing of sorts of the market, that situation was I think exacerbated somewhat if you go back two years now, we had a lot of capital coming in on at the prices. They recognized that, that with that after long process so legislatively and among other things accelerated that the renewable portfolio standards.

Recognizing a number of things not only from the environmental point of view but also from the economic development point of view, a lot of jobs in industry, and so now when you look at where SREC prices, look at that going forward what you see is that oversupply being bugged off who were active in the market getting out, you see that in that one slide that has structuring going down. And you see an acceleration of the renewable portfolio standard, that's what kind of supports think other market dynamics that would may be -- and we’ve seen that in that over the last year [indiscernible].

Unidentified Company Representative

Yes, we are still so committed to maintain in about 50-50 debt equity capital structure at corporate level. We think between our retention, cash flow, and the ability to our dividend reinvestment plan to a few equity radically over the next several years, we’ll be able to do that very comfortably and that has in fact into by the way 4% to 7% earnings fare growth, as an earnings fare growth or did not.

Unidentified Analyst

Okay but that's, so the drip is the only that the periodic equity investment equity issuance [indiscernible].

Larry Downes

Correct and our drip plan has the dribble feature which allows us to allows us to offer with 1% to 2% type discount, so left is private placement equity and we will plan on utilize that feature more than what we have in the past.

Unidentified Analyst

Okay now I understand you on the asset and I understand your outlook just because these experiences volatility, I was just wondering what is the sensitivity [indiscernible] from central pulling and earnings. What is your price expectation, I guess basically it's gone higher but if you could talk a bit [indiscernible].

Larry Downes

It’s a guess, I mean our forecast is looking at the construction schedules that are out there, current RPS standards and how fast they have raised annually and our internal forecast as those RPS rise construction for now I mean get monthly updates on those construction numbers, they are well below the monthly amount that need to be built that rise in RPS.

So in another words, we expect the market to support again. The last time the market was short SREC services what was required by RPS. Price went to about 95% of the penalty rates; penalty rate in 2017 is above $300. So we are not going to tell you the exact forecast we have, but clearly if the construction stays anywhere close there is now, do expect when that market gets short, we think it'll be in a couple of year that price is quite probably close to the levels it was less than a month.

Unidentified Analyst

Would it stop people from building in that [indiscernible] doesn’t that get people sort of I mean generally there is need, I can follow up on that.

Larry Downes

I think one of the issues that we had, I mean this is a new market and quality of the information about the building levels vis-a-vis the renewable portfolio standard that was revolving and improving, I think personally that would make a big difference that not happening again. Because we have got more information still time when we see the trends in the market place and quite frankly back in 2010-2011 we didn’t have that, we were finding that out [indiscernible]. Rick do you want to add anything to that?

Unidentified Company Representative

Big deals other thing we can talk about is, if you have limited [indiscernible] bit of a cap on our ability to quickly cross over I think that’s another factor [indiscernible].

Unidentified Analyst

Okay, we spoke last year, I am just curious is there any opportunities in Fort Monmouth, I know you were working on a number of projects over there and in some idea on necessary projects but you have got some ideas about the potential earning opportunity at that location?

Larry Downes

There is an authority there the Fort Monmouth Economic Recovery Authority, FMERA another acronym and that authority is charged with building an overall plans. They have there a variety of things being looked at there, from residential projects to commercial projects, office buildings, there was some discussion about trying to bring a research university there, I am not sure if that’s going to happen because of the merger of the state's research university. I'm going to ask Thomas Massaro to talk about that, he's especially involved with that.

Unidentified Company Representative

We will actually start to see some customers coming on and being developed in fiscal '14 at the Fort Monmouth, as Larry mentioned it’s a very dynamic planning process so for the entire track of land. We are not certain what is going to be carved out to be residential, commercial, industrial and so forth. We are starting to see some bits and piece back in we'll start to see it. [Indiscernible] there is a lot of different views on that, the authority is doing a good job of bringing all those together but it's still lot of work. But we are starting to see some transit, as you know we are now seven years I believe.

Unidentified Analyst

[Question Inaudible]

Larry Downes

I'm going to ask Craig Lynch to take that one.

Unidentified company Representative

[Indiscernible]

Larry Downes

I think the last point Craig made is the important one that the size of all this has to be done context of the Company’s overall supply requirements [indiscernible].

Unidentified Analyst

[Question Inaudible]

Larry Downes

There is actually a bought for sale in down Montana. On the solar side I would answer it by saying before talk about that wins. We’re downstream at the business so all the stuff that’s been going on upstream is actually good for us bringing prices down and that’s why today to give you a sense of what our inventory is a [grid] connected project to see what we’ve been able to accomplish on this Sunlight Advantage I think that area we feel good about that. I am sure wind side when we were thinking about that strategy we did not want to be in that business of development. That’s not our business.

And so we looked very carefully to find a partner who could take that risk and would focus on the midsized projects and that’s where our own energy, part of our analysis before we decided to make the investment in that company a year ago in September was to get a sense of their project portfolio and that’s the 1,300 megawatt. And that is in -- that's in varying stages of development right now. We feel comfortable that given the amount of capital that we want to commit there and given the way we want to participate in that business and the things we don’t want to do, that owns fits that in for us and keep us away from that development process, which we don’t have that expertise so we don’t want to be a part of it.

As I said I think as you see today with Two Dots is an example we’re looking for the long term our purchase agreement add the stability and of those [indiscernible].

Well, again thank you for being here today. We, as always, appreciate you interest and support of our company and our [indiscernible] team will be around if you have other questions please let us know. Thanks very much.

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