New Jersey Resources Corp (NJR) 2002 Q2 法說會逐字稿

Good morning. My name is

and I will be your conference facilitator today. At this time, I would like to welcome everyone to the New Jersey Resources Second Quarter Fiscal Year Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press stars and the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question press the pound key.

Thank you. Mr. Downes, you may begin the conference.

Good morning. Welcome to New Jersey Resources Second Quarter Fiscal 2000 Conference call and web cast. I am joined this morning by Larry Downes, Chairman and CEO, and Glen Lockwood, our Senior Vice President and CFO. As you know, certain statements in our earnings released and in today's call are forward looking statements that reflect our expectations about the future. Like any such statements, they are subject to a number of factors that could cause actual results to differ materially from our expectations. These factors include items to be discussed today, items mentioned in our Earnings Press Release and items identified in our quarter report on Form 10Q filed with the SEC on February 12, 2002. At this time, I would like to turn the call over to Larry Downes, our Chairman and CEO, to discuss our six-month results.

Thanks Dennis, and good morning everyone and thanks again for being with us this morning.

I am pleased again to report to you that our business model that we have had in place for the last several years continues to provide us with consistent earnings growth. We did yesterday announce our earnings as you know, they were a record again, for the six months ended March 31, 2002, the numbers were $54.6 million or $2.04 a share. That can compare with $50.7 million or $1.91 per share of last year, which reflected a 6.8 percent increase. I think as you all know, we split our stock three for two. That was effective in March and all of the per share data that I am referencing reflects that stock split.

We also in January increased our share repurchase program, again reflecting our performance and overall financial strength. The performance that we have had year to date again very, very strong. We forecast that that will continue for the balance of the fiscal year and we believe that we are on track to achieve our 11th consecutive year of earnings growth, a record of consistency that is unmatched in our industry. The results that we report were driven by a number of factors, including continued profitable growth in our core market. That is retail customers and improvement in our unregulated results, lower interest expense as well as lower operation maintenance expenses and I think, as you all know, the weather has been extremely warm this winter, but nonetheless, we were able to show continued improvement in our financial results.

I want to focus just for a couple of moments on the weather. For the six months ended March 31st, the weather was 18 percent warmer than normal and 24 percent warmer than last year, which has made it the warmest winter in our company's history, but nonetheless, we have been able to overcome that and record the performance that we are sharing with you here today. In fact, if you look at the number of degree days that we actually lost because of the weather, those sales are basically equal to the entire month of March. But the good news is that we do have a weather normalization clause in place.

As you know, that minimizes year-to-year fluctuations on both our company's margin, as well as customer bills that can result in changes in the weather pattern. We do base normal weather on a 20-year average, but it is also important to note that the weather normalization clause does not protect us from, completely insulate us, from the weather. It is influenced by a number of factors, including customer usage. Those were set at the conclusion of our last base rate case in January of 1994.

But the fact that we did have that in place obviously helped us this year and to the extent that the weather normalization clause did not cover all of the margin deficiency, we were able to make that up in other areas, again leading to the strong financial performance. I want to focus on some of the factors that are driving our performance through our core operation, New Jersey Natural Gas; natural gas distribution remains our core business. I think as you all know, we have excellent growth prospects characterized by a number of factors starting with strong retail growth, one of the highest rates of growth in the nation. - That is further supported by a very stable customer base, 94 percent of our customers are residential and it is further supported by the demographics in our marketplace.

As we have stated over and over again, the growth in our distribution market really provides the foundation for our other activities and as we have also disclosed publicly, we have spent a good deal of time during the past year surveying, doing research on the marketplace and feel comfortable with our growth rate for the foreseeable future. We are continuing to experience strong growth in the new construction market. The conversion market moderated somewhat, but on balance, our throughput and our margin numbers are consistent with our plan, again giving us confidence in our financial performance this year. Through the end of March, our growth in New Jersey Natural Gas equated to approximately 1.3 billion cubic feet of new throughput.

We expect that that will generate about $3.8 million in annual gross margin and again, we expect that that, that our growth rate will remain at approximately three percent in Fiscal '02, which is well above the average for natural gas distribution companies in the United States. When we annualize those numbers, we expect that the growth in our core market will add about 2 billion cubic feet of furnace sales and that should generate about $6 million in additional annual margin. One of the important elements of our strategy has been to manage our growth and manage our company's operations without filing base rate cases.

In fact, April 5 of this year marked the ninth anniversary of the filing of our last base rate case. During that time we spent probably $400 million in new capital, added over a 100,000 customers and have been able to manage that growth, as well as hit our financial targets without needing to file for traditional base rate increases and I would say to you emphatically that we have no plans to file for a base rate increase. As many of you may know, here in New Jersey, all four of the electric companies will be filing for base rate cases within the next several months.

In our wholesale operations, specifically off system sales and capacity management, as you know, we have incentive sharing arrangements for those sales, which generated pretax margins of about $2.9 million or 6 cents per share in the fiscal year to date. We have been very successful in those markets and since 1992, when we began those programs they have generated earnings per share of more than $1.06 per share. Our customers have also benefited. In fact they have received over $163 million in credit since 1992. If you look at that on an annual basis, those credits that come back in equate to about five percent of those bills. Obviously, those programs have been very, very successful for us. We have currently before the Board of Public Utilities a request to extend those programs through 2004.

On the unregulated side, our wholesale business, our wholesale energy services subsidiary, NJR Energy Services, continued to grow profitably. For the six months ended March 31st 2002, NJRES earned $5.2 million or 19 cents a share. That compared very favorably with the $3.1 million or 12 cents per share that NJR Energy Services earned last year. As we have said time and again, this business is in outgrowth of the success that we have had. On the regulated side, we have really established ourselves in the wholesale markets and we have seen consistent increases in both throughput and profitability. During the six months, NJRES has benefited from increased optimization of storage and capacity assets, as well as park and loan transactions with our pipeline partners.

We have also been looking at a number of opportunities, one of them we announced during the first six months and that is our participation in the Stagecoach Storage Field. We expect that Stagecoach will help us increase both our growth and earnings. NJR Energy Services, just to review, has been engaged as the exclusive marketing agent for Stagecoach, which is a storage field that is being developed in upstate New York and we expect that it will begin operations during the second quarter of 2002, calendar quarter of 2002.

And then finally, I just want to touch on NJR Home Services, which is our unregulated premise services business, which as you may recall, we spun out a little over a year ago from New Jersey Natural Gas. It contributed $317,000 or about a penny a share to our earnings. That was an improvement over the break-even results for the same period last year. That business is going successfully for us. We have very carefully, very thoughtfully expanded its lines of business from being primarily an appliance service contract business covering natural gas appliances. We have added an air-conditioning service contract, as well as an installations business. So, we have grown that business sensibly and it supports our overall array of services here in the service territory. As of the end of March, NJR Home Services had over 272,000 appliances under contract. So as I said, we have experienced steady growth in that business, which has been supported by careful management of the expenses there as well as careful management of the logistics that support the delivery of those services.

So that is an overview of what has been a very successful six-month period for the company. We will take questions in a while, but I would like to ask Glen Lockwood, our Chief Financial Officer to go through some of the more specific details on our financial and operating results.

Thanks Larry, and good morning everybody.

I will cover some of the details included in the appendix to the release itself with all the detailed financial information, both consolidated and by segment. First thing, I would like to mention is that for both the quarter and the six months ended March, the significant variances are very consistent in the nature and type of those variances. So I will focus my comments on the six months' information, but they are consistent with both the quarter and year to date.

First thing I would like to mention is that we did have growth in each of our business segments, which helped grow the company. As Larry mentioned in total, almost seven percent for the year to date, but the weather was obviously a factor and as you will see in the details that NJNG's margin was actually a little bit lower than last year, again reflecting the extent of the weather beyond the amount protected by the weather normalization clause. In fact, the weather clause did capture about almost $15 million of margin for future recovery, but we estimate that about $6 million of margin had to be made up through the rest of the operations of the company and some of the details on how we did that. We noticed that consolidated OEM was actually down 1.3 percent for the six months. The biggest variable there is last year we had an early retirement program, which we are now reaping the benefits of. That particular program helped offset some expenses unavoidable, such as insurance and security and other things post September 11th. So we did have some normal increases, but we made up that with general cost control efforts and again the impact of that early retirement program from last year.

Interest Expense: as everybody obviously knows short-term rates have been extremely lower than prior years and we actually benefited to the tune of $2.6 million with 23 percent reflecting the impact of those lower rates.

Depreciation: was actually down $400,000 or two and one-half percent. That reflects the fact that back in 1995 through 1997, we installed a major computer system upgrade. We depreciated that system over a five-year period, or significant portions of it, and we are now seeing the benefit of having almost fully depreciated most of those assets and we do not currently see any major need to extend significant capital to upgrade it any further in the near future. Therefore, we will see the benefit of lower depreciation. NJRES, our unregulated wholesale services saw a 29 percent increase in its throughput, reflecting the growth in the several assets that they are managing and transacting with our pipeline partners.

To just underscore the continued importance of our relationships with our pipelines and again, that business continued to grow at a very significant rate. As Larry mentioned, our retail operations, which we spun out from the utility last year, have grown through internal growth focusing on our utility service territory through some pricing flexibility and additional services saw results increase to about $300,000 of profit from what was a basically, a break-even result last year. In addition to all of what we have looked at as positive earnings results, I want to emphasize that we continue to make sure we are looking at the financial strength of the balance sheet and I am pleased to announce that as of March 31, we still have an excellent balance sheet with a 45 percent equity ratio as a percent of total capital, including short term debt. So, we are not just focused on the earnings, but also on the stability and the strength of the balance sheet as well.

With that, I think we turn the phone over to some questions if there are any.

At this time, I would like to remind everyone in order to ask your questions, please press star and then the number one on your telephone keypad. We will pause for just one moment to compile the Q and A roster. Your first question comes from Joanne Fairchild, Salomon Smith-Barney.

Good morning. It is

. As you pointed out, your unregulated results have been growing and you are looking at storage projects. Are there any other areas or businesses under the unregulated arena that you would be thinking about looking at?

Jo, you may add, if you are referring to outside of the existing focus on wholesale with a lesser focus on the appliance service business, the answer is no.

Okay.

Within the wholesale side, I was not sure you could hear me and follow up with the question. Within the home side, we have done very well there and, but as far as anything else, whether it be telecom or anything like that, we have no plans to look at anything like that. We do think that there are a number of opportunities for us to continue to grow sensibly on the wholesale side and that is really where we are focused on, but we also believe that in terms of the overall earnings mix that the regulated company, New Jersey Natural Gas, will still comprise between 80 and 85 percent of the total.

Okay thank you.

Sure.

At this time, I would like to give everyone an additional moment to press star one to ask your questions. Your next question comes from Dan

, AG Edwards.

Good afternoon or good morning, I guess I should say. Just a quick question for you. I guess, first, when will you have a decision on the extension of your off system sales sharing agreement, I guess, and the second question is maybe you could touch a little bit on your recent investment in the fuel cell area. I am kind of interested in that and what your broader expectations for there?

Sure. First, Dan, on the incentives, we would

It is impossible to predict, you know with a 100 percent accuracy, but certainly some time in the next several months, we will get a decision. It is a filing that is included as part of our LGA

gas adjustment clause, a filing that is before the Board of Public Utilities right now. We are in the process of discussing those issues with them right now, but certainly no later than the fourth quarter I would not expect and those, you know, in those discussions, there is nothing unusual included in that filing.

With regard to fuel cells, I think as everyone knows, we were on the front end of that several years ago with fuel cells. We were, and continue to be, an investor in Capstone, an equity investor, we also had a relationship that we announced, I believe in 1999 with Plug Power, with also, GE was part of that. Our assessment of the marketplace following, really the experience that we gained from both the Capstone and Plug Power experience is that the more appropriate way for the company to participate in the whole distributed generation area would be through New Jersey Natural Gas.

We believe that the number one benefit to the company is the throughput that the increased throughput that the company would experience and with that particular approach, we are really indifferent to the type of technology that actually would utilize natural gas for the production of electricity. As a result of that, the focus has been in the utility where we believe that we can offer benefits in there. Obviously dealing with regulatory issues, dealing with operational issues to the extent that there are incentives available, we can help potential developers or manufacturers with that whole process.

So the first point, Dan, in answering your question is the strategy has basically changed in terms of its focus. The second point I would make to you is that I think the reality is that that process has slowed down a bit, but we are still enthusiastic about its longer term prospects. There are still some hurdles there in terms of cost I think that have to be overcome. So right now, we are viewing it as more of a longer term opportunity. We did, you may have seen recently, we were part of an announcement that a hotel in our service territory in Parsippany owned by Star Wood, announced that they would be using a fuel cell energy fuel cell and that was, PP&L was also part of that and we will be providing the gas to it. But I think longer term, the approach that we have taken in terms of really, if you will in open access, of sorts, to encourage as many different distributors as possible, come into the service territory is the appropriate way to go.

I appreciate your comments. Thanks very much and congratulations on another very solid quarter.

Thanks and let us hope the Cardinals keep it doing to the Mets. We enjoy that.

Go Cards!

Gentlemen, at this time there are no further questions.

Okay. Well I just want to say thanks again for joining us here today. We appreciate your interest and support and if you do have other questions, please call us, and to those who are joining us down in Florida, we will be making another presentation down there, so we look forward to seeing you there.

Thank you.

Thank you for participating in today's New Jersey Resources Second Quarter Fiscal Year conference call. This call will be available for replay beginning at 1:00 p.m. Eastern time today through 11:59 p.m. Eastern time on Tuesday, April 30, 2002. The conference ID number for the replay is 3901253. Again, the conference ID number for the replay is 3901253. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you.