New Jersey Resources Corp (NJR) 2002 Q4 法說會逐字稿

Good morning. My name is Mandy and I will be your conference facilitator today. At this time I would like to welcome everyone to the New Jersey Resources fiscal year 2002 earnings 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 star, then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you Mr. Puma you may begin your conference.

Thank you Mandy, Good morning everyone. Welcome to New Jersey Resources fiscal 2002 year-end conference call and web cast. I am joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Senior Vice President and CFO as well as other members of the New Jersey Resources senior management team. As you know certain statements in our earnings release 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 include actual results to differ materially from our expectations. These include items to be discussed today, items mentioned in our earnings release and items mentioned in our quarterly report on form 10-Q filed with the SEC on August 12, 2002. At this time, I would like to turn the call over to Larry Downes our chairman and CEO. Larry.

Thanks Dennis and good morning everyone and again thank you for taking the time to join us here this morning. I think as you all know this morning once again we announced very favorable financial results. We are pleased to announce record earnings for fiscal 2002 for the 12 months ended September 30, 2002 with 56.9 million dollars which was 2 dollars and 12 cents per share that compared with 52.3 million dollars or a dollar 97 per share last year. The increase was 7.6 percent.

Before I get into the information, I would remind everyone that all of the per share data has been adjusted to reflect the 3 for 2 stock split which became effective in March. This performance was our eleventh consecutive year of higher earnings that is a record of consistency that is unmatched in both the natural gas and electric utilities industries and one that we are very, very proud of. Our total energy deliveries by all of our subsidiaries were 491.2 billion cubic feet, which was an increase of 47 percent over last year. Those energy deliveries were made to customers in the Gulf Coast to New England and Canada and since 1992, our total energy deliveries have increased by more than 9 fold.

In just a few minutes, I am going to turn the call over to Glenn Lockwood, our Chief Financial Officer who will give more of the specifics on our financial and operating results, but I am pleased to share with you that our board of directors approved a 3.3 percent increase in our quarterly dividend rate to 31 cents per share from 30 cents per share. This is the eighth time that we have increased the dividend in the last seven years. The new quarterly rate is effective with the dividend that is payable January 2, 2003 to shareowners of record on December 16, 2002 and it brings our new, our indicated annual dividend rate to a dollar 24 per share.

What is also important is our dividend payout ratio, which is less than 60 percent. It is actually about 57 percent and we believe that that level is a allowing us to maintain an appropriate balance between dividends being paid to our shareowners and earnings that are being re-invested into our business. We also announced this morning that we will begin to expense the cost of stock options granted beginning in fiscal 2003. Any future employee stock options will be expensed over the life of the stock option investing period in accordance with the statement on financial accounting standards number 123 which is titled as you know, accounting per stock base compensation.

By decision to adopt this method of accounting insurance that we can continue to use as valuable tool as part of employee compensation while fairly presenting our results to investors and we estimate that based upon historical world levels the financial impact of this change will be less than a penny per share in fiscal 2003 and through fiscal 2006 will increase to about 2 cents per share.

Now before I turn it over to Glenn, I just want to make a couple of other comments. Now as you know, it was another outstanding year for us, our eleventh consecutive year of higher earnings with earnings per share of 2 dollars and 12 cents per share. Glenn is going to get into the details but I want to emphasize a few points.

First of all our financial performance once again underscores our commitment to consistent financial result. We have, as you know the longest streak of consecutive earnings growth in the industry and the testimony to that really goes to our employees and everything they have done to bring us to where we are today.

I would also emphasize, that our financial profile is strong. New Jersey Natural Gas Company remains the highest rated local distribution company in S&P's universe of A rated companies and has the best credit rating of any of our state's electric and natural gas utilities. The strength of our financial profile gives us full access to the capital markets to support our spending plan. Core growth in New Jersey Natural Gas Company remains strong despite some of the economic challenges we have had in the State and we expect to continue meeting our goals for sales and margin in fiscal 2003.

Our wholesale business is strong and profitable. I would again remind everyone that we do not rely on speculative trading or market-to-market accounting to drive our financial results in NJR Energy services; rather our business model is based more on managing our own assets and assets on behalf of others as well as working very closely with our pipelines. As I said in the past, just to move away from the financials for a moment, as a said in the past, we maintain a conservative corporate governance structure. We earned much support to New York stock exchange proposals and have all ready in place.

We have implemented the overwhelming majority of the proposals and just as I close here, I would share with these some other non-financial statistics but ones that are, we think, very important to our overall business strategy. First of all New Jersey Natural Gas Company became the low-cost provider in the State among New Jersey's Natural Gas distribution companies and we expect to remain in this position for the year. Just last week, may be you probably saw that JD Power rated New Jersey Natural Gas number 1 in customer satisfaction among all natural gas distribution companies in the east and I would also point out that we have no plans to file a traditional base rate case in the future. In fact it has been now since April of 1993 since the last time we filed the base rate case. During that time we have spent over 400 million dollars in capital, added about 110,000 new customers.

So in summary, fiscal '02 was another outstanding year for us. Our strategy remains straight forward built around profitable growth in our core market, a disciplined approach to wholesale energy services as well as primary services. The strategy is supported by a strong financial profile, a transparent business model and a recognition of the importance of balancing the needs of all our stakeholders. In short, we are comfortable with our prospects of the future and we believe that those prospects have never been better. I look forward to taking your questions in just a little while and now I am going to ask Glenn to get into some amount of specifics.

Thanks Larry and good morning everybody. As Larry mentioned our consolidated earnings increased 7.6 percent to 2 dollars and 12 cents per share versus a dollar 97 last year. I'm pleased to report that on a segment basis, we had growth in each and every business segment and the Utility despite the warmest year in our company's history; the Utility grew 1 percent year-to-year. In our unregulated wholesale marketing subsidiary earnings grew by over 2 million dollars and in our retail unregulated operations while much smaller, they also grew impressively.

The Utility earned 48.4 million dollars in fiscal 2002, as I mentioned that 1 percent increase over last year, driven again by the continued profitable customer growth. We also had lower depreciation and interest expenses, which I'll get into in a second. The weather was the major topic to deal with all year long. Some of the statistics, for the year the weather was 17 percent warmer than normal and 22 percent warmer than last year, as I mentioned especially with September, though a very warm September it didn't want to be in the warmest in our history.

As you know, we do have a weather normalization cost, which is designed to minimize the fluctuations on our margins and our customer bills that result from the changing weather patterns and this normal weather is based on a 20-year average. It is important to note that, as we've been disclosing for several years that the weather normalization cost does not fully protect the Utility from factors such as unusually warm weather, which we had and other factors like changes in customer usage patterns.

Factors like that were said in conclusion of our last rate case, base rate case which was in January 94. Some numbers associated with the weather cost itself, during the year, it did protect 16.4 million dollars of margin for future recovery from customers because of the weather cost. But because it was so warm, we estimate that approximately 7.6 million dollars of margin was not recovered because of that warm weather. Through the Utility, growth remains strong. The core business is characterized by a strong retail customer growth, one of the highest growth rates in the country. A stable customer base, 94 percent of our customers are residential and excellent demographics.

During 2002, despite a weakening economy, we added over 11,000 new customers, to be exact 11,282 new customers, which we expect to generate about 5.9 million dollars in gross margins. This equates to about 2.2 BCF of throughput. And in total, we expect when considering additional services to existing customers almost 6.6 million dollars of new margin from the growth in 2002. Despite the weakening economy, we had a healthy mix of conversion to new customer growth, as we discussed in our past presentation that healthy mix helps keep our capital costs as low as possible and making the customer growth profitable.

In the Utility, turning to the margin-sharing programs, we had another successful year where the off system capacity management programs through sales of 96 Bcf generated 4.7 million dollars of margin, which equates to 10 cents per share to the bottom line. Since 92, these programs have generated a dollar 11 per share. Just as importantly customers benefit from these programs.

In 2002, our customers will receive credits of 23 million dollars and over the same timeframe have received credits of 186 million dollars. These programs have also contributed to, Larry pointed out to earlier, which is the overall cost to our customers being the lowest in the state. A major topic of conversation for us and as, on these conference calls is the status of the margin-sharing programs with the BPU.

The existing programs expire at the end of this calendar year, December of 2002. We are pleased to announce this morning that the utility has reached an agreement with the staffs of the BPU and the Ratepayer advocate, which is subject to BPU approval, whereby the 85/15 margin-sharing programs for off-system sales and capacity release transactions will be extended through October 31, 2003. As part of this agreement, the portfolio-enhancing programs, which include the reduction of the cost of capacity, would continue to receive 60/40 margin-sharing treatment for transactions completed before December 31, 2002.

Moving on to our unregulated wholesale business, which continues to grow profitably. This business is very much an outgrowth over our expertise in the off system capacity management business in the Utility and as we do not rely on market-to-market accounting to drive any of the revenues or margins in that business. For the year NJRES reported earnings of 6.4 million dollars, a 2.3 million dollar increase over last year, which generated 24 cents per share. That segment benefited from increased optimization of our storage and capacity assets, park-and-loans transaction, and other transactions with our pipeline partners.

During the year, NJRES also began acting as the exclusive marketing agent for the Stagecoach Storage Field, which is a natural gas storage project located in Tioga County, New York. We also began operations at the Dawn Storage Hub in Canada working with our partners at Duke and had limited operations in fiscal 2002. In total this unit sold, were managed 332.6 BCF in 02 and 91 percent increase over the same period last year.

Turning to our last business segment, our unregulated subsidiary that handles home appliance sales and installation services, our NJR home services company, their earnings more than tripled to 859,000 dollars or 3 cents per share in 2002. You may recall that this business was spun out of our Utility in fiscal 2000 to give us more flexibility with products and pricing.

We also included in our press release, this morning information with regard to post retirement benefits, a very hot topic these days given the impact on the economy, basically due to the market, negative market conditions especially in equity markets over the last couple of years, especially in the fourth fiscal quarter of fiscal 2000.

There has been some negative impacts to pension plans. With the decline in asset values of the existing plan and our reduced assumptions looking forward both in our discount rate and the expected return on plan assets in the future, we will go through a couple of significant issues. First, companies like us have to reflect a minimum pension liability on our balance sheet. The after-tax number for us is 8.6 million dollars. I emphasize that is the balance sheet adjustment looking forward to cash contributions. We expect now in 2003 to make minimum cash contributions of about 3 million dollars. Our last contribution wasn't necessary, wasn't needed. The last time it was needed was in 1998 in a much smaller amount. Here I would like to emphasize again, based on our prudent capital allocation policies and strong balance sheet, we do not believe that this recognition of liability or the need for future cash contributions will have a significant impact on either our bank covenants, our financial condition or our access to capital.

Moving ahead to some of the specific numbers in the press release, turn the attention to page 7, where we have a full income statement for the consolidated entity. I will point out a few of the key variations and fluctuations for the year. As I believed everybody knows that in our business our call revenues gas purchases and energy tax is all moved in tandem and they are lower this year than last year reflecting the warmer weather and the utility versus a year ago. Our O&M cost of a modest 2.9 percent that included significantly increased cost and insurance security and pension in 2002, some of those related to post 9/11 events of last year and the beginning of our pension cost happens to increase. You also note that depreciation is actually down 2 percent as we disclosed over the last several quarters. We had significant parts of our computer system, which were installed in 95 and 97, have become fully depreciated. So we are seeing a slow down in depreciation expense. You might also notice other income is lower than last year, a bigger contribution from our operating income, last year had slightly higher deferred interest related to certain regulatory assets and you also notice that we did benefit from the decline in interest rates as you can see our interest costs are lower by about 3.1 million dollars from the year-to-year basis. The rest of the financial statistics breaks down the numbers by business segments and I believe my opening comments covered all the significant variations from year to year by business segment.

With that I turn it back over to Larry and then we will take questions.

Okay, we would like to open up our lines for questions, if anyone has any now.

At this time, I would like to remind everyone, in order to ask a question please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Once again, if you would like to ask a question, please press star then the number 1 on your telephone keypad. At this time there are no questions. Mr. Puma, are there any closing remarks?

Okay well, we are available here our number is [Laughter] 732-938-1491, if anything comes to mind we will be delighted to expand on that. As always I appreciate the support of the financial community that is shown throughout the years and I also want to emphasize that all of the results that you see here today are really the work of our employees who have done such a great job to bring us where we are today.

Thank you very much for listening.

Thank you for participating in today's New Jersey Resources fiscal year 2002 earnings conference call. This call will be available for replay beginning at 11:30 AM, eastern standard time today through 11:59 eastern standard time on November 6, 2002. The conference ID number for the replay is 587-9423. Again the conference ID number for the replay is 587-9423. The number to dial-in for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.