New Jersey Resources Corp (NJR) 2003 Q4 法說會逐字稿

Good afternoon. 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 Corporation fiscal 2003 year-end 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 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.

I will now turn the call over to Mr. Dennis Puma.

Thank you, Mandy.

Good afternoon, everyone. Welcome to New Jersey Resources fourth quarter and year-end conference call and webcast. I'm joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Senior Vice President and CFO, as well as other members of the senior management team of New Jersey Resources.

As you know, certain statements in our news release and in today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And in our cautions readings -- readers -- that assumptions forming the basis for forward-looking statements include many factors that are beyond our ability to control or estimate precisely, such as estimates of future market conditions and the behavior of other market participants.

Other factors that could cause actual results to differ materially from our expectations include, but are not limited to, weather conditions, economic conditions in NJNG service area, impact of regulations, including the regulation of rates, fluctuations in energy-related commodity prices, conversion activity and other marketing efforts, environmental matters, and other uncertainties.

For more detailed information about these factors, they are set forth in our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed on August 14, 2003. NJR's Form 10-Q is available at sec.gov and at our web site, njliving.com.

At this point I'd like to turn the call over to Larry Downes, our Chairman and CEO.

Thanks, Dennis. Good afternoon and thanks for joining us.

First of all, I'm pleased to report that our business model that we've had in place now for several years continued to provide us with consistent financial performance and earnings growth. This morning, as you know, we were pleased to announce record earnings for fiscal 2003, for the 12 months ended September 30, 2003, of $65.4 million, which was $2.41 per basic share. That compared with $56.8 million or $2.12 per basic share last year, which represents an increase of 13.7%.

This year's performance was the 12th consecutive year of earnings growth. That's a record that we believe is the longest streak in the electric and natural gas utility industry, and once again underscored the reputation that we have developed for consistent financial performance.

The reason for that, which Glenn will get into in just a little while, was due primarily to profitable growth at our main subsidiary, New Jersey Natural Gas, we also had a very strong year at our unregulated wholesale energy services subsidiary, NJR Energy Services Company.

Before we get into the details, I want to extend a special note of thanks to our employees, because it's really their dedication and their creativity that is allowing us to be reporting these excellent results today. As you know, we have a very focused strategy. For almost nine years now, we've put a very strong focus on the strengths of our core energy market, but it's really our employees -- are the ones who allow us to carry out our primary mission of providing safe, reliable, and affordable service to our customers.

Our shareowners during the past year were rewarded with a one-year total return of 13.3%, and if you look at that on a longer term basis, we've enjoyed a five-year average annual total return of 12.6%, which compares with just 1.5% for the S&P 500. During the year, we also achieved a major milestone when our market capitalization surpassed $1 billion for the first time in our company's history.

We had a number of important achievements in addition to our financial results during the year. We maintained our status as the low-cost provider of natural gas with the highest ranking in customer satisfaction and the strongest financial profile among New Jersey natural gas and electric utilities. Our wholesale market expertise and our activities in hedging our portfolio saved our customers an estimated $60 million in natural gas costs over the year.

And in addition, I think as you all know, we've put a strong focus on not filing for increases in our base rates. This year that streak continued. It is now more than 10 years, that, too, is the longest streak among the state's utilities.

For the 11th consecutive year, New Jersey Natural Gas achieved the lowest number of inquiries to the New Jersey Board of Public Utilities per 1,000 customers, again, that among all the state's electric and natural gas utilities. And we continue our focus on safe, reliable service. This year we invested about $50 million, which is consistent with what we have done over the past several years, persistent maintenance upgrades and expansion to support our growth.

Before I turn the call over to Glenn to discuss the financial operating results, there are a couple of other items I want to share with you. First of all I was pleased to report that our Board of Directors approved a 4.8% increase in the quarterly dividend to a quarterly rate of 32.5 cents a share, that's an increase from 31 cents a share.

That new quarterly rate will be effective with the dividend that is payable on January 2, 2004 to shareowners of record as of December 15, 2003. The new annual dividend rate is $1.30 per share. And I would point out that this is the ninth time in the past eight years that we have increased our dividend, and we'll continue our streak of paying consistent quarterly dividends since the company was formed in 1952.

Now, with regard to our dividend payout ratio, we are at about 51%. We are reinvesting an appropriate amount back into the company to maintain a strong balance sheet and to support future earnings per share growth.

And part of that, as I'm talking about our financial profile, I should also point out that in September, our work in maintaining a strong financial profile was recognized by both Moody's and Standard and Poors. Moody's raised the long-term debt rating of New Jersey Natural Gas to AA-3 from A-2, which was a jump of two notches. Standard and Poors increased the corporate rating of New Jersey Natural Gas to A-plus from A, while it increased our first mortgage bond rating to AA-minus from A-plus.

We were the first natural gas utility in the country to be upgraded by Moody's and the second by Standard and Poors in 2003. And we remain the highest-rated credit among all of the natural gas utility -- electric and gas utilities in New Jersey by both Moody's and Standard and Poors.

We were also able to settle several regulatory issues, in fact, we did that just last week, in a way that will benefit both our customers and our shareowners. Also very importantly, in the year of high natural gas prices, the settlements we achieved were a critical part of our efforts to bring our customers the best possible natural gas prices.

The settlement resolved issues associated with the collection of prior under recovered gas costs and includes an agreement for the Board of Public Utility staff and [INAUDIBLE] advocate to work with New Jersey Natural to jointly develop a fixed price pilot program for our low income customers. We hope that that will contain elements for a program to be offered to all customers, ultimately.

Our off system sales and capacity release and financial risk management, as well as interruptable incentive programs under the existing margin-sharing formulas of 85/15 for customers and shareowners were extended for three years. That approval extends through April 30, 2004, our capacity reduction in portfolio enhancement program for transactions done before December 31, 2002.

We have also agreed with the Board of Public Utilities to evaluate the potential benefits of a new capacity reliability program by October 1, 2004.

The BPU also approved for us through October 31, 2006, a new storage incentive program. That program includes sharing gains and losses on an 80/20 basis between our customers and our shareowners, respectively. The program, which will measure the difference between the actual cost of our gas in storage, any benchmark that will be applicable to the October -- excuse me, April through October injection season will be reviewed in a year for possible modifications.

And then finally, the board approved our request to update factors used in our weather normalization cause. As you know, that cause, which we've had in place now for more than 10 years is designed to smooth out year-to-year fluctuations that can result from changes in the weather that affect both our gross margin and our customers' bills.

Consumption factors in the weather normalization have not been adjusted to reflect our growth and actual customer base since the settlement of our last base rate case, which, as I mentioned, was nearly a decade ago. And updating those factors will make the resulting calculations from the weather normalization clause, I think, more reflective of the actual impact of weather.

So that is just some of the highlights of what has been another exciting year for New Jersey Resources. Again, I think when you look at those results and you consider our business strategy, you can see that it is really built upon the company's core strengths. And as CEO I'm proud of what our employees have accomplished and pleased to be able to share those results with you today.

Glenn is now going to take us through some more details regarding our financial and operating results.

Thanks, Larry, and good afternoon, everybody.

Hopefully, you had a chance to look at our actual press release, which we've attempted to expand to give even more detail than we have in the past, as to giving details by segment of both the annual and quarterly fiscal results, and where appropriate, explain significant variations by business segment.

As Larry mentioned, the results for the year came at $65.4 million, or $2.41 per share, a 13% increase over last year. First, and our most important and biggest business segment, the gas -- New Jersey Natural Gas Company, the utility clearly remains our core business, represented approximately 77% of the core earnings, total earnings of the company.

Again, we have excellent growth, characterized by strong retail customer growth of one of the highest in the nation. A stable customer base. 94% of our customers are residential and an excellent demographics in the marketplace. This growing distribution market provides the foundation for our other activities.

Some of the details. We added 11,044 new customers in fiscal '03, 35%, a very healthy percentage converted from other fuels. We also added gas service to 1266 existing customers during the year. In total, these additions are expected to generate approximately 2.1 BCF of throughput, which would equate to about $6.4 million of gross margin annually. These factors contributed to NJNG's earnings of $53 million in '03, an increase of 9.5% compared to last year.

NJNG's gross margin, to get a little bit more details about the components of the earnings, gross margin increased 10.1% in fiscal '03 to $215.7 million, due primarily to our customer growth and the colder winter weather. In fact, the weather was dramatically colder, it was 13% colder than normal and 35% colder than last year. Normal being based on 20-year average temperatures.

And as you know, the impact of weather for us is significantly offset by our weather clause. Larry mentioned it a minute ago that going forward it would be even more refined, but the existing clause acted accordingly this year. During a cold year, we deferred about $9 million of margin for future credits to customers.

Since it doesn't currently impact -- mitigate the full impact of the weather, we did earn an additional, approximately, $3.4 million of margin because of that cold weather beyond the amount covered by the WNC. Last year, it was 17% warmer than normal, whereby we accrued $16.4 million of margin for future recovery from customers, and we estimate that our margin was hurt by $7.6 million, again because of the imperfect WNC.

Gross margin from the wholesale programs in the utilities, our off system capacity management programs, increased to $5.4 million, compared with $4.7 million last year. The increase was due primarily to the higher value of capacity in the winter, resulting from that colder weather. You'll notice that our actual throughput in those programs were much lower than last year, but the value of that throughput was much higher, again, following with the impact of the weather.

And as Larry said earlier, we're very pleased to announce that those programs were either extended and/or expanded, or we have new programs now beyond the expiration of the existing programs. And to refresh everybody's memory, these programs have been in existence since 1992 and since then, NJNG customers have saved approximately $205 million on their natural gas bills, or approximately 5% annually, and have contributed to NJNG having that lowest overall cost -- gas price in New Jersey.

On the O&M side, NJNG's O&M expenses for the year were $84.6 million compared with $73.5 million. The increase was due to several factors, higher labor, pension in OPEB, bad debt insurance, and several community-related investments that we made during the year.

Our interest costs were lower than a year ago by $1.9 million, or 14.3%, due primarily to lower interest rates which offset -- or more than offset higher average balances.

For the quarter, we do typically have a loss on the quarter. We lost -- the utility lost $5.2 million in the quarter, compared with $3 million last year. The increased loss was due to higher O&M, which offset slightly higher margins and lower interest expense.

The margin increased $1.7 million in the quarter, due primarily to that growth. O&M increased to $21.9 million from $16.4 million, due again to higher labor, and especially in the fourth quarter, there were more community-related expenses this year than a year ago.

Net interest charges decreased a little less than a half a million dollars in the quarter, due again to those lower interest rates, which offset slightly higher average debt balances.

In our unregulated wholesale energy services company, NJR Energy Services: NJRES earned $11.4 million for the fiscal year, compared with $6.4 million a year ago, reflecting higher margins from increased storage and capacity utilization through expanded market opportunities. NJRES's portfolio of transportation and storage assets, which is substantially hedged, has been tailored to provide opportunities to increase margins in volatile wholesale and natural gas markets. And NJRES benefited this past winter when those markets were very volatile.

For the quarter, NJRES's earnings were essentially flat at only $350,000 year -- quarter-to-quarter, which would be expected, given that was the time period for mostly refill and storage and not as much activity.

In our last segment, Retail and Other, which consists primarily of our unregulated appliance service business, New Jersey -- NJR Home Services, which provides service, sales, installation of appliances to approximately 141,000 customers, CR&R, which still has some real estate to be developed, and NJR Energy, which consists primarily of our 3.2% equity investment in the Iroquois Gas Transmission System, LP.

For the year, Retail and Other earnings were $1 million compared with $2.1 million last year. And the decline there was primarily due to the prior year having an other income item of a gain of almost $900,000 on a sale of real estate. So, absent that, a gain, the results from year-to-year were -- were fairly slightly lower, not as dramatically lower, as I just mentioned.

For the quarter, the increased earnings was $1.2 million compared to 124 -- $124,000 last year. And again, it worked out that that gain that I just mentioned was in that fourth quarter of last year, offset this year by higher growth in our retail appliance service segment.

So, a lot of numbers, but we're happy with the progress in all the business segments, and I'll turn it back over to Dennis.

Okay, Mandy. I think we'd like to open the lines up for any questions that anyone may have.

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.

Your first question comes from David Schanzer with Janney Montgomery.

Yes, good afternoon, and congratulations on a good year.

Thank you.

Thank you.

A couple of questions. One is, we're hearing, of course, that gas prices are going to head north, and I was just curious as, both in terms of results and in terms of adding the traditional number of new customers that you've been able to add each and every year, what the sensitivity was given the kinds of prices we're hearing about? What do you think the effect will be on adding new customers and on results?

Dave, we haven't seen a lot of impact at all. And when you look at the relative cost of the competing fuels, fuel oil, where we're basically comparable, but electricity, which is basically three times as expensive as natural gas, we haven't really seen it have any impact at all.

Okay. And then I noticed that in the quarter, CNI quantity sales were up fairly significantly, and certainly revenue was. I was wondering if -- if you could give us some color as to how that came about?

Glenn?

We -- Dave, Tim Hearne, during the quarter we added a new customer -- an electric generation customer, Ocean [INAUDIBLE] and Power that came on during the fourth quarter.

This is a co-generator down in Lakewood, where we had negotiated an incentive clause with our regulators for sale to Ocean Power.

Okay. And are they on some negotiator rate or your regular tariff?

It's a negotiated rate with margin share associated with it, Dave.

Okay, good. Thank you.

And then lastly, I know you -- I know Glenn touched on it briefly, but I was wondering if you have any way of breaking, you know, the O&M increase in the quarter, just from '03 versus '02, same -- same quarter comparison, whether you could give us, you know, a little more detail as to, you know, how much was pension, how much was other things? It was about, I think, 21% increase this year over last year.

David, we don't have it broken down by specific topic. I can tell you the -- that on the community-related activities, the fourth quarter would be the normal quarter for a lot of those activities to happen, and this year there was a significant increase over the prior year. When we do our annual report and public dissemination of all the information, we will have more information by topic.

Your management's discussion, huh?

Correct.

All right. Thanks, guys.

Thanks, Dave.

Thanks, Dave.

Again, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Donato Eassey with Royalist Research.

Good afternoon, Larry, everybody. I -- Larry, you didn't say we couldn't ask it, so I'm going to ask it.

You know, you've got a neighbor for sale, put themselves up for sale and, you know, I'm just curious from your view, recognizing difficulty in -- in addressing the question, but would the BPU be more favorable to a New Jersey-based entity versus a non--New Jersey based entity? And, you know, in looking at that and/or -- put another way, do you think there will be a -- a, you know, a fairly aggressive amount of competition for those assets?

Donato, that's one that I really can't comment on that in any way, as you might imagine, and I'm sure you can appreciate.

I can. I was surprised you didn't say you wouldn't up front. But that's fine.

Second question. Glenn, if you could go over where you sit, kind of in relation to the trading side of the business and how you are dealing with it as we head into winter and, you know, if you could kind of capsule your comfort level with, you know, current gas prices, where you're, you know, the fiscal positions are and things like that? Thank you.

Sure, Donato. Yeah, as part of our internal risk management program, we have a fairly aggressive hedging program going in before any winter season, and we're happy to say that we're essentially full as far as our storage is concerned, and over 90% of our expected firm sales during the winter months have already been hedged.

So, we are -- we do not think we are susceptible at a significant level, anyway, to significant swings in the markets because of what I just mentioned. 90% already hedged through a combination of our physical gas in the ground and financial hedges for some of the other expected firm sales.

Donato, after the last price run up several years ago, we worked very closely with our regulators to put targets in place going into the heating season to try and address the potential volatility, and that program has worked well for us.

Great. Just wanted to make sure it was still same program and no changes. Thank you very much and congratulations, as well.

Thank you, Donato.

Thanks.

If you would like ask a question, please press star, then the number 1 on your telephone keypad.

At this time, there are no further questions. Are there any further remarks?

No, just wanted to say thanks to everyone for participating this afternoon.

Thank you very much.

Thank you.

Bye-bye now.

Thank you for participating in today's New Jersey Resources Corporation fiscal 2003 year-end conference call.

This call will be available for replay beginning at 6:00 p.m. eastern standard time today through 11:59 p.m. eastern standard time on Monday, November 3, 2003. The conference I.D. number for the replay is 3558771. Again, the conference I.D. number for the replay is 3558771. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you. You may now disconnect.