New Jersey Resources Corp (NJR) 2004 Q2 法說會逐字稿

Good afternoon. My name is Brandy, and I will be your conference facilitator today. At this time I would like to welcome everyone to the New Jersey Resources second quarter 2004 earnings call. [Operator Instructions] After the speakers' remarks there will be a question-and-answer period. [Operator Instructions]

I would now like to turn the call over to Mr. Dennis Puma, Manager of Treasury Services. You may begin, sir.

Thank you, Brandy, good afternoon everyone.

Welcome to NJR's second quarter fiscal 2004 conference call and webcast. I'm joined by Larry Downes, our Chairman and CEO; Glenn Lockwood, Senior Vice President and CFO as well as other members of our senior management team.

As you know, certain statements in our news release today and in today's call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. NJR cautions persons listening to this call and readers of our earnings release that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR's ability to control or estimate precisely, such as estimates of future market conditions and behavior of other market participants. Other factors that could cause actual results to differ materially from our expectation include, but are not limited to, weather conditions, economic conditions in NJNG's service area, the impact of regulation, including the regulation of rates, fluctuation in energy-related commodity prices, conversion activity, other marketing efforts, environmental matters, litigation, and other uncertainties. More detailed information about these factors is set forth in NJR's filings with the Securities and Exchange Commission, including NJR's quarterly report on Form 10-Q filed on February 9th, 2004. NJR's Form 10-Q is available at sec.gov and at njliving.com.

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

Thanks Dennis. Good afternoon and as always thank you for joining us.

I'm happy to share with you this afternoon that our business model continues to produce outstanding results. I think as you all know this morning we recorded a 15% increase in basic earnings per share for six months ended March 31st, 2004. That was an increase to $2.75 a share which compared with $2.39 a share last year. And from what we have seen so far that compares quite favorably with our peers.

Glenn is going to get into the details, but I would tell you the increase is primarily attributable to better results at NJR Energy Services, which is our unregulated wholesale energy service subsidiary, and the positive impact of continued customer growth at our principal subsidiary New Jersey Natural Gas.

I did want to emphasize several points with you again before Glenn gets into some of the more specific financial and operating information.

First of all, I'm happy to tell you our share owners have been rewarded over the past year with one-year total return of 19.6%, and if we look a little bit longer term over the past five years the average annual return has been 13%, again which compares quite favorably with our peer group.

Secondly, as always, I want to point out the contribution that our team has made. They are the ones that have produced these results and continue, despite all of the changes going on in our industry, just to do a wonderful job and they're the ones that really are responsible for this performance.

Also today we announced earnings guidance and I wanted to let you know that based upon our results year to date and, of course, assuming normal weather and the impact of seasonal factors and the timing of certain expenses we currently estimate that our basic earnings per share for the year for fiscal 2004, that is, will be in a range of $2.55 to $2.65 per share. One of the things that we are very proud of here at New Jersey Resources is the consistency of our performance, particularly in the financial area, and I am personally delighted that our results to date, and our expectations for the balance of the year, put us firmly on track to achieve our 13th consecutive year of earnings growth. That streak as you know is one that we believe is in the -- the longest in the industry.

A number of other things that happened during the quarter that I think acknowledges the company's performance for the third year in a row, we earned a spot in the Fortune 1000, this year we were number 591, moving ahead 123 places over the prior year, but I think, beyond the actual ranking, what we were really pleased about was that among the 54 natural gas and electric utilities that were listed in the Fortune 1000, we ranked second in annual return to investors and fourth for annual earnings per share growth for ten years ending 2003. So certainly our track record is one that of consistency, one of reliability, and one that we are very proud of.

Many I know we will see down at the AJ financial forum, so we will be presenting down there so we will obviously be getting into our numbers in greater detail, but I did want to turn the call over to Glenn Lockwood to give you some more of the financial and operating information for the quarter and the six months.

Glenn.

Thanks, Larry.

Again as Larry mentioned we've announced excellent results today. A 15% increase in basic earnings per share for the six months ended March 2004, 2.75 versus 2.39 last year. On a diluted basis per share for the six months increase to 2.70 compared to 2.35.

For the quarter our earnings per share on a basic basis increased 22% to $1.86, compared with $1.52 last year, again for the quarter on a diluted basis earnings increased to $1.82 versus $1.50. The financial community consensus estimate for the quarter was $1.50 per diluted share. On an O&M basis, or a consolidated, the increase for both the quarter and six months were attributable pretty much to higher fringe benefit costs. That's pension and OPEB, in total they grew about 4% on a consolidated basis year to year.

Let me get into some of the segment information. As you know we basically have three segments.

The first and the largest in our key subsidiary is New Jersey Natural Gas. Our Natural Gas Distribution remains our core business. Our excellent results characterized again by our strong retail customer growth, very stable customer base, and the continuation of excellent demographics. This is the -- this distribution market provides the foundation for our other activities.

In the first quarter NJNG continued its customer growth adding approximately 1 bcf of new throughput which expected to generate about 2.9 million in annual gross margin. We currently anticipate NJNG will generate annual growth rate of about 2.5% in the year, adding about 2 bcf of firm sales, which represents about $6 million in annual gross margin.

We continue to have excellent success in the conversion market. About 35% of that customer growth is expected to come from conversion, which as we've talked about several times helps keep our overall capital cost per new customer down.

From a bottom line perspective NJNG earned $54.4 million in 6 months ended March, compared with 53.7 last year, again driven by higher gross margin from the customer growth. I'd like to point out that from a gross margin perspective last year, when we had a less precise weather clause, and it was much colder, last year's margin had an incremental $2.2 million of margin because of what I would refer to as the more imprecise weather clause.

For the six months ended March the weather was 4% colder than normal and 6% warmer than last year. For the quarter itself it was 8% colder than normal and 4% warmer than last year. And we define normal weather as 20-year average temperatures.

As I mentioned we do have a weather clause that has been recently refined to be more exact. It is meant to reduce the fluctuations that the weather would have on our margin and customer bills. Based on six months of 2004 we have actually deferred almost $2.4 million of gross margin for future credits to our customers. Again because of the colder than normal weather.

One detail I'd like to remind everybody about that's a little different this year, we think for good reason, is how we do define gross margin. Because of an increase in our regulatory rider expenses, which if we do not do the separation that we're about to talk about, it would look like margin went up even greater because of the dollar for dollar recovery of regulatory riders. We now reduce gross margin by the recovery of regulatory riders and we separate that level of expense on the income statement. And the reason for that increase is an increase in our societal benefits charge, which is calculated on a per-therm basis.

During the first six month of the year gross margin from our off-system capacity management and financial risk management programs increased to $3.7 million, compared to $2.9 million last year, about a 28% increase and that increase was due to increased off-system sales. As you know we share the margin earned from these off-system sales and related programs with customers and share owners according to a formula that's in effect through now October of 2006.

Through these programs this fiscal year we've saved our customers approximately $19 million and since the establishment of these programs in '92 we've saved almost $225 million for our customers. Breaking it down for the quarter these programs generated $2.2 million of margin compared to $1.7 million last year.

Now seguing into our NJR Energy Services business, our unregulated wholesale energy services business, NJRES reported an 84% increase in earnings to $20.6 million compared with $11.2 million last year, that significant increase was due primarily to higher margins from our portfolio of storage and transportation assets, as well as higher management fees. For the three months -- we also had an excellent increase in the prior year as NJRES earned $15.3 million compared with 7.3 million last year. I again emphasize that our portfolio of assets, which are storage and capacity assets in the Gulf Coast, the mid continent, Appalachia and eastern Canada, have -- have -- did become more valuable in part due to the volatility that we saw this past winter.

As we've talked about we are first and foremost a physical marketer of natural gas, but our value is increased when there is volatility and that volatility can be between geographic locations or between different time periods. We also create value by managing other people's assets, other company's assets, and this segment of the business provides us an additional base of earnings which is, again, a lower risk since we are not using our own capital to pay for these assets.

We manage other companies storage, pipeline, and fuel contracts and basically, if you recall this was really the beginning of the business back in 1995, when we first started managing, at the time it was GPUs, gas management. The -- from a management fee perspective the basic model we use is we have a base fee that pretty much offsets any internal cost we expend to manage other companies' assets, and then there are incentive fees that are generated based on the level of revenue we produce for those other companies. And again the results this period were due in part to higher management fees from that side of the business.

I'd like to remind everybody that we believe we take a relatively -- a low-risk approach to this business and to remind everybody that we are strictly a natural gas marketer. We do not have any electric exposure. We have collected 100% of our receivables. We have not had any counter-party write-offs. We have a very low risk VAR.

Very low VAR, about $1.8 million, as of March, and that is consistent with our attitude of not betting on an IMEX and instead working with natural gas capacity and having very tight risk-management guidelines. Our traders are not compensated based on sales volumes or any other things that's apparently got other companies in trouble in the past. We also have netting agreements to help us with that credit exposure.

I do want to point out; however, that our financial results are seasonal in this business. And the results for the six months are not necessarily indicative of the results for the full year. Just like in our utility, the cost of transportation and capacity assets can be fixed throughout the year and the value of those assets are generally higher in the winter months. So the same cost profile, if you will, from -- even in our utility with capacity contracts. This is one of the reasons we decided to provide earnings guidance at this time.

Finally, in our third segment, our home services and other segment, this consists of NJR home services which provides service, sales, installation of appliance to over 137,000 customers here in New Jersey, commercial realty and resources, which develops commercial real estate and NJR Energy which consists primarily of our 3.2% equity investment in Iroquois Gas Transmission System Earnings in this segment, also higher this period, were $433,000, compared with the loss of 271 last year. For the quarter, it was a positive $393,000 compared with the loss of 200,000 last year, and that increase in both periods was due primarily to better results at Iroquois.

At this point we'll turn the call back over to Dennis and open up for questions.

Okay Brandy, we're ready to open the lines now for questions.

[Operator Instructions] We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Sam Brothwell [ph] of Merrill Lynch.

Hi everybody.

Hi, Sam. Hey, Sam, how are you?

Doing okay. How are you?

Good.

Just looking although the results in NJRES, some of the other folks that we're hearing from that are in that line of business were negatively impacted by a lower degree of volatility this year, and maybe you could just kind of contrast how your results were able to go up. Is it just because you're growing the business? Maybe you can give us a just a little more color on that.

We have -- Sam, it's Larry. We have two people from that segment who you know, Rick Gartner and Joe Shields. Rick is going to take that one.

How you doing, Sam?

How are you?

Pretty good. It is true that volatility this winter compared to last winter, many various market points, was less than the year prior. However, we've actually increased our asset base storage capacity by 15% this winter compared to last winter and that really is something that helps drive the earnings at this company.

So basically you've increased your level of activity and even though the market was less volatile your business just got bigger?

That's correct. Less volatile at various pricing points, but I think it's important to remember, as you measure volatility, and it's really a definition of at what pricing point are you referring to. We have an asset base that's very integrated and as we've moved our business footprint into the Michigan and Chicago area we're able to take even lower "volatilities" at each individual point, and as the synergies of the points as they touch, and we're able to move gas from one area to the next, allows us to create value.

Okay. Thanks a lot.

Thanks, Sam. See you in Florida.

Your next question is from the line of Dave Schanzer of Janney Montgomery Scott.

Hi, good afternoon, congratulations on a nice quarter.

Hi Dave. Thanks Dave.

Within the guidance that you guys have given us could you kind of give us a little bit more idea of how some of these things are going to happen during the year? For instance, I was looking at the operating and maintenance expense line, which, by the way, was up 6%, and I was wondering how much of that is timing, whether it's going to get higher or lower going forward. Can you keep it within 6% or even lower than that?

I'll have Glenn take that one. Glenn.

Yeah, I think the 4% was sort of six months, and, yes, Dave, based on seasonality and timing of certain things we think that around 4% is the amount we're expecting for the year.

Okay. And then the regulatory rider expense, which is still relatively new to us, is that also at a level that we can kind of expect going quarter to quarter?

Dave, that's going to change. These are pass-through items, things that are part of our rate structure, margin and expense, and what we -- what we've been trying to do is come up with a way that reports that and doesn't distort the --

O&M

-- direction overall picture, but O&M and quite frankly margin. One of the items that -- one of the items that is big for us right now is the costs -- recovery of the cost associated with our manufactured gas plants which are, you know, included in our rates -- we have a filing with the Board of Public Utilities right now that will influence that number, but we will continue to be quite explicit in that disclosure so we're focusing people more closely on the riders.

But there won't be any seasonal patterns necessarily? That's what I'm trying to drive at.

No, no.

No, Dave, and from the guidance perspective it's more in the demand cost, both utility and Energy Services have similar profile in demand cost for these capacity assets are relatively fixed year-round, but the margin, obviously, would be higher in the winter months.

Okay. Are there any other timing issues that I haven't thought about or mentioned?

There's always various timing differences, but I think as I mentioned the results of the six months we think has the appropriate trend for the year.

Okay. Thanks a lot. See you in Florida.

Thanks, Steve.

[Operator Instructions]. Your next question is from the line of Faisel Khan of CSFB.

Yeah, hi, Faisel Khan from CSFB. Can you give us the percent of your operating income in Energy Services that was from these management fees and it was from the physical marketing aspect of it?

The management fee part of the business is approximately 15% of Energy Services results.

Okay. And then can you characterize the volatility on the physical marketing side? Was that -- you talking about month to month kind of gas volatility or are we talking about basis differential on the transportation that you guys have? What really caused this higher than normal number?

Rick Gartner is going to take that again. Go ahead, Rick.

Couple of things, one, we just have a larger asset base, we increased that by about 15% of capacity winter to winter. Volatility, everybody talks about volatility and I just wanted to point out that you really need to define what volatility you're talking about in each pricing point has a different volatility. Taking each one of them separately they were lower year-over-year. I think what you're seeing with the increase of our results for this quarter is increased asset base as well as higher management fees year-over-year.

Okay.

Did you want to ask a follow-up on that?

Yeah, I mean just the earnings were double kind of what they were last year. I understand a 15% increase in the asset base. I'm just trying to characterize exactly, you know, if it was just the increase in asset base or if it was something else I'm missing here, but I guess if that's what it is, it is.

Management fees are a portion of that. The 15% increase in asset base also brings value that's additional than just saying you had a certain value in -- and you increase the base 15% as earnings would go up. As we add our asset base we are very conscious to take a look at assets that provide some synergy. They basically touch other assets we own in the collective results of that are greater than just each asset individually.

Okay. I guess going forward, would you expect these sort of results in future years based on your increased asset base, or if you do increase your asset base going forward can we expect, kind of, results to be stable or improve?

I think the best way to characterize that is we are still comfortable saying that this segment of the business will account for about 20% of total earnings.

Okay, got it. Thank you.

You're welcome.

Your next question is from Peter Harte [ph] of Tillen Capital.

Good afternoon. And congratulations on a fine quarter. My question is a follow-up to Faisel's question which if you can give the absolute amount of management fees that you booked in the quarter and why aren't those amortized, then, over the life of the contracts?

Peter, the first question, the -- regarding the specifics on the management fees, we consider that to be a competitive issue, in all candor. Can you repeat your second part of the question?

Yeah, I guess, it seems to have bolstered your second quarter. I was wondering why those wouldn't be amortized over the life of the contracts.

Glenn will take that one too.

Yes, Peter, the nature of some of our management contracts have some hurdles that have to be met before we earn certain incentive fees. So, quite frankly, a contract could, for example, run from April to April as far as the year of the management engagement, but it wouldn't be towards the end of that cycle that we actually trigger the hurdle, if you will, for to us earn fees.

Gotcha, Glenn. So as you make that milestone you book the earnings?

Right.

It would be a lot easier to do it the way that you suggested.

[ LAUGHTER ]

Right, right. Then just kind of onto that, you've done $2.70 here in the first six months, and giving guidance of $2.55 to $2.65 suggest a net earnings drag in the second half of 5 to 15 cents, yet when you look back last year, I think, in the second half of '03 you did a net positive 3 cents. So would the, you know, the net change, this 8 to 18 cents, second half over second half, would that be fully explained by the capacity contract costs as they kind of -- the fixed portion of that as they flow through the second half of the year?

Peter, it's Glenn again. Yes, the majority of the reason for our guidance where it is is the higher asset base would mean higher demand cost associated with those assets. They're always other issues out there, but clearly that is the biggest issue for that math you just did of the $2.70 versus the $2.55 to $2.65.

Gotcha. I was just hoping you guys were being overly conservative, as usual.

[ LAUGHTER ]

The last one, you don't have to answer this.

[ LAUGHTER ]

You haven't expressed a lot of interest in NUI. Have you ruled out any interest entirely?

Can't comment on that, Peter, as you might imagine.

All right. Well thank you gentlemen and congratulations again.

Thanks for listening.

Your next question is from Dan Fidell of A.G. Edwards.

Good afternoon.

Hey, Dan.

Congratulations from me on a great quarter as well. Most of my questions were asked by Faisel and answered by you satisfactorily. One quick question though, perhaps, you can you talk about Iroquois' results and sort of what you expect for the coming year and into next year?

Sure. Joe you want to take that? Joe Shields, who you know Dan, is one who is deeply involved, with Iroquois so he will take that.

Thank you.

Go ahead, Joe.

Dan, Iroquois, as you know, has been having some good earnings here lately. We expect it to be pretty much the same. The East Chester project was major project that Iroquois brought on, and that was delayed by a couple of months, but we expect the earnings to be pretty consistent going forward from here on out.

Okay. Thanks very much.

Thanks, Dan.

[Operator Instructions] There are no further questions. Are there any closing remarks?

No, just to say thank you to everyone for joining us this afternoon and for those who will be in Florida I think our presentation is Monday afternoon, in addition to the breakfast visitation table so we will look forward to seeing everyone then.

Thank you.

Thank you for participating in today's New Jersey Resources second quarter 2004 earnings call.

This call will be available for replay beginning at 6:00 p.m. EST today through 11 p.m. EST on Monday, May 3rd, 2004. The conference ID number for the replay is 6375703. Again, the conference ID number for the replay is 6375703. The numbers to dial is 1-800-642-1687, or 706-645-9291.

Thank you for your participation. You may all now disconnect.