New Jersey Resources Corp (NJR) 2004 Q3 法說會逐字稿

Good afternoon. My name is

, and I will be your conference facilitator today. At this time, I would like to welcome everyone for the New Jersey Resources earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 one on our 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, Shirinko. Good afternoon everyone. Welcome to our conference call for the quarter. I'm joined here today by Larry Downes, our Chairman and CEO; Glenn Lockwood, our Senior Vice President and CFO; as well as other members of our New Jersey Resources, Senior Management team. As you know, certain statements in our earnings release and in today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. New Jersey Resources wishes to caution persons listening to this call and readers of our earnings release that 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 the behavior of other market participants. Other factors that could cause actual results to, including gross margin, earnings, customer growth, to differ materially from the Company's expectations include, but are not limited to weather conditions, economic conditions in NJNG's service area, the impact of regulation, including the regulation of rates, fluctuations in energy-related commodity prices, conversion activity and other marketing efforts, environmental matters, litigation and other uncertainties. More detailed information about these factors are set forth in our filings with the Securities and Exchange Commission, quarterly report form filed on Form 10-Q, filed on May 10, 2004. Our Form 10-Q, is available at sec.gov, and njlivings.com. NJR does not by including the statement assume any obligation to review or revise any particular forward-looking statement, referenced herein in light of future events. At this time, I would like to turn the call over to our Chairman, Larry Downes.

Thanks Dennis, and good afternoon everyone, and as always thank you for joining us here today. I think as everyone knows, this morning we reported a very strong 9.8% increase in our basic earnings per share for the nine months ended June 30, 2004. The actual earnings were $2.80 per share, which compared with $2.55 last year. That increase was primarily the result of higher margins that NJR Energy Services which as you know is our unregulated wholesale energy services subsidiary. NJR has continued to achieve excellent results this year. We also experienced continued steady customer growth at our principal subsidiary New Jersey Natural Gas Company. Glenn is going to get in to the details of the nature and operating statistics in just a few minutes. What I think is, as you evaluate our results, you will see that once again we are continuing to turn in a very solid financial performance during fiscal 2004. I do want to emphasize a few points. First of all, I want to say thank you to our employees, it is really their hard work in dealing with a changing environment in our industry that has allowed us to achieve the results that we have reported to you today. Secondly, I wanted to comment on the return that we have been able to provide to our shareowners. Over the past 12 months, we have provided total return of 20.7%, and over the past five years, have generated an average return of 13.2%. And when you look at the five-year period, we finished number one among our peer group of 26 companies. I also want to point out to you that during the quarter, New Jersey Natural Gas Company's business profile was increased by Standard & Poor's to a one from a two. I think as you all know that is on a ten-point scale, and that represents the lowest risk assessment in Standard & Poor's rating system for business profiles. But, I think importantly with that change, New Jersey Natural Gas became the highest ranked company among all regulator, electric, gas, and water distribution utilities within the corporate group grade A+, with a stable outlook by Standard & Poor's. And the significance of that action is it once again underscores our commitment to maintaining a strong financial profile. As you know, that is an important element of our overall strategy, is the lifeline service provider. It is critical that we maintain access to capital, regardless of circumstance and obviously generate an appropriate return on that capital. Finally, also as we noted in our press release, I'm pleased today to reaffirm that we are on track to meet our earnings guidance for fiscal 2004. Previously, we had communicated to you a range of $2.55 a share to $2.65 per basic share. And as we note in the press release, we are on track to achieve that. Our record for consistent performance in the financial area is something that we are very proud of and delighted that these results that we have announced today put us firmly on track to achieve our 13th consecutive year of earnings growth, a streak that we believe is the longest in our peers in the industry. With that, I want to introduce Glenn Lockwood, our Chief Financial Officer. Glenn will provide you with more other specific better results. I should also point out to you that I am joined today by Tom Kononowitz, our Senior Vice President of Marketing; Rick Gardner, Director of Energy Services, Joe Shield, Senior Vice President of Energy Services, Tim Hearne, our Senior VP, and Treasurer, and Barbara Roma, our Senior Vice President of Customer Services. So, with that, I'll turn it over to Glenn, and I look forward to your questions.

For the nine months, NJR earned $77m, compared with $69m last year, an increase of 11.6%. On a per share basis, that equated to a 9.8% increase and our basic earnings per share to $2.80 compared with $2.55 last year. On a diluted basis, earnings per share for the nine months increased to $2.74, compared with $2.51 last year. The increase for the nine months was attributable primarily to a higher margins at NJR Energy Services, our unregulated wholesale energy services subsidiary, and continued customer growth at New Jersey Natural Gas, all of which offset some of the impact of colder weather last year, which we'll get into in more detail later.

For the quarter, NJR earned $1.6m compared with $4.5m last year. Fiscal third quarter basic and diluted earnings per share decreased to $0.06 per share, compared with $0.16 last year. This anticipated decrease in earnings for the quarter was attributable primarily due to increase in fixed demand charges associated with our additional capacity contracts at NJRES, and colder weather during the prior year's quarter and how that was impacted by last year's WNC or weather-normalization clause, and I'll get into some of those details again, like I said, a little later. Consolidated operation and maintenance expenses were $76.6m for the nine months, compared with $74.4 last year and for the quarter O&M expenses were $25m versus $24.9m last year. The increase in both periods were due primarily to higher labor, fringe, and insurance cost.

Now, I would like to break it down by business segment through New Jersey Natural Gas. Natural gas distribution remains our core business. We continue to have excellent growth prospects characterized by strong retail customer growth, a stable customer base made up mostly of residential and small commercial customers and excellent demographics in our service territory, and this growing distribution market provides the foundation for our other activities. During the first nine months of the year, NJNG added approximately 1.3 Bcf of throughput, which is expected to generate about $4m in annual gross margin. For the year, NJNG expects to maintain its approximate 2.5% annual customer growth rate, which is well above the national average for natural gas distribution companies. In total, in fiscal 2004, NJNG expects to add approximately 2 Bcf of throughput representing about $6m of annual gross margin. Importantly, conversions from other fuels represents about 35% of that customer growth. NJNG earned $58.2m for the nine months, compared with $58.2 last year.

For the nine months, weather was six-tenths of 1% warmer than normal and 10.2% warmer than last year. Weather for the third quarter, was 21% warmer than normal and almost 37% warmer than last year. The impact of the weather is significantly offset by NJNG's recently updated weather normalization clause. And as you know, that clause is designed to smooth out the year-to-year fluctuations that may result from changing weather on NJNG's margin and customers' bill. The warm weather in the quarter has brought weather for the whole fiscal year of 2004 within the `normal range` for WNC purposes. Therefore, NJNG did not have to defer or accrue any gross margin to customers under WNC in fiscal 2004. Now, this WNC was updated in October 2003 when the BPU approved NJNG's request to update the factors that are used in the clause. These consumption factors have not been updated since the conclusion of NJNG's last base rate case, over a decade ago. The updated consumption factors have made the results and calculations from the WNC more effective in mitigating the impact of weather. With the previous consumption factors in place and the prior year's colder weather, NJNG's gross margin for the three and nine months ended last year included approximately $2.4m and $4.6m respectively of additional gross margin beyond the amount covered by the WNC. Bringing last year's earnings to the bottom line, when -- that last year's earnings benefited by $1.4m or $0.05 per share and $2.7m or $0.10 per share for the three and nine months respectively. So, you can see the impact of how last year's margin earnings were improved by last year's version of the WNC in a colder weather.

I would also like to remind you that earlier this year we did make a change in how we define gross margin to be more comparable from year-to-year based on changes to our regulatory rider expenses. You know that we have a new line broken out called the regulatory rider expenses, which was previously included as part of O&M. Regulatory rider expenses represented societal benefit charges on customers bills and are calculated on a per-therm basis. From an income standard perspective, there is a one for one match of revenue expense related to these items. Since, for the first time in use, there is an increase in this universal service fund charge we felt it prudent to break out this expense at this time, and we have broken it out on the income statement. During the first nine months of the year, NJNG's off-system sales, capacity management, and financial risk management programs, and for the first time our storage optimization program generated $4.8m of gross margin compared to $4.2m of gross margin in the same period last year. This new storage incentive program provides another opportunity to benefit both customers and shareowners. As you know, NJNG shares some gross margin earned from these incentive programs according to a margin-sharing formula in effect through October 2006. So far, this fiscal year customers have saved over $23m in natural gas costs through these programs. And since the establishment of these programs in 1992, NJNG customers have saved over $229m on their natural gas bills. During the quarter, these programs generated $1.1m of gross margin compared with $1.3m last year.

Shifting to NJR Energy services, NJRES' earnings totaled $17.8m during the first nine months of this fiscal year which was 60% higher than a year ago, and this benefited from higher margins generated by a growing storage and transportation portfolio and higher management fees associated with NJRES' management of other company's assets. To create this value, NJRES has developed a portfolio of assets in the Gulf Coast, the Mid-Continent, Appalachia, and Eastern Canada which become more valuable when there are change in prices between these areas, as well when there are change in prices between time periods. Another way NJRES can create value is through the management fees. This segment of the business provides us with a baseline of annual earnings, which are relatively lower risk than the other parts of the business. NJRES earns management fees for managing other company's storage, pipeline, and fuel contracts. And NJRES has been in this business essentially since 1995 when our first contract was with GPU back then. This segment of the business does the same type of transactions we talked about above for other companies. Some companies do not have the infrastructure we have in this area, while others do not view this as a core to their business. NJRES optimizes underutilized assets held by the companies to create value for those companies and we receive a base plus an incentive fee for most of those types of contracts. As we've talked about in the past, we have taken a relatively conservative approach to managing the risks of this business. We again are strictly in natural gas operation. We have not electric exposure. We do a lot of work monitoring and managing our counterparty credit ratings. We have had no write-offs to discuss. We have a relatively low value at risk and have minimum mark-to-market income. Our trader compensation is not based on sales volumes or revenues and we have netting agreements in place with many of our counterparties again to reduce potential credit risk.

During the quarter, NJRES had a net loss of $2.8m compared with a loss of $98,000 last year. The larger loss in the quarter reflects the growing portfolio of capacity contracts and the related increased amount of fixed demand costs. Gross margin from this portfolio was generally greater during most of the months, while the fixed costs are spread throughout the year. Therefore, consistent with the seasonality, the results for the nine months will not be indicative of the results for this fiscal year as a loss in the fourth fiscal year would be anticipated based on those -- on that seasonality. We continue to estimate that NJRES' contribution to consolidated earnings in 2004 will be between 15% and 20%.

our third business segment if you will New Jersey -- NJR Home Services and other. This business segment consists of Home Services which provides service, sales, installation of appliances to over 141,000 customers, Commercial Realty and Resources which develops commercial real estates, and NJR Energy which consists primarily of a 3.2% equity interest in Iroquois Gas Transmission System, L. P. Earnings for the nine months in this segment were $959,000 compared with a loss of $207,000 last year. And earnings for the quarter were $526,000 compared with $64,000 last year. The increase in the nine-month period is primarily due to better results from both Home Services and Iroquois, while Home Services provided the majority of the increase for the quarter. That is all I have on the details behind the numbers and I'm turn it back over to Dennis, at this time.

Operator, we are ready open the line for any questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Mike Werner with Kennedy Capital.

Hi, thanks. I had a question, actually, two questions. First of all, just to clarify the -- what did I have -- on the seasonality of the -- on the New Jersey Energy Services. I just want you to reiterate just for one more time about, the costs are -- are they -- is it normal for the cost to be a bit higher during this quarter to next quarter, and that to be offset in the other two quarters, just help me with the seasonality a bit again?

The amount of the cost are relatively fixed year round. It's the margin that is generated from these assets, are generally greater in a winter month. So, particular to your question, yes, the amount of cost which is pretty much consistent in the different quarters.

And should I take from your commentary both on the call and the release that you've a growing portfolio of contracts, that that's I'm assuming that you are continuing to see more business in that segment, is that fair conclusion to that comment?

Yes, that's fair and we are specifically also talking about in relation to the prior year.

Okay.

But it is fair that it is growing portfolio.

Okay. I had a question on the tax rate, why was it so -- did you comment on why was it lower in the quarter?

It was slightly low

the quarter related a very small adjustment related to recent changes in the Medicare Act, but a very small impact on the quarterly effective tax rate.

Do you expect that, is that more of a one-time anomaly or is it -- are we going to see that in other quarters thus going forward?

I think it's a little bit bigger in the particular quarter because this is the first quarter we've adopted, well more details on that when we issue our 10-Q, but it is not a significant amount going forward.

Okay. Everything else looks fine. Thanks very much.

You are welcome.

Your next question comes from David Schanzer with Janney Montgomery Scott.

Hi, good afternoon, guys.

Hi, Dave.

This is more of a clarification question. I understand the impact of weather on 2003, but I'm not real clear yet on 2004 even after reading and the explanation. What you are basically saying, and correct me if I'm wrong, that by the end of the nine-month period you basically hit a normal range in terms of accruing margin for customers?

Correct.

Okay. So, but for the quarter itself what was the weather impact in '04?

Hi, David. Similarly, it was warmer during the quarter.

Yes. I mean in terms -- if you took booth the utility and the non-utility, is there any way to quantify -- was there any kind of significant impact in terms of earnings?

David, let me take a shot of that. For that quarter, I thought it was out more but I'll call more efficient WNC. You can say that the weather no matter how much warm or cold on a quarter, really did not impact our margin.

Okay.

We are just pointing out that we don't owe or the customer do not owe us any monies related to that clause.

Okay. Was there a non-regulated impact from weather?

No, nothing significant from that weather.

Okay.

We tried to explain it last year because we had a different weather clause and consumption factors since it was cold in a normal week benefited last year, which we would not benefit this year.

Okay, great. Thanks.

Your next question comes from Mike Weinstein with Zimmer Lucas.

Hi guys. It appears I have a mathematical question for you. I've heard a couple of times that New Jersey Resources Energy Services going to be about 15% to 20% of earnings. Now, if the Utility is for the first nine months so far this year is about flat with last year, is that right?

Yes.

So if you assume that last year they made a $1.92 at the Utility. Now that would imply that Energy Services is going to have to be higher than 20%, more or like 25% or 26% of earnings to get to the middle of the range of 235 to 265 that you guys have been forecasting for '04? So I am just wondering if there is a reason, why say 15% to 20%?

I would think, we have take seasonality into effect for all of our business segments -- for us --- specifically as we pointed out in this press release NJR Energy Services, but I think you would see other seasonality with regards to our Utilities more than prior years. So it's just a matter of looking at the relative impact of the seasonality in a different business segment.

Okay, but this is an annual thing. So I don't think seasonality is really part of it?

How would we -- could expect how much seasonality impacts the different business segment?

All right. Only we can talk about this more offline. Thanks a lot.

Again if you wish to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Mark

with Merrill Lynch.

Hi, it is actually same Sam Brothwell. Just following up David's question, as you look towards through the current quarter do you expect the WNC to have any impact, positive or negative on the Utility this year, based on being it a basically zero for the nine months?

WNC is not in effect some of the months.

Okay, so it would not -- you don't expect it to have any impact, I just want to clarify, you don't expect it to have any impact for the current fiscal year?

It's not operational.

Okay. Thanks.

Your next question comes from Stacy Saul with WH Reaves and Company.

Hi. I have two questions on NJRES. First of all, can you give an indication of how much of their earnings is from management fees versus I guess trading on the portfolio of assets? That is my first question.

We haven't broken an out, Stacy, well to take that into revision when we did the 10-Q.

Okay, and then also you see NJRES is going to earn 15% to 20% of '04 earnings. If you assume a normal level of volatility, I guess, is that going to be a similar number -- is that a sustainable number that we can see in future years, 15% to 20% of earnings?

We see no reason to change that as we going forward.

We are comfortable with that Stacy.

Okay, great. Thank you.

Again if you wish to ask a question, please press star then the number one on your telephone keypad. There are no further questions at this time, I will now turn the call back over to Mr. Puma.

Okay, Thank you very much for participating and we will be in touch soon. Thank you very much, bye bye.

Thank you for participating in today's New Jersey Resources earnings conference call. This call will be available for replay beginning at 06:00 PM ET today to 11:59 PM ET on Monday, August 2, 2004. The conference ID number for the replay is 8237096, again the conference ID number for the replay is 8237096. The number to dial for the replay is 1800-642-1687 or it is 706-645-9291.