New Jersey Resources Corp (NJR) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the New Jersey Resources fiscal 2004 earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Puma, you may begin your conference.

Good afternoon everyone, welcome to New Jersey Resources' fiscal year-end 2000 (ph) 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 our senior management team.

As you know certain statements in our news release and in today's call contain estimates and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We wish to caution readers of our news release and listeners to this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR's ability to control or estimate precisely which could cause results to differ materially from our Company's expectations.

A list of these items can be found, but is not limited to, items in the forward-looking statements section of today's news release, on Form 10-Q filed with the SEC on August 6, 2004, which can be found at SEC.gov, and in our press release issued this morning and filed with the SEC on Form 8-K.

NJR does not by including this statement assume any obligation to review or revise any particular forward-looking statement referenced herein and later future events. At this time I would like to introduce our Chairman and CEO, Larry Downes.

Good afternoon everyone and thanks for joining us this afternoon. I'm pleased to report to you that our business model continues to provide us with very consistent financial performance. This morning we were pleased to announce record earnings for fiscal 2004 of $71.6 million or $2.60 per basic share. That compared with 65.4 million or $2.41 per basic share last year, and represented an increase of almost 8 percent.

Our strong fiscal 2004 performance represents our 13th consecutive year of earnings per share growth. We believe that that record is the longest streak among all electric and natural gas utilities in the country.

In addition to earnings we achieved a return on equity of 15.6 percent during fiscal 2004. That marked the fourth consecutive year of return on equity over 15 percent.

Our strong financial performance is due primarily to the continued growth of our largest subsidiary, New Jersey Natural Gas, and another very strong year at our unregulated wholesale energy services subsidiary, NJR Energy Services.

In just a few moments I am going to turn the call over to Glenn and he will give you most of the details behind the numbers. And then of course you'll have the opportunity to ask us questions, but there are a number of points that I would like to make.

First of all, our shareowners were rewarded with a 1-year total return of 18.5 percent, and on a longer-term basis have enjoyed a 3-year average annual total return of 15.2 percent. And that compares with the S&P 500 Index return of 3.9 percent for the same period ending September 30, 2004.

Second, I'm also pleased to report to you that our Board of Directors approved a 4.6 percent increase in the quarterly dividend rate to 34 cents per share from the current rate of 32.5 cents per share. The new quarterly rate is effective with the dividend payable January 3, 2005, to shareowners of record on December 15, 2004. And the new and indicated annual dividend rate will be $1.36 per share.

We have now increased our dividend in each of the last 10 years and have paid quarterly dividends since 1952.

This year's earnings per share performance brought our dividend payout ratio down to 50 percent. We believe that this continues to maintain a healthy balance between dividends being paid to our shareowners and earnings being retained in the business to support future earnings per share growth.

Third, our financial profile remains strong, which allows us to continue to access the capital that we need to support our business at attractive rates, as well as providing our customers with safe reliable service.

Fourth, assuming normal weather, stable economic conditions and continued customer growth at New Jersey Natural Gas, and continued volatility in the wholesale natural gas markets for NJR Energy Services, and subject to all of the factors that Dennis discussed in the forward-looking statements part of our conference call and today's release, we are initially estimating that earnings for fiscal 2005 will be in the 2.65 to 2.75 per basic share range.

And finally, I would like to extend a special thanks to all of our employees, because it is through their activities, their commitment and their efforts that we're able to report these results today. They continue to be the driver of everything that we do and enable us to carry out our primary mission of providing safe, reliable and affordable service.

So with I will turn the call over to Glenn Lockwood, and he will get into some more of the specific details behind the numbers.

Good afternoon everybody. As Larry mentioned, today we announced earnings of $71.6 million, which compares to a little bit more than $65 million last year. On a basic earnings per share basis earnings increased 7.9 percent to 2.60 per share compared with 2.41 last year.

Breaking down the numbers by segment, NJNG remains the primary source of our earnings. Last year NJNG earned 55.5 million compared with $53 million in the prior year. That represents 78 percent of our total earnings. The increase is due primarily to their continued profitable customer growth.

NJR Energy Services reported a 19 percent increase in earnings to $13.6 million, compared to 11.4 million in the prior year as higher gross margins were generated by its portfolio of storage and transportation capacity, as well as higher management fees. These earnings represent 19 percent of total earnings for the total Corporation.

The balance of our earnings came from our other business segment which consists of NJR Home Services, which provides sales and service of appliances to over 144,000 customers; CR&R, which develops commercial real estate; and NJR Energy, which consists primarily of our 3.2 percent equity investment in Iroquois Gas Transmission System LP, who collectively earned $2.5 million in fiscal '04 compared with $1 million last year.

Consolidated operating and maintenance expenses were $101.1 million this fiscal year, slightly below last year's $101.4 million. And in fiscal '04 O&M did include $1.2 million of an additional expense associated with an early retirement program for eligible employees which was primarily offset by lower fringe benefit and advertising costs.

During the year under our share repurchase program we purchased 31,300 shares. And under this plan we may purchase shares on the open market or a negotiated transaction based on market and other conditions. Since this plan began in September of 1996 we have invested $58.2 million to repurchase 1.6 million shares.

For the quarter we posted a loss of $5.4 million or 19 cents per share compared with a loss of 3.6 million or 13 cents per share in the same quarter last year. As you probably know, a seasonal loss is expected in the fourth fiscal quarter due to the seasonality of both our LDC business in NJNG and the wholesale energy services business at NJR Energy Services.

A little bit more about each segment. In New Jersey Natural Gas, which is again our core business, we have excellent growth prospects which have been characterized by strong retail customer growth, approximately 2.4 percent customer growth; a very stable customer base with about 94 percent of our customers residential; and continued excellent demographics in our service territory. Again, this provides a foundation for all of our other activities.

Some of the facts for fiscal '04. We added 10,635 new customers, 35 percent of which converted from other fuels. We also added natural gas heat and other services to over 1,200 customers during the year. In total we estimate that these additions are expected to generate 1.8 Bcf of annual throughput, which would equate to about $5.5 million of annual gross margins. These factors contributed to NJNG’s earnings, growing with the $55.5 million in fiscal '04 compared with the (technical difficulty) million dollars last year.

The weather really wasn't a factor in '04. It was 1.1 percent warmer than normal and 10 percent warmer than the prior year. This is based on 20-year average temperatures.

The reason there's little impact is because the impact of weather is significantly offset by the utilities' weather normalization clause which is designed to smooth out year-to-year fluctuations on both NJNG's gross margin and on the customers' bills that would normally result from changing weather patterns.

Since the 1 percent warmer than normal weather was within our deadband range and happened in the fourth fiscal quarter, for WNC purposes there's no gross margin accrued or deferred under that WNC clause.

For the quarter year-to-year NJNG lost $2.6 million this year versus 5.2 million last year. And again that loss is expected in this quarter because of the obviously low demand of natural gas for our residential heat customers in the summer. The improvement from year to year were due primarily to lower O&M expenses in the quarter.

During the year utilities incentive programs, which include off system sales, capacity management, storage optimization and financial risk management, totaled over 47 Bcf and generated $5.8 million of gross margin. That compared to 35.8 Bcf and $5.4 million of gross margin in the prior year.

This year there was a new storage incentive program that has provided us another opportunity to generate benefits for both our customers and our shareowners. NJNG shared these gross margins earned from all of these incentive programs with our customers and shareowners through margin share and formuli that are in effect through October 2006.

From a customer perspective they will save nearly $29 million this year through the benefits they receive in these programs. Since these programs began in 1992, NJNG's customers have saved over $230 million on their natural gas bills.

Shifting to NJR Energy Services, our wholesale energy services business, they recorded a 19 percent increase in earnings to $13.6 million this year due primarily to higher gross margin generated from its portfolio of storage and transportation capacity, as well as higher management fees.

NJRES benefited from higher gross margins due to an increase in their portfolio of storage and transportation assets in the Gulf Coast, the MidContinent, Appalachia and eastern Canada, which became more valuable when there were change of prices between the various geographic locations and between different time periods.

As we have talked about in the past, gross margin generated by this portfolio is generally greater during the winter months while the fixed costs of this capacity is spread throughout the year. Therefore consistent with the seasonality, the three months ended September 30, '04, did produce a net loss of $4.3 million compared with slight earnings of 350,000 last year. And this loss again was related to the growth in the demand fees associated with those capacity assets.

And last but not least, in our NJR Home Services and Other segment, again I mentioned earlier the different segments and services that they provide. Earnings for the year were $2.5 million compared with $1 million last year. And in the quarter earnings grew to a 1.5 million compared with 1.2 million last year. And in both periods, the quarter and the year to date, the increase was due to our Home Services segment and a growth in the service contract business.

So with that we have plenty of information in the release itself. And I will turn the call back over to Dennis for questions.

Lee, we would like to open up the lines at this point.

(OPERATOR INSTRUCTIONS). Dan Fidell of A.G. Edwards.

A couple of questions for you on the quarter. First, can you talk a little bit about lower O&M for the quarter? O&M costs have generally been rising for most LDCs, health care, bad debt. If you could talk a little bit about some of those items, what you expect into fiscal '05, and sort of what caused O&M to pull back here a little bit in the last quarter.

A couple of things. 1, we did have some seasonality from year to year. The prior year we had some large and unusual contributions last year versus this year. So that was just some seasonality.

But more important, we talked about in our public filings how we made optional large contributions into our pension plan at the end of fiscal '03. And that had a very nice impact for us on (technical difficulty) funding our pension plan, which has the impact of lowering what for most companies are probably rising pension expense. And instead we had a lower pension expense.

Again because we actually put more cash into the pension plan. That is again using our strong balance sheet and taking advantage of being able to fund that pension plan. Because if we didn't, we would see pension costs rising and we did not want to see that.

So fringe benefits we mentioned in the press release, that is mainly pension costs.

Also during the year there was a change in the Medicare law. And for companies that have medical plans that meet certain criteria there is a benefit that we are going to receive from federal government. And that actually lowered our post retirement costs as well. And that was again because of a change in the law for the Medicare. So we benefited from both of those items.

We did control our advertising costs. Based on, as the year was going on, we just managed our advertising costs better. And again, that offset what was a $1.2 million expense we incurred last year for an early retirement program.

Thanks. Just another question for you on the Energy Services side. Commodity prices are all over the place obviously. And you guys had a very good year here, about 50 cents or so per share to total earnings versus about 40 cents last year. Can you give us some -- how the recent volatility, if it persists, what that is going to mean for Energy Services into fiscal '05?

2 things. 1, I want to explain with the recent run-up in prices there is a short-term working capital issue that is going to be obvious in our documents, and we should talk about that as well. And it really proves a point.

We are effectively hedged with regard to physical NYMEX commodity prices, which means to the extent we have gas in the ground and that we sell in the winter, we're not taking the risk or the reward in that case of NYMEX prices moving dramatically.

We have done that by selling futures. So in the short-term the run-up in prices is actually generating some margin calls which will see some run-up in short-term debt levels. That is a short-term cash flow issue and balance sheet issue.

From the idea that it is continuing volatility, both commodity and capacity, that is good for our business. And as we said in our press release, we are comfortable with seeing our Energy Services business maintain that 15 to 20 percent of our total earnings for the year. And that is included in our earnings guidance for next year.

So it is good for the business. And in total we still see 15 to 20 percent from that business segment.

Thanks, Glenn. And then just a last question and I will let someone else ask you a question. Just about the Home Services outlook for that, had a nice jump there. I am just wondering is there further growth in that area that we might see? Is it mostly service and sales pricing driven, or what can you tell us about where earnings might go from here?

Again, yes, we do see it growing. We see the relative mix between the business segments staying at approximately where we have been talking about. So still 1 to 2 percent of the total, but yes growing and being profitable.

(OPERATOR INSTRUCTIONS). At this time there no further questions. Are there any closing comments?

Thank you guys. We appreciate your time.

Thank you for joining today's conference call. You may now disconnect.