New Jersey Resources Corp (NJR) 2005 Q2 法說會逐字稿

Good afternoon. My name is Dawn and I will be your conference facilitator today. At this time I would like to welcome everyone to the New Jersey Resources second-quarter fiscal 2005 conference call. (OPERATOR INSTRUCTIONS) Mr. Puma, you may begin your conference.

Thank you, Dawn. Good afternoon, everybody. Welcome to our second-quarter conference call. I'm joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, 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 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 the 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 and on Form 10-Q filed with the SEC on February 7, 2005, which can be found at SEC.gov, 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 in light of future events.

At this time I would like to introduce our Chairman and CEO, Larry Downes.

Thanks, Dennis. And good afternoon, everyone, and thank you for joining us.

I'm pleased to report that our business model continues to provide consistent results for our investors. As you know, excluding onetime items this morning we reported six-month earnings of $77.4 million, or $2.79 per basic share, versus $75.4 million, or $2.75 per basic share, last year. The unusual items totaled a net gain of $0.17 per basic share, and those resulted from the sale of a commercial office building by our commercial real estate subsidiary, Commercially Realty & Resources, offset partially by a charge associated with an early retirement program for officers as part of an overall restructuring plan for our organization.

The increase in earnings was attributable primarily to higher results at both NJR Energy Services, our unregulated wholesale energy services subsidiary, and NJR Home Services, which is our unregulated appliance service subsidiary. Our primary subsidiary, New Jersey Natural Gas, continues to enjoy strong customer growth this fiscal year. But that growth was offset somewhat by lower-than-expected customer usage per degree day, which resulted from inconsistent weather patterns.

Before I turn the call over to going to Glenn to you more of the details there are a number of other points I'd like to make.

First of all, our shareowners have been rewarded with a one-year total return of 19.6%. And on a longer-term basis they've enjoyed a three-year average annual return of 16.1%. Those numbers compare favorably with the S&P 500 Index returns of 6.6% and 2.5% for similar periods, and also compare well with our peer group.

Secondly, during the quarter we were pleased to learn that for the third year in a row NJR earned a spot of the Forbes Platinum 400. In the January 10th issue of Forbes we were the only New Jersey-based energy company among a total of 25 energy companies and utilities on the list. I think as many of you know, the Forbes Platinum 400 recognizes companies according to growth in sales, earnings, leverage, stock market returns and other factors such as the quality of their earnings. More recently, in the April issue of Fortune, we were named for the fourth consecutive year to the Fortune 1000.

We could not achieve these results without the hard work and dedication of our nearly 800 employees. And as always, I thank them for everything that they have done because they make us what we are as a Company. They continue to be the driver that will allow us to carry out our primary mission of providing safe, reliable and affordable service to our customers, while at the same time meeting the needs of all of our stakeholders.

Finally, subject to the factors that were discussed during the forward-looking statement part of our call and as noted in today's press release, we are on track to achieve the earnings guidance that we previously discussed for fiscal 2005, which is a range of $2.65 to $2.75 per basic share. Of course, that guidance excludes the gain on real estate sale and the charge associated with the early retirement program that I mentioned previously. Consistency is something that we're very proud of at NJR, and I'm delighted that our results have put us firmly on track to achieve our 14th consecutive year of earnings growth, a streak that we believe is the longest among all electric and natural gas utilities in our industry.

With that, I will turn the conference call over to Glenn Lockwood, and he will take you through some of the details behind the numbers we announced today.

Thanks, Larry. Good afternoon, everybody. As Larry mentioned, this afternoon we announced six-month earnings of $81.9 million, or $2.96 per basic share, compared with 75.4 million, or $2.75 per basic share, last year. Earnings for the six-month period included a gain that Larry mentioned of $0.22 per basic share from the sale of an office building by commercial real estate and a charge of $0.05 per share associated with the voluntary early retirement program. Net of these items our earnings were 77.4 million, or $2.79 per basic diluted share and $2.74 per diluted share.

To be as transparent as possible, included in today's press release is a schedule on page seven which provides the reconciliation of these items to net income and earnings per share on both a basic and diluted basis.

For the second quarter, basic earnings per share increased to $1.87 compared with $1.86 last year. For the three months diluted earnings per share increased to $1.84 compared with $1.82.

Looking at O&M, for the six months O&M expenses were 53.5 million compared with 51.7 last year. That increase was due primarily to that aforementioned early retirement program. For the quarter O&M expenses were 24.9 million versus 26.8. This decline for the three months was due primarily to a decrease of $1.4 million in costs associated with the Company's long-term incentive program.

Also, as you know, in January of '05 our Board of Directors authorized an increase in the Company's share repurchase plan from 2 million to 2.5 million shares. In this fiscal year we have so far purchased 547,400 shares under that plan, bringing our total investment under the plan to about $81 million, which has repurchased 2.2 million shares.

Now talking about the business segments in more detail, first our primary subsidiary, New Jersey Natural Gas Company. NJNG earned $53 million for the six-month period ended March 31, 2005 compared with 54.4 million last year. And again, that decrease was due primarily to NJNG's share of the early retirement charge and that impact of lower customer usage per degree day, which we saw primarily in the first fiscal quarter.

As you know, NJNG remains our core business. We have excellent growth prospects, characterized by the strong retail customer growth, a very stable customer base of about 94% of our customers being residential, and excellent demographics. Our growing distribution market provides the foundation for our other activities.

Details about that growth -- during the six months of the fiscal year NJNG added approximately 0.8 Bcf of new throughput, which is expected to generate about 2.4 million in annual gross margin. NJNG anticipates continuing to maintain an annual customer growth rate of about 2.4% in fiscal 2005, which would add approximately 1.8 Bcf of firm sales, and that would represent approximately 5.6 million of annual gross margin. And importantly, about 35% of that anticipated growth are expected to be conversion from other fuels.

For the six months ended March 31st the weather was 3% colder than normal and slightly warmer than last year when we had a very cold quarter and excellent results last year as well. Normal weather is based on a 20-year average temperature.

The impact of the weather is significantly offset by the weather normalization clause which is designed to smooth out year-to-year fluctuations on both NJNG's gross margin and customer's bills that may result from changing weather patterns. As a result of the colder than normal weather, NJNG actually deferred $2.4 million of gross margin during the six months to be credited to our customers in the future. Gross margin, however, was negatively impacted by lower-than-expected usage per degree day. We believe that this resulted from very inconsistent weather patterns experienced primarily in the first quarter.

Some more details on that -- in the first quarter our usage per degree day was actually 10% lower than normal even though the weather during that same period was only 2.5% warmer than normal. For the six months we did see some improvement as year-to-date usage is now a little better -- only 4% lower than normal.

During the six months, talking about our incentive programs, NJNG's incentive programs totaled 53 Bcf and generated $4 million of gross margin, which compares with 53 Bcf last year's low and about $3.7 million of gross margin last year. These incentive programs include our off-systems sales, capacity management, storage optimization and financial risk management programs. NJNG's shares the margins earned from these incentive programs with customers and shareowners according to margin share and formula which are in effect through October 2006. Since the establishment of these incentive programs in 1992, NJNG customers have saved nearly $256 million on their natural gas bills, or approximately 4% annually.

Shifting now to our wholesale marketing subsidiary, NJR Energy Services, NJRES reported a 7% increase in earnings to $22 million compared with $20.6 million last year, due primarily to higher gross margins from its portfolio of storage and transportation capacity assets, as well as higher management fees.

Gross margin in this segment is defined as natural gas revenues and management fees less natural gas costs. NJRES has developed a portfolio of storage and transportation capacity in the Northeast, Gulf Coast, Mid-Continent, Appalachian and Eastern Canada. These assets become more valuable when there are price changes between these areas and when prices change between time periods. Gross margin from this portfolio is generally greater during the winter months, while the fixed costs of these assets are spread throughout the year. Therefore, the results for the six months will not be indicative of the results for the entire fiscal year. For the three month NJRES earned $15.5 million compared with 15.3 million last year. This increase was due primarily again to higher gross margin and the higher management fees.

Our final segment, NJR Home Services and Other, consists of NJR Home Services, which provides service, sales and installation of appliances to nearly 140,000 customers; Commercial Realty & Real Estate, which develops commercial real estate; and NJR Energy, which consists primarily of about 3.2% equity interest in the Iroquois Gas Transmission Systems Limited Partnership.

Earnings for the six months in this segment were $6.8 million compared with 433,000 last year. This is a segment that includes the gain on sale of the real estate building of about $6 million, or $0.22 per share. So excluding this gain in this segment's results would reflect earnings of $1.4 million compared to 430,000 last year. For the quarter these earnings were 961,000 compared with 393 last year. And in both periods the increase was due primarily to growth at NJR Home Services, the service subsidiary.

With that, I will turn the call back over to Dennis for questions.

Okay Dawn, we're ready to open the lines for questions if there are.

(OPERATOR INSTRUCTIONS) Daniel Fidell, AG Edwards.

Thanks for the call. Just a couple of questions, I guess. First, how are you guys feeling about conservation at this point? It doesn't seem like you -- it looks like it's too big an issue, but just any thoughts you have on that in your service territory.

When you look conservation, I think you have got to look at that on really a longer-term basis. As you know, both when you look industry-wide on the commercial side, over the last 20 years we've seen almost a 20% drop in average use for the industry, and on the residential side since 1980 about 25%. I think there's a lot of factors for that, starting with more efficient equipment.

But it's a trend that we have to deal with. We reported today the numbers as far as usage, and quite frankly we will be doing additional work internally to understand more about that issue. I think as you know it's not an easy one to get your hands around. So conservation will continue to be an issue that we will have to deal with.

DO the regulators address it at all in your state? I know Northwest Natural is the model everybody's trying to implement in their own jurisdictions. Have you gotten any feel from regulators as to whether or not they might be open to implementing a similar mechanism in New Jersey?

No one has filed that. I think there is a, as you know -- as you say, the Northwest Natural model has become the main one that everyone is looking at. But I think speaking for ourselves we're still trying to understand how all that would work and would interact with some of the other aspects of our current regulatory structures; for example, the weather normalization clause. But no one has proposed it in the state that I'm aware of. And I don't think the regulators have really come out with a position on that.

Having said that, New Jersey, as I think you know, has a very strong environmental focus from a policy perspective. So there would clearly be, I think, interest on their part in looking at really any way to promote and support conservation.

Maybe just one another question and I will give up the line to someone else. Energy Services -- without giving away any kind of competitive information, can you just maybe tell us generally, or geographically, where you're winning? The numbers came in again quarter-over-quarter. Exactly -- or not exactly, but just in general terms where are you deriving this real good growth? You're in a number of areas. Is it evenly spread or is it more balanced into one area?

As you point out, Energy Services continues to do a great job. They're doing that in a very disciplined way. On the call with us here today is Rick Gardner, who is the Director at NJR Energy Services. Rick, do you want to comment on that to the extent that you can? And I think if you can't for competitive reasons I think the people on the call would understand that.

I think the real answer to that is the storage portfolio does derive quite a bit of the value. And you really can't focus that it is one particular geographical area where we're doing the "winning", as you put it. But it's all the pieces together. As we build this portfolio, we're very conscious about adding pieces that touch something we already have, meaning we add some storage on one end of the transportation piece we have or we'll ads some transportation where we already have some storage. When we add all of those options that get created together, that's what's generated our value. But right now, (indiscernible) generally say the storage book provides a lot of value for us.

I would say I think on our website is our most recent investor relations presentation. If you look at the section dealing with NJRES you'll see the map where we have different investments in capacity and storage. I think that will help you understand what Rick is saying.

(OPERATOR INSTRUCTIONS) Peter Hark, Talon Capital.

Maybe for you or for Rick, just following up Dan's question on Energy Services, trying to understand whether a good chunk of it is coming for management fees or from the transportation and storage itself, because if you look, for instance, at the statistics you provide under, for instance, gas sold and managed, where that has come down now through six months about 10% and down about 13% for the quarter, yet your net income has gone up in both periods, and maybe even particularly here in the first quarter where gross margins are down just modestly, but net income is up. So I'm trying to understand how the dynamics are working to where you are able to put up these kind of net income numbers which are pretty impressive.

There's a financial aspect to your question and an operation one, so I will ask Glenn to take the financial one. And then Rick, why don't you jump in?

You're right to point out that the actual amount of gas sold and managed is down. But as you point out, between 15 and 20% of our margins are derived from management fees. Last quarter we announced an arrangement with Niagara Mohawk on the latest addition to their portfolio. So you're on the right track that financially the percentage of management fees does impact that result.

Got you.

I'll let Rick talk about the specifics of the volume changes.

The volume change, that's just kind of -- it is hard. I would like to get together and have some of these discussions. But it really does get down to optimizing a portfolio. Just get a quick example.

If you have a piece of transportation that went from point A to point B, and you bought gas at point A and transported it to B and sold it, you could count that as one unit of a gas sale. But the based on volatility at end of that piece of transportation, pricing signals may send you the opportunity to not only have that original sale at point B, but maybe you sell off your gas at point A, repurchase at point B to deliver on your original sale at point B. So the scenario I just gave you, that produced the opportunity to sell two units where originally the plan was to sell one. So depending on how the hedges are laid out the first time, you basically build options. How those options are eventually executed upon can really affect the volume.

So I think that the key thing to take away from that is the volume by itself does not dictate your opportunity to generate margin and hence net income.

Got you. That's a perfect answer. Thank you. Separately from that, I was actually looking at the expense line items. And if you strip of the charge for the employee severance, the six-month number would be about $52 million, which is just modestly -- just less than 1% up relative to the six months of '04. Where do you expect O&M to come in for the remainder of the year? Would we see this as kind of like a run rate, like flat? Or could we even see declining O&M?

Glenn, can you take that?

Sure. Excluding that early retirement charge, I think it is fair to say that the six months of performance is what we internally expect for the year.

So kind of running flat, Glenn?

That's our expectation.

Great. I know we had talked about in the past; I just want to understand the expense line for the regulatory rider expense.

Sure, I'll take that. We have previously disclosed that last year we received a rate increase to recover a substantially higher amount of our manufacturing gas plant costs that had been building up over time. So that rate increase, the way it reflects in our financial statements is our revenues are increasing for that rate increase. And we then recognize dollar for dollar that increase in revenues for the amount of cost its recovering. That's actually a good indicator that we're actually recovering more of those MGP costs.

That's perfect, Glenn. Thanks. Lastly, just to jump back on the Energy Services, is it fair to think that there's some portion of it that is almost like a marked to market on the storage itself that could reverse out over the next two quarters? Does that make any sense?

I'll handle that. Following the accounting rules from several years ago there were two or three contracts that did not qualify for hedge accounting which we marked to market. That is a very small piece of our overall portfolio. The vast majority of our derivatives and contracts all qualified for hedge accounting. So we do not see significant volatility because of marked to market accounting.

Great. Thank you very much. I appreciate your answers. Thanks.

That's part of when I refer to the strategy as being disciplined, that's part of it, the way we try to keep it hedged.

Right, and keeping the stable earnings profile going. Thanks Larry.

Can I just add something on that just as a follow off? Peter, there are fixed charges associated with the portfolio of storage and transportation. That's why we do caution that the first six month's results wouldn't be reflective of the whole period. Because there are certain fixed charges that are spread throughout the 12 period.

Got you. Thank you very much. Thank you.

(OPERATOR INSTRUCTIONS) Dan Fidell, AG Edwards.

Just a follow-up question. On the home services business, just wondering if you could sort of touch on a little bit. That's becoming a more material contributor to earnings as we're growing here. What is your outlook for continued new customer additions and pricing and anything else you can share with us as we look to that particular line going forward?

Glenn, why don't you take that? Just a comment. As you know, Dan, we spun that business out several years ago. And the team has done just an excellent job not only growing the business, but improving productivity there. And you're seeing that -- you're really seeing that on the bottom line. But I would say going forward it will continue to be -- it won't be a large piece. It will be a modest piece of the total. And just as importantly, it complements the overall services that we provide to customers.

Glenn, do you want to talk about the outlook and percentage going forward?

Yes, the overall percentage I think will not change dramatically. We've talked about energy services being about 15 to 20% of the total. The vast majority of the balance is obviously our utility. And I guess it works out to be 1 to 2% is our remaining businesses, Dan.

I can tell you that we continue to see opportunities to grow the services provided in that segment. In the last year or so we've done well in adding some installation opportunities, both heat and air-conditioning, which has supplemented very nicely our service contract work. As you can see from the release, we've grown customer base about 2% over the last year. So that type of steady consistent growth fits in with the rest of our portfolio. And that's what we're shooting for going forward.

So your service contract business really provides a nice base for that business. And as Glenn notes, we've tried to build on that by expanding the service contract offerings, but also getting into the installation and plumbing businesses, which have worked out well. And primarily in our service territory too it's been an important part of the strategy.

As it grows are there any plans to add any kind of new advertising program, do anything different from what you're doing? Or is the model just sort of continuing to grow on its own; you don't need any incremental costs to keep it going?

I think on the advertising side we're constantly looking at the marketplace and adjusting the messages accordingly. But I think, too, that market is pretty straightforward, what I think customers are looking for. So I wouldn't see a big change in direction there. Obviously advertising is an important part of what they do, but I wouldn't see it increasing significantly.

Thanks again.

There are no further questions, sir. Are there any closing remarks?

No, just to say thank you all again for being on the call, and we will see you in July.

Thank you for participating in today's New Jersey Resources second-quarter fiscal 2005 conference call. This call will be available for replay beginning at 5 PM Eastern Standard Time today through 11.59 PM Eastern Standard Time on Tuesday, May 3, 2005. The conference ID number for the replay is 5315245. Again, the conference ID number for the replay is 5315245. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you.