New Jersey Resources Corp (NJR) 2005 Q3 法說會逐字稿

Good afternoon. My name is Lee and I will be your conference facilitator today. At this time, I would like to welcome everyone to the New Jersey Resources quarterly earnings conference call.

[Operator Instructions]

Thank you. I will now turn the call over to Mr. Dennis Puma, Manager of Treasury Services. Sir, you may begin your conference.

Thank you, Lee. Good afternoon, everyone. Welcome to New Jersey Resources third quarter conference call and webcast. I'm joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, our 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 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 materially differ from the Company's expectations.

A list of these items can be found, but is not limited to, items in the forward-looking statement section of today's news release and on Form 10Q filed with the SEC on May 6, 2005, which can be found at sec.gov and our website, njliving.com, in our news release issued this morning and filed with the SEC on Form 8K. 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. Larry?

Thanks Dennis. Good afternoon, everyone. And as always, thanks for taking the time to join us today. I'm pleased to share with you that on balance, our business model continues to provide consistent results. As I think you know, excluding one time items, this morning we reported nine month earnings of $79.2 million or $2.80 per basic share, which compared with $77 million or $2.80 per basic share last year.

The one-time items totaled a net gain of $0.17 per basic share and that resulted from the sale of a commercial office building by our real estate subsidiary, Commercial Realty Resources, that totaled $0.22 per share and was partially offset by a charge of $0.05 per share that was associated with an early retirement program for officers, which was part of an overall management restructuring plan that we announced earlier this year.

The increase in earnings for the nine-month period was attributable primarily to better results at both NJR Energy Services, which is our unregulated wholesale services subsidiary and our unregulated appliances services business. Our largest subsidiary, New Jersey Natural Gas continues to enjoy strong customer growth which is translating into higher margins this fiscal year. But that growth was partially offset by New Jersey natural's share of the early retirement charge that I just mentioned and the impact of lower customer usage per degree day.

Now before I turn the call over to Glenn, and he will get into more of the details behind the numbers, there are a number of points I would like to make. First of all, through June 30, 2005, our share owners have been rewarded with a one-year total return of 19.2% and on a longer term basis we've enjoyed a three-year average annual total return of 20.4%. This performance compares favorably with both the S&P 500 index returns of 6.2% and 8% for similar periods. Secondly, in May, we decided to invest an additional 8.7 million dollars to increase our equity investment in the Iroquois gas transmission system from 3.28% to 5.53%. Iroquois has provided us with excellent returns and we were happy to have the opportunity to increase that investment.

And third, shortly after the end of the third quarter, Inergy LP entered into an agreement to acquire the Stagecoach project. Upon closing this transaction, we'll terminate NJRES's existing marketing agreement with Stagecoach, including the related obligation of guaranteeing a certain level of revenue to Stagecoach.

And in addition, NJRES entered into a letter of intent with Inergy to provide a variety of energy management services including base gas, natural gas supplies, and firm storage optimization for the Stagecoach project. And I just want to say that we're very much looking forward to working with Inergy in the future. And also I want to thank our employees for their hard work and dedication. Without them, we could not report these steady results that we've reported here today. They continue to be the driver which allows us to carry out our primary mission of providing safe, reliable and affordable service to our customers while providing consistent returns to our shareowners and meeting the needs of all of our stakeholders.

And finally, subject to the factors discussed in the forward-looking statements outlined in today's release, in our performance during the first nine months of the fiscal year, we're on track to achieve the earnings guidance we have previously disclosed for fiscal 2005, which is a range of $2.65 to $2.75 per basic share.

Consistency is something that we're very proud of and I'm delighted that our results thus far have put us firmly on track to achieve our fourteenth consecutive year of earnings growth this year, a streak that we believe is the longest among all electric and natural gas utilities in the industry. And as always, I want to thank you all of you for your interest in your investment in New Jersey Resources. And with that, I would like to call the turn over to Glenn.

Thanks, Larry. Good afternoon, everyone. As Larry mentioned, this morning we announced earnings for the 9 months ended June 30, 2005 of 83.7 million or $3.03 per basic share, compared with $77 million or $2.80 per basic share last year. These earnings included a gain on the sale of commercial office building of $0.22 per basic share by CR&R and a charge of a nickel per basic share associated with the voluntary early retirement program that Larry mentioned earlier.

Net of these items, our earnings were 79.2 million or $2.87 per basic share and $2.81 per diluted share. To be as transparent as possible, included in today's press release on page 7 is a schedule which provides a reconciliation of reported to as adjusted net income by each business segment and earnings per share reflecting this gain on the building sale and the charge. Fiscal third quarter basic and diluted earnings per share increased to $0.07 compared with $0.06 last year. On the O&M side, expenses were $77.8 million for the nine months compared with 76.6 last year. And that increase was due primarily to the cost associated with that early retirement program.

For the quarter, expenses were down slightly at 24.3 million versus 24.9 million last year. I believe you know in January 2005, our board of directors authorized an increase in our share repurchase program from 2 million to 2.5 million shares and in the fiscal year, we've repurchased 547,400 shares under the plan. And since the plan began in September 1996, our total investment now totals about $81 million to repurchase 2.2 million shares.

Talking about each business segment, first New Jersey Natural Gas. NJNG earned $57 million for the nine months ended June 30 compared with 58.2 last year, and again this decrease was due to the - their share of the early retirement charge, and the impact of lower customer usage per degree day. And we'll get into more detail on that in a second.

As you know, through New Jersey Gas, our distribution system remains our core business. We continue to have excellent growth prospects, characterized by very strong retail customer growth, a very stable customer base with over 90% of our customers residential and continue to enjoy excellent marketplace demographics. And again, this business segment continues to provide the foundation for all of our other activities and we continue to expect it to be our largest segment.

Speaking of customer growth, during the first nine months of the fiscal year, NJNG added approximately 1.3 BCF of through-put to new and existing customers, which is expected to generate about $3.9 million in annual gross margin.

NJNG anticipates maintaining an annual customer growth race of about 2.4% in fiscal 2005, which would add approximately 1.8 BCF affirmed sales, which would represent about $5.5 million of annual gross margin. About 1/3 of the anticipated new customers are expected to convert from other fuels.

With regard to the weather. For the 9 months ended June 30, the weather was actually 2.3% colder than normal and 2.7% colder than last year. For the quarter, the weather was normal and actually 31% colder than last year. The impact of the weather is significantly offset by NJNG's weather normalization clause which is designed to smooth out year-to-year fluctuations on both NJNG's margin and customers' bills that may result from the change in weather patterns.

As a result of this colder than normal weather and our weather clause, NJNG deferred $2.1 million of gross margin for the 9 months ended June to be credited back to customers in the future. Now gross margin was negatively impacted, however, by lower than expected usage per degree day per customer. To put this in perspective, while the weather as measured by the number of degree days was 2.3% colder than normal, the usage per degree day per customer was actually 5% below normal.

We've been reporting this usage issue throughout the winter and recently commissioned a study to analyze the usage per degree day issue. Based on that study, we believe that a majority of the decrease was due primarily to a combination of inconsistent weather patterns experienced during the winter, where we had stretches of very warm weather and then stretches of very cold weather, combined with the impact of higher wholesale natural gas prices being passed through to customers.

With regard to NJNG's incentive programs, during the first 9 months of the year, NJNG's gross margin from these programs totaled $4.8 million at sales of 38.7 BCF. This compares to 4.8 million of margin of last year with about 37 BCF of sales.

These incentive programs include our off-system sales, capacity management, storage optimization and financial risk management programs. NJNG shares the gross margin earned from these programs with customers and shareowners according to a margin-sharing formula currently in effect through October 2006. Since the establishment of these programs in 1992, NJNG's customers have saved nearly $260 million on their bills or approximately 4% annually.

Segue into NJR Energy Services. NJRES reported earnings of $18.7 million compared with $17.8 million last year for the 9 months ended June. This increase was due primarily to higher gross margin from its portfolio of storage and transportation capacity, as well as higher management fees. NJRES has developed a portfolio of storage and transportation capacity that now covers the Northeast, the Gulf Coast, the Mid-continent, Appalachia, and eastern Canada.

These assets can become more valuable when there are volatility in prices between these areas, and/or between time periods. Now gross margin in this business segment and from this portfolio is generally greater during the winter months, while the fixed costs associated with these capacity contracts are spread throughout the year. Therefore, consistent with the seasonality, a loss in the third and fourth fiscal quarters is anticipated. Accordingly, the results for the 9 months of the year are not indicative of the results for the entire fiscal year.

For the quarter ended June 30, NJRES had a net loss of $3.3 million compared with $2.7 million last year. The larger loss in the quarter reflects NJRES' growing portfolio of these capacity contracts and the related increased amount of demand costs associated with them and, of course, the larger amount of interest expense associated with this larger portfolio and the related storage inventory. NJRES expects to contribute between 15% and 20% of NJR's consolidated earnings in fiscal 2005.

The balance of our earnings came from our other business segment which consists primarily of NJR Home Services, which provides service sales installation of appliances to nearly 140,000 customers, also includes CRNR, which develops commercial real estate and NJR Energy, which consists primarily of what is now the 5.53% equity investment in the Iroquois system.

Earnings for the 9 months ended June 30 in this segment were $8 million compared with 959,000 last year. Of course, this is the segment that included the gain on the sale of the commercial office building we previously mentioned, which was about $6 million or $0.22 a share. So net of this gain and this segment's portion of the early retirement charge, earnings were $2.6 million dollars compared with $959,000 last year and for the quarter, earnings were $1.3 million compared with $526,000 last year. And so net of the unusual items, the increase in both periods was due primarily to growth in both at home services segment and NJRE.

So, with that I'll turn the call back over to Dennis and open the lines up for questions.

Okay, Lee. At this time, we would like to take any questions that are out there.

[Operator Instructions]

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

Good morning, guys.

Good afternoon, Dave.

My question has more to do, I think, with maybe a slight change in philosophy. Are you more interested today in investing in things like storage and pipeline? I know that the right of first refusal was there all along, and I guess my question was, if additional pieces of Iroquois became available, is that something you're interested in? Are you interested in more acquisition of storage?

Dave, as you know, we've been a participant in Iroquois for a long time. It's been an excellent investment for us, and this presented an opportunity for us to build on that. I don't really view it as a change in philosophy. It was more of a unique set of circumstances that we wanted to take advantage of. If there are other pieces out there, we would go through the same review process that we went through this time to figure out whether it provides us with an appropriate return.

The same with storage?

Yes, our focus, as you know, with storage has been on the management side through NJRES as opposed to being an investor in the physical side of storage. We do have storage and capacity positions, as you know. But as I said, I think the main part of your question is, is there a change in our philosophy. And the answer to that is no.

OK. great. Also, just as a matter of just staying current, has there been any changes in either '06-'07 CapEx plans or financing plans?

Glenn, why don't you take that?

No Dave, nothing new from our previous disclosure in our annual report.

Okay, great. Thanks.

Thanks, Dave.

Your next question comes from Dan Fidell with A.G. Edwards.

Good afternoon, guys. Thanks for the call.

Hi, Dan.

Just a few questions for you, I guess. The first is kind of a housekeeping question. Can you break out for us perhaps the -- a quarter and the nine months year-to-date on the home services profit, specifically separating the core appliance sales and service business and Iroquois exactly, how much is sort of coming from each?

Dan, we'll look at breaking out each in the 10Q. It's mostly home services versus Iroquois at this point. The increase in our investment actually didn't happen until June. So we only benefited one month on the higher investment in Iroquois, although it was, obviously, a benefit. So the majority between those two segments is home services growth.

For the nine month number, though? Is that -- how should we be thinking about that? Is it a 50-50 split generally as the year comes in and those numbers come in, is that how we should be thinking about that segment?

There are lots of little pieces in that segment, Dan. I can say that, again, it's a similar growth pattern, where home services was better than the Iroquois piece of it. And when we file the 10Q in a week or so, we'll get breaking out that more specifically. But at this time, we don't break it down more specifically.

Great. And then a question for you Larry perhaps, a macro question that goes more toward the-- seems like the conservation issue that you guys are starting to face, as well. Have you given any kind of thought toward asking for a conservation tariff or decoupling mechanism, the way that Northwest Natural implemented and the way that three or four other of your peers have already started to request?

I would say at this point what we're doing is just looking at the trends that are out there. As you know, we do have the weather normalization clause as part of the overall rate structure, which has been very effective on the -- in insulating us on the degree day side. But we're looking at any number of strategies, just in the normal course of putting together our overall regulatory strategy. But we don't have a plan right now to file a decoupling tariff.

To your knowledge -- I mean, has the staff or anyone at the commission given any kind of indication of how they might receive--

If they have, I'm not aware of that.

Okay. And then maybe just another question or two just quickly on the cost savings that you expect from the restructuring, specifically the early retirement stuff. Have you guys disclosed sort of what your -- what impact you think that may have on O&M in the next year?

Glenn, you want to take that?

We haven't disclosed that number. There is a savings associated with it, Dan. But we have not gone to that specific -- there are still some decisions to be made, et cetera, so it will be savings, but we have not disclosed the exact amount.

Okay, great. Thanks very much.

You're welcome.

Thanks, Dan. See you in a few weeks.

[Operator Instructions]

At this time there are no further questions. Mr. Puma, do you have any closing remarks?

Dennis, I just want to come back to, if Dave is still on the line, what I took his question to be referring to the construction of storage as opposed to what we're doing in buying storage and pipeline capacity. Just want to make that clear. My comment was directed at the investing the construction of new storage. Go ahead, Dennis.

Okay. I think if there are no more questions, we will see you guys next quarter. Thank you.

Thank you all.

Bye-bye.

Thank you for participating in today's New Jersey Resources quarterly earnings conference call.

[Operator Instructions]

Thank you. You may now disconnect.