New Jersey Resources Corp (NJR) 2005 Q4 法說會逐字稿

Good morning, my name is Dawn and I will be your conference facilitator today. At this time I would like to welcome everyone to 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 session. [OPERATOR INSTRUCTIONS] I will now turn the call over to Dennis Puma, Manager of Treasury Services. You may begin your conference.

Thank you, Dawn. Good afternoon, everyone. Welcome to New Jersey Resources fiscal fourth quarter and year-end 2005 conference call and webcast. I'm joined by Larry Downes, our Chairman and CEO, Glen Lockwood, our 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 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 our 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 statements section of today's news release and on Form 10-Q filed with the SEC on August 5, 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 statements referenced herein in light of future events. At this time I would like to turn the call to our Chairman, Larry Downes.

Thanks, Dennis. Good afternoon, everyone, and thanks for joining us. First of all, I'm pleased to report that, despite a number of challenges this year, our business model continues to provide us with strong financial results. As you know, this morning we reported our 14th consecutive year of earnings growth by releasing fiscal 2005 earnings of $2.77 per basic share, which included some unusual items that we will discuss with you this afternoon. Those items included a gain of $0.22 per basic share resulting from the sale of a commercial office building by our commercial real estate subsidiary, Commercial Realty and Resources. Also there was a charge of $0.05 per basic share associated with an early retirement program for officers as part of an overall management restructuring plan for the organization. And finally, an item which occurred in the fourth fiscal quarter of this year and that was an impairment charge of $0.09 per basic share related to undeveloped land in Atlantic County, New Jersey, as CR&R has changed its strategy from development to the sale of this land.

Net of these items our basic earnings per share were $2.70 compared with $2.60 per basic share of last year. The increase in earnings for the fiscal year is attributable primarily to higher results in NJR Energy Services, our unregulated wholesale energy services subsidiary. Our primary subsidiary, New Jersey Natural Gas, continued to enjoy strong customer growth in fiscal 2005, but that growth was offset during the year by the utility share of the early retirement charge and the impact of lower customer usage per degree day driven in part by weather as well as higher prices. Before I turn over the call to Glenn, who will give you more of the details behind the numbers, there are a number of points I would like to make. First of all, our share owners have been rewarded with a one year total return of 14.3%. On any longer term basis have enjoyed a five year average annual total return of 14%. This compares favorably with the S&P 500 index returns of 12.1% and a negative 1.7% for similar period. And that's measured through September 30, 2005.

Secondly, I'm also pleased to report to you that our Board of Directors approved an increase in the quarterly dividend rate to $0.36 per share from $0.34 per share, which raises the annual rate to $1.44 per share. We believe that our growth rate of just less than 6% will be above the industry average. The new quarterly rate is effective with the dividend that's payable January 2, 2006, to share owners of record on December 15, 2005. This year our dividend payout ratio, based upon reported earnings, dropped to 49%. And even excluding the unusual items, our payout ratio was still a very healthy 50%, maintaining the strength of the overall organization from a financial perspective while increasing dividends to our share owners. We believe that we are maintaining a healthy balance between dividends and earnings reinvestment. And third, I want to extend a special thanks to our employees, without whom we would not be reporting these excellent results today.

They continue to be the driver which allows us to carry out our primary mission of providing safe, reliable and competitively priced service to our customers while meeting the needs of all of our stake holders. And I also want to say thanks to our Board of Directors for their continued guidance and support. Finally, assuming normal weather and customer usage, stable economic conditions, continued customer growth at New Jersey Natural Gas, and continued volatility in the wholesale natural gas market at NJR Energy Services and subject to the factors discussed in today's news release under forward-looking statements, we are initially estimating that earnings for fiscal 2006 will be in the $2.75 to $2.85 per share range and that's based upon basic shares. As always, I want to thank everyone for your interest in investment in NJR and I would like to turn the call to Glenn now who will give you more of the details.

Thanks, Larry, and good afternoon, everyone. As Larry said, this morning we announced earnings for fiscal 2005 of $76.3 million or $2.77 per basic share, compares with $71.6 million or $2.60 per basic share last year. 2005 earnings included a gain on the sale of a commercial office building of $6 million or $0.22 per basic share by our real estate subsidiary, CR&R. There was also a charge of $1.5 million or $0.05 per basic share associated with a early retirement program. And both of these items were recognized and we've been reporting on since the first fiscal quarter. In the fourth fiscal quarter we recognized an impairment charge of $2.5 million or $0.09 per basic share due to a change in strategy at CR&R. And I will explain that transaction more fully when we get into the segment information. The net impact of these three items was a positive $0.07 per basic share, therefore, none of these items, and what we believe are more comparable results, NJR's basic earnings were $74.4 million or $2.70 per basic share compared with $71.6 million or $2.60 per basic share last year.

On a diluted basis, net of these items, earnings were $2.65 and $2.55 in fiscal 2005 and 2004 respectively. Now the cause of these unusual items and to be as transparent as possible, included in today's press release are schedules on pages eight and nine which provide a reconciliation of reported to as adjusted net income and earnings per share for the items that we just discussed for both the 12 months and and the three months respectively. NJNG remains the primary source of our earnings. NJNG earned $53.4 million in fiscal 2005 compared with 55.5 million last year. NJR Energy Services reported a 21% increase in earnings to $16.5 million compared with $13.6 million last year. And the balance of our earnings of $6.5 million came from our NJR Home Services and Other Business segment, which consists of NJR Home Services, which provides service, sales and installation of appliances to over 146,000 customers, CR&R, which holds and develops commercial real estate and NJR Energy, which consists primarily of a 5.53% equity investment in the Iroquois Gas Transmission system.

On a consolidated basis, operation and maintenance expenses were $108.1 million for the fiscal year compared with the $101.1 million last year. This increased included two of the items we already noted, the early retirement cost and the impairment charge. Excluding these items, O&M increased less than 1%. Switching to our share repurchase program. As you may know, in January of 2005 our board authorized an increase in a share repurchase plan from $2 million to $2.5 million shares. In fiscal 2005 NJR repurchased 547,400 shares. Since the plan began in September of 1996, we have invested about $81 million to repurchase about 2.2 million shares on a split adjusted average price of 28.55 per share. Turning to the quarter, in fourth quarter NJR reported a loss of $0.27 per basic share. This amount included the impairment charge I've just discussed of $0.09 per share due to the changing strategy at CR&R.

Net of this one item, NJR's results improved $0.01 a share to a loss of $0.18 per basic share compared with $0.19 per basic share loss last year. A loss is typical in our fourth fiscal quarter when natural gas consumption at NJNG is at its lowest levels of the area and the value of our capacity contracts at Energy Services is also generally at its lowest point of the year. The improvement in the quarter was due primarily to better results at Energy Services, which reported a loss of $2.2 million this year compared with the loss of $4.3 million last year in the quarter. This improvement was due to higher gross margin due primarily from increased market volatility. For the quarter, O&M expenses were $30.2 million compared with $24.5 million. And, again, that increase was due primarily to the impairment charge in the fourth quarter. Seguing into the segments a little bit more detailed. First at New Jersey Natural Gas Company. NJNG earned $53.4 million in fiscal '05 compared with 55.5 million last year.

The decrease was due primarily to its share of the early retirement charge and the impact of lower customer usage per degree day. We believe that the lower usage per degree day was due primarily to the impact of higher wholesale natural gas prices and inconsistent weather patterns, which offset continued strong customer growth. As you know, through NJNG, our natural gas distribution business remains our core business. We continue to have excellent growth prospects characterized by strong retail customer growth. Over 90% of our customer base is residential and we continue to enjoy excellent marketplace demographics. On customer growth, in 2005, NJNG added 10,435 new customers and about 34% of those converted from other fuels. This represents a very healthy growth rate of 2.3%. We also added natural gas heat and other services to an additional 929 existing customers during the year.

These additions are expected to generate approximately 1.8 billion cubic feet of throughput and approximately $5.5 million of gross margin annually in the future. NJNG currently expects to maintain the approximate 2.3% annual customer growth rate in fiscal 2006, which is above the national average for natural gas distribution companies. On the weather side, in fiscal 2005 the weather was actually 1.5% colder than normal and 2.5% colder than last year. And normal is defined as 20 year average temperatures. The impact of weather is significantly offset by our weather normalization clause, which is designed to smooth out year to year fluctuations on both our gross margin and our customer's bills that may result from changing weather patterns. As a result of the colder than normal weather, NJNG deferred $2.1 million of gross margins in fiscal 2005 to be credited to customers in the future.

On our incentive programs, during the fiscal year NJNG's incentive programs totalled 52.4 bcf and 6.1 million of gross margin compared with 47.1 bcf last year and $5.8 million of gross margin. These incentive programs include our office and sales, capacity management, storage optimization, and financial risk management programs. These programs -- NJNG shares the gross margin earned from these incentive programs with customers and share owners according to their margin sharing formula in effect through October, 2006. Since the establishment of these incentive programs in 1992, NJNG's customers have saved nearly $266 million on their natural gas bills or approximately 4% annually. Switching to our next segment, NJR Energy Services. Their earnings for the year was $16.5 million, a 21% increase from last year due primarily to higher gross margin from its portfolio of storage and transportation capacity assets.

NJRES has developed a portfolio of storage and transportation capacity in the Gulf coast, mid-continent, Appalachia and eastern Canada, which becomes more valuable when there are changes and prices between these areas. This storage capacity is also more valuable when prices change between time periods. Gross margin generated from this portfolio is generally greater during the winter months and periods of higher volatility, while the fixed costs of the capacity assets are spread generally throughout the year. Switching to our last segment, NJR Home Services and Others. Earnings for the fiscal year was $6.5 million compared with $2.5 million last year. This segment's earnings included the gain back in the first quarter on the sale of commercial office building of $6 million and the impairment charge of $2.5 million recognized in the fourth quarter related to undeveloped land in Atlantic County, New Jersey.

CR&R changed its strategy from the development of this land to the sale of the land in the fourth quarter. The impairment charge represents the difference between the book value of this investment and the estimated fair value of the land pursuant to this new sales strategy. Net of the items noted above and this segment's portion of the early retirement charge, earnings for the fiscal year in this segment increased at $3.3 million compared to $2.5 million last year. I will now turn the call back over to Dennis and then open the line for questions.

Dawn, we are ready to take questions right now.

If you would like to ask a question during this time, please press star then the number one on your telephone keypad. Again, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just one moment. Your first question comes from the line of Stacy Stall with W.H. Reeves.

Good afternoon. I was just wondering on the change in strategy on C&R, do you have more land that you will be selling in the future?

No, Stacy,as I think you know, we have got our land assets are primarily in Monmouth County and Atlanta County. In Monmouth County, since we substantially reduced our real estate investment back in 1995, we have been on a very disciplined basis developing that land. And based upon the projects that we see in the pipeline right now, we think that that land will be fully developed over the next several years without any additional land sales. Atlanta County was a different matter. We felt it was prudent at this point to change that strategy, focus on the sale rather than the development of the land. Hence the -- what we are announcing today and the financial impact. Glenn, do you want to add anything to that?

No, that covers it.

Thank you.

You're welcome.

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

Good afternoon, guys.

Hi, Dan.

Just a quick question for you on the usage per degree day issue. What kinds of, and this is not, obviously, an issue that you guys are alone in facing, what kind of things can you do, at least over the near-term, to combat this? Is it possible to go in and seeking stabilizing mechanisms to counter this without going through a full-blown rate case? Are there things you can do?

We are actually going through that process right now of looking at what would be the potential regulatory strategies that would be available to us if we continue to see a precipitous decline in customer usage. But I would ask our regulatory VP, Mark Sperduto, to add some to that also.

Hi, Dan. I think that what you mentioned, a mechanism to smooth out the reduction in usage per degree day, is top of our list at this point for our analysis, since that would basically take care of most of the issues revolving around declining usage per customer.

Dan, I think the other thing is, when you think about that issue, is not just to look at usage by itself. What we are trying to do is understand the impact of not only higher prices but also, as we said in the press release, changing weather patterns because even though it was colder than normal, what we are learning is depending upon how the degree days actually fall will impact the usage itself. So we were going through a process, as I think many of our peers are also, to understand those issues in greater detail.

Understood. As you go forward, is there the possibility that this could be something that has quick action to it? Perhaps sometime over the next several weeks or months where it could have a impact on fiscal '06?

To tell you the truth, Dan, I wouldn't want to speculate on it at this point.

Okay great. Thank you very much.

Again, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment. There are no questions, sir.

Okay. Thank you guys. We appreciate all of your time and we will talk to you next quarter. Bye-bye.

Thank you for participating in today's New Jersey Resources earnings conference call. This call will be available for replay beginning at 5:00 pm today through 11:59 eastern standard time on Tuesday November 1, 2005. The conference ID number for the replay is 1206829. Again, the conference ID number for the replay is 1206829. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you.