New Jersey Resources Corp (NJR) 2006 Q1 法說會逐字稿

I would like to welcome everyone to the New Jersey Resources first quarter fiscal 2006 conference call. [OPERATOR INSTRUCTIONS] Thank you, Mr. Puma of Manager of Treasury Services, you may begin your conference.

Thank you. Good afternoon, everyone, welcome to New Jersey Resources first quarter fiscal 2006 conference call and webcast. I am joined by Larry Downes, our Chairman and CEO; Glenn Lockwood our CFO; as well as other managers 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 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 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 statement section of today's news release and on Form 10-K filed with the SEC on November 29, 2005 which can be found at SEC.Gov. Also 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. With that said I would like to turn the call over to our Chairman and CEO, Larry Downes. Larry?

Thanks, Dennis, and good afternoon everyone. First of all I'm pleased to report that despite the impact of warm weather on customer usage our business model continues to provide us with consistent financial results. As I think you all know, this morning we reported first quarter earnings of $34.3 million which was $1.24 per basic share and that compared with $30.2 million or $1.09 per basic share last year. As you probably recall, last year's earnings included a gain of $0.21 per basic share related to the sale of a commercial office building. That was partially offset by a charge of $0.05 cents per basic share associated with an early retirement program that we had offered our officers last year. The increase in earnings this quarter was attributable primarily to higher results in NJR Energy Services, which is our unregulated wholesale energy services subsidiary. Our primary subsidiary, New Jersey Natural Gas was affected by lower customer usage but continues to enjoy strong customer growth in its service territory.

Now before I turn the call over to Glenn, and to give you more of the details behind the numbers there are a few points that I want to make. First of all, in December, 2005, we filed a proposal with the New Jersey Board of Public Utilities to implement a conservation and usage adjustment clause which is more commonly referred to as a decoupling tariff. The new program would enable NJNG to more actively and aggressively promote conservation to our customers and to help reduce energy usage and save money. That proposal is still undergoing regulatory review.

Secondly, in December NJNG received approval from the Board of Public Utilities to implement a 23% price increase which reflected the impact of higher natural gas prices on our basic gas supply service. That as you know is simply a pass through of the cost of natural gas to our customers. The increase had no affect on NJNG's gross margin. Recently, however, due to the warmer than normal weather, the wholesale cost of natural gas has declined which has enabled us to provide a credit of about $25 million to our customers. This credit will save the typical New Jersey Natural Gas customer who uses 325 therms of natural gas, approximately $61 while it is in effect for the months of February and March of 2006.

Third, on January 25, 2006, our Board of Directors authorized a increase in our companies share repurchase plan from 2.5 million to 3.5 million shares. As you know, New Jersey Resources was one of the first companies in the utility industry to offer repurchase plans beginning back in 1996. Our ability to increase the number of authorized shares in the plan reflects on our overall financial strength as well as our commitment to enhancing value for our share owners.

And fourth, assuming normal weather , a continuation of lower customer usage, stable economic conditions, continued customer growth and continued volatility in wholesale natural gas markets and subject to the factors discussed below under forward-looking statements which I would strongly encourage everyone to read carefully we are confirming our previously disclosed earnings guidance for fiscal 2006 which is a range of $2.75 to $2.85 per basic share. And finally I want to extend a special thanks to our employees because we would not be reporting these excellent results today were it not for everything that they have done. They continue to be the driver that is allowing us to carry out our primary mission of providing our customers with save, reliable, and affordable service while meeting the needs of all of our stakeholders. And as always I want to say thank you to all of our share owners for their interest, their commitment, and their investment in New Jersey Resources. With that I would like to turn the call over to Glenn Lockwood who will get into some more of the details behind the numbers. Glenn.

Thanks Larry. Good afternoon, everyone. As Larry mentioned, this morning we reported first quarter earnings of $34.3 million, or $1.24 per basic share, compared with $30.2 million or $1.09 per basic share last year. Last year's earnings included $0.21 per basic share from the gain on the sale of a commercial office building and a charge of $0.05 per share associated with an early retirement program for officers. On a diluted basis earnings per share were $1.23 compared with $1.06 last year, an increase of 16%. NJNG earned $18.7 million in the quarter compared with 17.8 million last year. Last year's earnings at NJNG included its share of the early retirement charge. Net of this item NJNG earned $18.7 million last year. So on a comparable basis NJNG's flat earnings were due primarily to the impact of higher gross margin from its incentive programs which offset the lower than expected customer usage. The company believes that the lower usage was due primarily to the consumer response to the higher natural gas prices which offset continued strong customer growth.

NJRES' earnings of 14.9 million in the first quarter of fiscal 2006 were 127% higher than last year, due primarily to higher gross margin generated by its diverse portfolio of pipeline and storage capacity. As you know NJRES has developed a portfolio of storage and pipeline capacity in the Gulf Coast, mid-continent, Appalachia, and Eastern Canada which becomes more valuable when there are a change in prices between these areas. I will talk more about this segment in a moment.

The balance of our earnings came from our NJR Home Services and other business segment which consists of NJR Home Services which provides service, sales, installation of appliances to over 141,000 customers. CR&R. which develops commercial real estate and NJR Energy which consists primarily of its 5.53% equity investment in the Iroquoi gas transmission system. Earnings for the quarter in this segment were $684,000 compared to $5.8 million last year. Last year's first quarter results in this segment were actually $406,000 net of that gain on the sale of commercial real estate property and this segments portion of the early retirement charge. Focusing on the expense side, consolidated O&M were 27.7 million for the first quarter compared with $28.7 million last year. This decrease was due primarily again to last year's result including this early retirement charge. Excluding the early retirement charge O&M increased by $1 million or 3.8% due primarily to higher bad debt expense and fringe benefit cost.

As Larry mentioned, in January, 2006, our Board of Directors authorized an increase in the Company's share repurchase plan from 2.5 to 3.5 million shares. So in the first quarter we have repurchased 253,400 shares under the plan. So since the plan began in September of '96 we have invested at $91.8 million to repurchase over 2.4 million shares.

Now a little bit more about each business segment's operating results. First New Jersey Natural Gas Company. Through this natural gas distribution segment which is our core business we have, we maintain excellent growth prospects characterized by our strong retail customer growth, a stable customer base which is about 90% residential, and excellent demographics. In the first quarter of 2006 NJNG added 3,424 new customers, 36% of which converted from other fuels. This growth is expected to assume a normal usage to generate approximately 0.5 a Bcf of new throughput which is estimated to generate about $1.5 million in annual gross margins. NJNG anticipates continuing to maintain an annual customer growth rate of about 2.3% in fiscal 2006, adding, assuming normal usage again, approximately 1.8 Bcf of firm sales which would represent approximately 5.4 million of annual gross margins. About a third of these new customers are expected to convert from other fuels.

The weather in the first quarter was 1.6% warmer than normal and 1.5% cold than last year. Normal weather is based on twenty-year average temperatures. The impact of the weather is significantly offset by our weather normalization clause which is designed to smooth out the year to year fluctuations on NJNG's gross margin and customers bills that may result from changing weather patterns. NJNG did not accrue for any gross margin under the WNC for the quarter ended December 31, 2005. However, as we have said, gross margin was negatively impacted by lower than expected usage. Again, we believe that this resulted primarily from the impact of higher wholesale gas prices on consumer behavior. In December, 2005, NJNG filed a 'proposal with the BTU that would replace the existing WNC with the decoupling tariff that Larry mentioned that would capture variations related to both weather and usage. A benchmark for customer usage would be established and NJNG would compare actual results to the benchmark on an annual basis. Any adjustments positive or negative would be made in the following year.

With regard to our incentive programs. During the first quarter NJNG's gross margin from margin share and incentive programs which include our off system sales, capacity management, storage optimization, and financial risk management programs totaled 10.2 Bcf and $2.1 million of gross margin compared with 14.5 Bcf and 1.6 million of gross margin for the same period last year. This increase was due primarily to the off system sales and storage incentive programs both of which benefited from the volatile wholesale market. NJNG shares the gross margin earned from these incentive programs with customers and share owners according to a margin sharing formula and in effect through October, '06. NJNG has filed for an extension of these programs with the BPU through October, of '07, and in January the parties agreed to a one-year extension of these incentives under the existing terms. A stipulation has been signed and is awaiting BPU action. During the quarter customer saved approximately $15 million in natural gas costs through these programs. Since the establishment of these incentive programs in '92 NJNG customers have saved nearly 281 million on the natural gas bills or approximately 4% annually.

Now moving on to NJR Energy Services their earnings of $14.9 million in the quarter were 127% higher than last year, due primarily to higher margin generated by its portfolio of pipeline and storage capacity. Specifically in the first quarter of 2006 NJRES was able to take advantage of the increased volatility and unique pricing differentials between geographic regions occurred especially in the aftermath of the hurricanes Katrina and Rita in late September. Storage capacity is also more valuable when price changes between these periods.

I want to emphasize the seasonal nature of this business. In addition to the additional volatility in the quarter from the impact of the hurricanes, gross margin is generally greater in the winter months in this business while the fixed assets of these assets are spread throughout the year. Therefore the results for the three months are not expected to be indicative of the results for the fiscal year With that I will turn the call back over to Dennis for questions.

Thank you, Glenn. We will open the lines now for Q&A.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of James Ganello with Pally Capital.

Good afternoon, just a clarification. Does the reiteration of guidance assume normal weather from January 1, or from today forward.

Guidance assumes normal weather from now forward, but most importantly it assumes, because the weather is pretty much captured by weather normalization clause. Importantly guidance assumes the continuation of lower than expected customer usage.

Okay. Fair point. And on that, has there been a change since the December bills have been, I guess getting paid now or almost paid, has there been any noticeable change in consumption since the December bills have been out? And I know the weather has been really mild so there might be a lot of noise in there with that but any comments on that would be useful. Thanks.

I would say that our usage per degree day, if you will, has been fairly -- well, lower than expected but consistent over the last month or two including January.

On the decoupling how are the discussions going? And I know there was a thought that it may be retroactive to January 1. I think that's off the table now, but can you characterize how the discussions are going with that?

It's just going through the normal process right now so I wouldn't add anything else to it. Besides we filed it and we are responding to staff's request for information.

Okay. Thank you.

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

Good afternoon.

Hey, Dan.

The question I had had -- one of the questions I had was just asked and answered on the conservation. I guess the other couple of quick clean up questions for me. First of all there are no other one time non-recurring type gains that are in this quarter. Is that correct?

That's correct.

Okay. Great. As far as the share repurchase goes can we assume sort of a normal run rate from what we saw this past quarter? I know it has a lot to do with what's going on in the market but is this fairly typical what we saw you do on 250,000 shares or so?

It's going to be driven more by market conditions. We go through a disciplined process trying to understand where we are making the repurchase decisions, is that appropriate to do that based upon where the stock is trading. So I would say, no, there's not a run rate that you should assume.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Michael Winstead with Zimmer Lucas.

Just wondering also if you could characterize maybe some of the earnings from New Jersey Resources in terms of how much might be mark-to-market fluctuations in the quarter, how much is some kind of ongoing revenue stream and what the split is between expenses and revenues in the quarter and how things might reverse going forward?

Mike, the way I would answer that is there is not a significant amount of their quarterly earnings due to mark-to-market accounting. A very few number of contracts, when we adopt when those things change are mark-to-market but they are running out and they are very relatively minor compared to the overall revenues of the segment related to mark-to-market. It's almost all related to hedge accounting type treatment of our derivatives and hedging strategy; which we firmly believe is the more conservative and fits our business model where we are a true marketer of physical gas and not speculating on an IMEX or the direction of prices. We expect to issue our 10-Q tomorrow which will give some more detailed break down of the segments, expenses, and and revenues so I would hold off on discussing that. And all I would say is that in the affirming guidance we took into consideration obviously the quarterly results but also the expected seasonality in this segment and as we've talked about already on this call, the assumed continuation of a lower usage by consumers.

I guess I'm wondering by maintaining guidance, assuming lower usage going forward and everything that for some reason most of the outsized gross margin here in the segment is going to reverse, right, going forward. There must be some reason for that, some extra amount of season seasonality that you are seeing. It's not simply a good quarter, it's more of a fluctuation on an annual basis, right.

I wouldn't use the word reverse. We are clearly pointing out that the quarter had very attractive marketing conditions for the wholesale business post the hurricane season. So those margins are real margins for physically selling gas and delivering gas at attractive spreads if you will. But again we are taking into consideration the seasonality that you've seen in the past. If you look at past years results in the segment, we have typically had much larger margins in the winter than the summer and in fact in some quarters, third and fourth fiscal quarters it's not uncommon for that business segment to lose money. Again for the same reasons our utility normally loses money in the third and fourth fiscal quarter when it's fixed costs are spread throughout the year offsetting a decline in margins in those quarters.

I see. So maybe perhaps -- the volumes traded were lower than last year but I'm guessing maybe -- is it that the fixed costs are higher this year and that they haven't been booked in this quarter yet?

I wanted to comment on that I would say -- but you've pointed out, there were lower volumes we made and more margin so that's an indication of how much wider, if you will the spreads are in this particular quarter versus the past.

Okay. All right. Thank you very much.

You're welcome.

Your next question comes from the line of Joanne Foracio with Janney Montgomery Scott.

Hi, good afternoon, guys. Glenn, you said that some of your projections are based on normal usage, yet usage has been down. Have you lowered your definition of normal or how should we look at that? And I do have a second question.

In talking about customer growth, the only metric that we are prepared to use in this fluid market if you will is the historical normal usage assumption protected of course by our weather clause. So subject to whatever happens with the coupling and other issues and what happens with consumer behavior now that price has come down a little bit and we're issuing credits we are just not prepared to put new metrics on trying to forecast margin from customer growth.

And then you mentioned the decoupling mechanism. What is the time frame? Do you think it's a possibility that you get a decision before the end of the heating season and are allowed to implement that almost immediately or does it take time to do that? How do the mechanics work?

Joanne, we are right now as I said earlier, we are in the process of working through the regulatory process and responding to their data request and I would really want to stay away from speculating on when we would get it because we are going through the process right now.

Okay. Thank you.

Thanks.

Your next question comes from the line of Jim Harmon with Lehman Brothers.

Good afternoon. My question I guess is a deviation of what's been asked but in the wholesale division was there any one or two large items that maybe comprised the bulk of profits in the quarter? Or type of transaction?

Well, the type of transaction, Jim, would really -- it's just the value of the transportation and we could just make one reference to maybe the cost of gas down there in east Texas and northwest Louisiana where historically -- or comparing first quarter last year to this year maybe traded $0.40, $0.50 behind the hub this past quarter, first quarter for us, we saw that spread out to $2 behind the hub. So if you had the ability to transport gas in that location to a marketplace you can see how much better you are buying gas year-over-year. So it's just transportation value.

Jim, that was Rick Harden, who is our Vice President of energy services.

Jim, I would just add, this is Glenn, there was not a single transaction like we pointed out in our earnings release that impacted earnings like a gain on sale or early retirement charges. So nothing of that type of nature.

Oh, no, I wasn't looking for a gain. I was just trying to see if there was a specific type. Now related to that, let's see how I want to ask this before you refer me to a Q, but your first quarter was about $0.30 ahead of expectations. And so as we go through the year you're keeping guidance that implies that maybe there's another $0.30 of something that sops up your earnings power. I can understand the variable revenues versus fixed cost but can you give us maybe a little bit more feel as to what's going on in wholesale that might take that earnings contribution down as we go through the year? Maybe what percentage of cost are fixed and what percentage are variable?

Well, Jim, again, the way I would answer that is we don't comment on quarterly guidance especially Street expectations. We are being straight-forward as possible saying that the factors creating the margins that were created which were much higher than last year, we've pointed out the reasons at the same time a trend we are seeing in the utility with the impact of customer usage. You will see in the press release that utilities gross margin was relatively flat from year to year despite the fact we have had over a twelve-month period about 10,000 customer growth. But that's showing you the -- what we are seeing on the utility side. So all of that went into the mix to come up with us deciding to reaffirm guidance.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of David Schanzer with Janney Montgomery Scott.

Good afternoon. Uncollectible accounts receivable, do you folks see a trend toward that rising slightly going forward?

Dave, based on tariff design and stuff there's a certain percentage that we accrue as our bad debt expense. So as our prices rise, our expense if you will, will also rise. However, we track actual collections as well. We have not yet seen any significant variation from historical trends on the percentage being collected.

Okay. And then let me approach the guidance and outperformance in the first quarter a little differently. Going forward if you look at cost in the first quarter, O&M do you see second, third, and fourth quarter any extraordinary items? Do you think that you can -- the usual question, do you think that you can keep O&M kind of rising at the rate of inflation?

I think excluding the early retirement impact which I mentioned that was we think a variance for us this year. So I don't see anything one time like that. There is nothing one time in our guidance that we gave. Most of the fixed costs we are referring to would be related to demand charges which would be in our gross margin calculations. So what we are referring to driving some potentially less profitable quarters in the future would be seen in the gross margin line not in O&M.

Okay. Great. Thanks.

You're welcome.

We have no further questions at this time.

Okay. Thank you, guys. We will see you next quarter. Thanks. Good by.

Thank you for participating in today's New Jersey Resources conference call. This call will be available for replay beginning at 5:00 p.m. Eastern time today, through 11:59 p.m. Eastern time on Saturday, February 11, 2006. The conference ID. number for the replay is 4401217. Again, the conference ID number for the replay is 4401217. The number to dial for the replay is 1(800)642-1687, or (706)645-9291. Everyone, have a great day.