New Jersey Resources Corp (NJR) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to today's New Jersey Resources quarterly earnings conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to Mr. Dennis Puma. Please go ahead.

Thank you, Teri. Good afternoon, and welcome to NJR's second-quarter and fiscal year-to-date 2006 conference call and webcast. I'm joined by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Chief Financial Officer, 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 on the forward-looking statements section of today's news release, on Form 10-K filed on November 29th, 2005, and on NJR's quarterly report on Form 10-Q filed on February 7, 2006. All of 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. With that said I would like to introduce our Chairman and CEO, Larry Downes. Larry?

Thanks, Dennis. Good afternoon, everyone, and thanks again for being with us today. First of all, I'm pleased to report that our business model continues to generate strong financial results, despite the challenges that have been posed by lower customer usage. I think, as you all know, this morning, we reported fiscal year-to-date earnings of $94.5 million, which was $3.41 per basic share, and that compared with $81.9 million, or $2.96 per basic share last year. I would remind everyone that last year's earnings for the six months included a $0.22 per basic share gain on the sale of a commercial office building, which was partially offset by a charge of $0.05 per basic share, associated with an early retirement program for officers. The increase in earnings this year was attributable primarily to higher results at NJR Energy Services, our unregulated wholesale energy services subsidiary. NJRES posted strong results, due to growth in its portfolio of storage and transportation contracts, combined with continued market volatility.

Our primary subsidiary, New Jersey Natural Gas, continues to enjoy strong customer growth. During the first six months of fiscal 2006, we added 5,804 new customers, and currently expect a growth rate of about 2.3% this fiscal year. But that growth has been tempered somewhat this fiscal year by the impact of higher wholesale natural gas prices on customer usage. On the positive side, our margin sharing incentive programs continue to perform very well, providing benefits to both our customers and our shareowners. Also in April, we received a -- we reached a settlement agreement with the New Jersey Board of Public Utilities to extend those incentives through October 2007.

Now, before I turn the call over to Glenn, who will give you more details behind the numbers, there are a number of other points that I'ld like to make. First of all, as I think everyone is aware, in December 2005, we filed a proposal with the Board of Public Utilities to implement a conservation and usage adjustment clause, commonly referred to as a decoupling clause. Our CUA proposal is a pilot program that would replace our weather-normalization clause, and eliminate the link between customer usage and gross margin recoveries. The CUA will enable us to help customers save money, by more actively promoting conservation and energy efficiency, while at the same time allowing the company to maintain a strong financial profile. To date, discussions on the proposal are taking place with the Board of Public Utilities and the Rate Payer Advocate. Now, understandably, regulators in New Jersey have been spending a lot of time on the PSE&G-Exelon merger, but we are hopeful for a successful resolution to the filing, so that the CUA will be in place for fiscal 2007. If we are not successful in receiving approval of the CUA proposal, we will consider other regulatory strategies such as expanded incentive programs, and/or the filing of a base rate case.

The second point I would like to make, after evaluating the decline in wholesale natural gas prices since January, we have been able to provide lower prices to our customers in the form of bill credits In fact, for the months of February, March, and April, our customers saved about $80.

And third, assuming a continuation of lower customer usage, stable economic conditions, continued customer growth at New Jersey Natural Gas, continued volatility in the wholesale natural gas markets, the impact of seasonality on the company's businesses, and, subject to all of the other factors that we have discussed under forward-looking statements, we are confirming our previously disclosed earnings guidance for fiscal 2006 in the range of $2.75 per share to $2.85 per basic share. This performance would represent the 15th consecutive year of earnings growth for the company, which, to our knowledge is the longest streak in our industry. I would also note that our expectation of a loss for the last six months of the fiscal year is typical for our company.

And finally, as always, I want to extend a special thanks to our employees, because without them, we would not be reporting the excellent results that we are today. They consider to be the driver that allows us to carry out our primary mission of providing our customers with safe, reliable, and affordable service, while meeting the needs of all of our stakeholders. And as always, I want to thank all of our shareowners for their interest and for their support and for their investment in New Jersey Resources. And., with that, I would like to turn the call over to Glenn, and I look forward to your questions.

Thanks Larry, and good afternoon, everyone. As Larry mentioned, this morning we reported a 15% increase in six-month earnings, to $3.41 per basic share. On a diluted basis, earnings per share increased 16% to $3.37 per share. Last year's six-month earnings included the $0.21 per basic share gain on the sale of an office building, and a charge of $0.05 per basic share, associated with early retirement program. For the quarter, basic earnings per share increased 16% to $2.16, and on a diluted basis, earnings per share also increased 16% to $2.14. There were no unusual transactions in last year's second fiscal quarter. The increase in both periods was due primarily to the strong unregulated wholesale results, which more than offset the impact of lower customer usage on NJNG's results.

I would like to provide a quick update on our share repurchase plan. You may recall that earlier in the year, we announced increase in the plan from 2.5 million to 3.5 million shares. During the first half of fiscal 2006, we have repurchased an additional 305,100 shares. Since the plan began in September, 1996, NJR has now invested $94 million to repurchase approximately 2.5 million shares. Now, similar detailed financial information by business segment. First, with New Jersey Natural Gas, our principal subsidiary, it earned $52.2 million for the six months ended March 31st, 2006, compared with $53.1 million, last year. Last year's earnings at NJNG included its share of the early retirement charge, and net of this item, NJNG earned $54 million last year. For the quarter ended March 31st 2006, NJNG earned $33.5 million, compared with $35.6 million last year. Again, last year's quarterly results did not have any unusual items. The lower earnings in both periods were due primarily to the impact of lower customer usage on firm gross margin, as well as higher O&M costs, which more than offset the impact of higher margins from our incentive programs. We believe that the lower usage was due primarily to the pass-through of higher wholesale natural gas prices, which offset continued strong customer growth. NJNG remains our core business, and is characterized by the strong retail customer growth, a very stable customer base with over 90% of our customers being residential, and excellent marketplace demographics. During the first six months, NJNG added 5,804 new customers, and importantly 34% of those were conversions from other fuels. In addition, 151 existing customers added natural gas heat to their existing service. Looking at the entire year, NJNG continues to anticipate an annual customer growth rate of about 2.3%, and again about one third of which we expect to be conversions from other fuels.

A quick comment on the weather. The weather during the six months ended March 31st, 2006 was 7.4% warmer than normal, and 9.5% warmer than last year. For the quarter, the weather was 11.4% warmer than normal, and 16.3% warmer than last year, and included the second warmest January in NJNG's history. And, a reminder that normal weather as we define it, is based on 20-year average temperatures. Now, the impact of weather is offset by NJNG's weather normalization clause, which is designed to smooth out year-to-year fluctuations on both gross margin and customers' bills that may result from the change in weather pattern. Included in the weather normalization clause, is the assumption that usage-per-degree-day is equal to the average over the last four years. So based on the warmer than normal weather we had this winter, NJNG has accrued his $7 million of gross margin through March 31st, 2006, to be collected from customers in the future. However, as we have said, gross margin was negatively impacted by lower usage per degree day. And as Larry mentioned, we have filed our CUA in December, 2005. In the CUA, a benchmark for customer usage would be established, and NJNG would compare actual results to the benchmark on an annual basis. And, ny adjustments, positive or negative, would be made in the following year, very similar to our existing WNC.

During the first six months of the fiscal year, NJNG's gross margin share and incentive programs, which include offsystem sales, capacity management, storage optimization, and financial risk management programs, total 21.7 BCF and $6 million of gross margin, compared with 28.5f BCF and $4 million of gross margin for the same period last year. For the quarter ended March 31st, 2006, these programs total 11.5f BCF and $2.9 million of gross margin, compared with 14.1 BCF and 2.4 million of gross margin for the same period last year. The increase in gross margin, both periods, was due primarily to the storage incentive of financial risk management programs, both of which benefited from the volatile wholesale natural gas commodity market. NJNG shares the gross margin earned from these incentive programs with customers and shareowners, according to a gross margin sharing formula. And as Larry mentioned, in April, ,l we were happy to see that the BPU approved the one-year extension of these incentive programs through October of 2007. From a customer's perspective, this fiscal year, they have saved approximately $28.5 million in gas costs, because of these programs. And since these programs were established, beginning in 1992, NJNG's customers have saved $294 million on their natural gas bills, which equates to about 4% on an annual basis.

Now with regard to NJR Energy Services. They reported a 90% increase in earnings for the six months ended March 31st, 2006, to $41.9 million, compared to a $22 million last year, due primarily to higher gross margins generated from their portfolio of storage and transportation pipeline capacity. For the three months ended March 31st, NJRES earned $27 million, compared with $15.4 million last year. Specifically, in the first half of 2006, NJRES was able to take advantage of increased volatility and pricing differentials between geographic regions, as NJRES has developed a portfolio of storage and pipeline capacity contracts in the Gulf Coast, Mid-Continent, Appalachia, and Eastern Canada, which become more valuable when there are change in prices between these regions. These capacity contracts become more valuable, also, when prices change between time periods. Gross margin from this portfolio is also generally greater during the winter months, while the fixed cost of these assets are spread throughout the year. Accordingly, the results for the six months are not expected to be indicative of the results for the fiscal year.

In our last segment, NJR Home Services and other, which consists of home services, which provide service, sales, installation of appliances over 143,000 customers, CR&R, which develops commercial real estate, and NJR Energy, which consists primarily of our 5.3% equity investment in the Iroquois Gas Transmission System. Earnings for this segment for the six months ended March 31st, 2006, were $377,000, compared with $6.8 million last year. This is the segment that, last year, the sale of the commercial office building is reported, and that was a $6 million after-tax gain last year. For the three months ended March 31st, this segment had a loss of $307,000, compared with earnings of $961,000 last year, as Home Services had lower service contract revenue, and NJOR had higher corporate overhead expenses. With that, I'll turn the call back over to Dennis, and open up the line for questions.

Okay, Teri. We're ready for questions now.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Mike Weinstein of Zimmer Lucas.

Hi, I was wondering if you could review the reason why Home Services went from3 -- I guess it was positive 9 down to negative 3. Is that a permanent change, going forward? Do you expect that -- the lower contract revenues to continue, or is that going to turn around next quarter, just wondering?

We're confident that it's mostly timing differences Mike, so we did see some accelerated service contract cancellations, which we believe are also related to higher energy costs. But, between our air conditioning service contract business, and, like I said timing differences, we do not see that being a permanent adjustment.

Okay. And similarly, I guess, with the energy marketing segment, Energy Services, wondering you're not changing your guidance for the year. Now, does that mean you expect kind of, I guess -- what kind of results are you expecting for Energy Services, now that the revenue collection portion of the year, which is, I guess,the harder-to-predict part, is over, and, I guess, the next half of the year is all going to be the predictable asset costs, right?

Well, a couple things Mike. As you can tell by the earnings, guidance it is typical for us to have a loss, overall, for the last six months of the year. And that has to do with the seasonality, both in utility, and in the energy services segment. We don't break out our guidance by segment, so I don't want to predict the specific numbers by segment, but it is, again, subject to volatility. There is volatility in the summer, and in this business segment, that could also impact the segment-by-segment results.

Okay. And I'm sorry if I missed it in the beginning of the call, but is there any progress yet, on the decoupling mechanism in New Jersey? Do you now have a timeframe, now for when that will be settled out?

Well, Mike, as I said in the beginning, we don't have a specific timeframe, but discussions on the proposal are still going on with both the Board of Public Utilities and the Rate Payer Advocate. I think as you probably know, a lot of their time is being taken, right now, in the consideration and deliberations on the PS-Exelon merger, but we're hoping to get it resolved in time for fiscal 2007. But if not, we'll consider other regulatory strategies and/or a base rate case filing.

Okay, thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] We will go to Jay Yannello, Pali capital.

Good afternoon. Mike hit my questions, I'm going to just swing around again. On home services, I'm just curious, with people having higher bills, did you get more calls to go out and service furnaces, and were expenses up too?

We had some seasonal expenses, but it was fairly warm out here in New Jersey, during the six months. So, while there was not a noticeable increase in the calls for that, we did see some accelerated and early cancellations and turnover in the number of heat service contracts.

Okay. And did you say that air conditioning sign-ups are running at a normal rate or are they above normal, normal, below normal? I'm just curious.

It's too early to tell in air conditioners, but we are expecting in our forecast, what I mentioned earlier, that we see a turn around from what you saw in those first six month number,s over the rest of the year.

Okay. Going on to bigger subjects, going back to the decoupling, can you -- and I think I asked this on the last earnings call -- can you kind of characterize what the focus is, as far as the decoupling subject? Where is the BPU focusing on mostly, or what are kind of the points of highest interest?

Mark, do you want to take it.

Well, this is Mark Sperduto. I'm in regulatory affairs. Primarily, what you would expect in any decoupling filing, setting the baseline is an area of concern. Those typical issues that arise in a decoupling filing, how the revenue and/or the credit would be rolled into rates in future periods, those types of concerns.

Jay, I mean there's the aspect, of it. There's the policy aspect of it, and then there's the rate-making aspect of it, and we're working with the board staff, with the Rate Payer Advocate to address both of those issues.

Okay. And being an NJR customer, I realize how warm it was in your territory, and that the data is going to be skewed, but is there any trend you could pick up, with regard to elasticity as the season progressed, people got their bills, or then people got their credits. Is there any trend you picked up throughout the heating season?

Jay, I don't think it's -- I don't think we could really offer a statistically valid pattern there, based upon price. I think, as you know, a lot of the impact of usage because of price, at this point is -- is anecdotal. I mean, obviously, there was some impact, but again, to come up with a specific measure of price elasticity, I think -- I don't think that can be done in a statistically valid way at this point.

Okay, thank you.

[OPERATOR INSTRUCTIONS] We will go to Dan Fidell, AG Edwards.

Good afternoon guys.

Hi, Dan.

Just a quick question. My questions were asked and answered by the previous callers. Just wondering if you could share anything, in terms of adding some more color, in terms of the decoupling. I know it's being beaten to death here a little bit, but, just in terms of staff, commission, any initial comments on how they are viewing this.

Yeah, I would stay away from trying to kind of subjectively characterizing the discussions. I mean we've -- you, I think like most others on the call, are very familiar with the filing itself. And the board -- the BPU and the Rate Payer Advocate is going through the normal process that they would go through with any regulatory filing, but I would stay away from any comments that would talk about how it's going subjectively. They're asking us questions, requesting information, and we are responding to those promptly. The only thing, as I say, I would say, there are two elements to this, there's the policy side of it, and how it affects the State, and New Jersey, as you know, is a -- clearly a leader in environmental awareness and focusing on efficiency, that's the policy side of it. Then you've got the rate-making side, is , how do you put the regulatory strategy in place to help meet those policies.

Well, good luck to you as you go forward. We're certainly supportive of these kinds of mechanisms in other jurisdictions. I think they make a lot of sense, so good luck to you as you go forward.

Thanks. The new stadium looks good on TV too.

It is good.

And there are no further questions at this time. I will turn the conference back to you, Mr. Puma, for any closing remarks.

Okay, thank you very much, everyone, and we will talk to you next quarter. Thank you. Good-bye.

That concludes today's teleconference, thank you for your participation.