New Jersey Resources Corp (NJR) 2006 Q4 法說會逐字稿

Good day everyone, and welcome to today's New Jersey Resources fiscal 2006 year-end conference call. Today's call is being recorded. At this time, I'd like to turn the call over to the Manager of the Treasury Services, Mr. Dennis Puma. Please go ahead, sir.

Thank you, Felicia. Good afternoon, everyone. Welcome to New Jersey Resources fiscal fourth quarter and year-end 2006 conference call and Webcast. I'm joined today by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Senior Vice President and CFO, as well as other members of our senior management team. As you know, certain statements in our news release and in today's call contain statements 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 the are beyond our control or we cannot estimate precisely, which could cause results to materially differ than 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, on Form 10-K filed on November 29th, 2005, and on New Jersey Resources quarterly report on Form 10-Q filed on August 9th, 2006, all of which can be found at SEC.gov and in our press release issued this morning, which was filed 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'd like to turn the call over to our Chairman, Larry Downes.

Thanks, Dennis, and good afternoon, everyone. And as always, thank you for joining us on the call this afternoon.

First of all as you know, I'm pleased to report that our business model continues to provide us with consistent financial results. This morning we reported our fifteenth consecutive year of earnings growth when we released fiscal 2006 earnings of $2.82 per basic share, which compares favorable with last year's $2.70 per basic share, which is net of certain items. The increase in our earnings this year is due primarily to excellent results at our wholesale energy services company, NJR Energy Services.

Our primary subsidiary, New Jersey Natural Gas, again recorded strong customer growth. But that growth was tempered this fiscal year by the impact of higher wholesale natural gas prices on customer usage. On the positive side for New Jersey Natural Gas, our margin sharing incentive programs performed very well, providing benefits to both our customers and our share owners. And before I turn the call over to Glenn, who will give you more of the details behind the numbers, there are a couple of points I do want to make.

First of all, our share owners have been rewarded with a 1 year total return of 10.4%, and on a longer term basis, have enjoyed a 5 year average annual total return of 13.6%. That longer term number compares favorably with S&P 500 index return of 6.6% during the same period. Secondly, I'm also pleased to report to you that our Board of Directors approved a 5.5% increase in our quarterly dividend rate to $0.38 per share from the current level of $0.36 per share. The new quarterly rate is effective with the dividend that's payable on January 2nd, 2007, to share owners of record on December 15th, 2006, and which will make the indicated annual dividend rate now $1.52 per share.

This year, our dividend payout ratio is 51%. We continue to believe that this allows us to maintain a healthy balance between dividends being paid to our share owners, and earnings being reinvested into our business to support future earnings per share growth, as well as access to the capital we need to support our growth.

Third, to address the usage issue, as you know, in December of 2005, we filed a proposal to implement an adjustment clause, which is commonly referred to as a decoupling clause. Working in partnership with the Board of Public Utilities and the Division of Rate Council, we were able to develop a proposal that was approved the Board of Public Utilities on October 12th. This program, which you will hear us refer to as our Conservation Incentive Program, or CIP, 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. Mark Sperduto, who is our Vice President of Regulatory Affairs, will discuss more of the details of the CIP in just a few minutes.

And fourth, I want to extend a special thanks to all of our employees, without whom we would not be reporting these excellent results today. We're proud of the fact that this is our fifteenth year of consecutive earnings growth. We believe that's the longest streak in the industry. And it's really our employees that continue to be the driver that allows us to carry out our primary mission of providing safe, reliable and affordable service to our customers, while meeting the needs of all of our stakeholders.

And finally, assuming stable economic conditions, continued customer growth, and the anticipated impact of the CIP at New Jersey Natural Gas, as well as continued volatility in the wholesale natural gas markets at NJR Energy Services, and subject to all of the other factors discussed in the forward-looking statements which we have spoken of today in our release, we are introducing an earnings estimate for fiscal 2007 of a range of $2.85 to $2.95 per basic share. As always, I want to thank you all for your interest in NJR, and the fact that you've committed your capital to our Company.

We're grateful for that. And with that, I'd like to turn the call over to Glenn.

Thanks, Larry. And good afternoon, everyone. Our announced earnings for fiscal 2006 of $78.5 million, or $2.82 per basic share, compares with total earnings of $76.3 million, or $2.77 per basic share last year. However last year's earnings included a $6 million, or $0.22 per basic share gain on the sale of a commercial office building, our charge of $1.5 million, or $0.05 per basic share associated with the voluntary officer retirement program, and an impairment charge of $2.5 million, or $0.09 per basic share due to a change in strategy at CR&R. So net of these items, NJR's earnings last year was $74.4 million, or $2.70 per basic share.

On a diluted basis, earnings per share for the fiscal year increased to $2.80 compared with $2.71 last year. For the fourth fiscal quarter of fiscal 2006, NJR posted a loss of $0.43 per basic and diluted per share, compared with a loss of $0.27 per basic and diluted share last year. And last year's quarterly earnings included that impairment charge of $0.09 per basic share, due to that change in the strategy in CR&R. The decrease in earnings for the 3 month period is attributable to increased fixed demand charges, seasonality, and higher operation and maintenance expenses and interest costs at NJRES and weaker results at NJNG, due largely to the impact of seasonality, lower customer usage, and costs associated with our new CIP program.

A quick update on our share repurchase program, you may recall that earlier in the year we announced an increase to the plan to 3.5 million shares. During fiscal 2006, we repurchased 995,100 shares under the plan, bringing the total investment to $128 million, or 3.15 million shares at a split-adjusted average price of $33.44.

Turning to consolidated O&M, those expenses were $121.4 million for the fiscal year, compared with with $108.1 million last year. For the quarter, O&M was $35.2 million compared with $30.2 million last year. The increase in both periods was due primarily to $1.8 million of costs we've incurred in conjunction with the CIP program, increased labor, and increased charitable contributions.

Turning to our business segments. First, New Jersey Natural Gas. NJNG earned $46.9 million in fiscal 2006, compared with $53.4 million last year. This decrease was due primarily to the impact of lower customer usage per degree day. We believe that the lower usage was due primarily to customer conservation resulting from higher wholesale natural gas prices, as well as the warmer weather than in the prior year, which more than offset continued strong customer growth. In the quarter, NJNG lost $7 million versus a loss of $3.6 million last year.

The lower earnings in the quarter were attributable to the seasonal nature of the business as previously forecast by management, as well as costs incurred by NJNG related to the CIP program. These CIP costs represent the present value of the minimum level of funding for programs that encourage energy efficiency and further conservation efforts, as required by the CIP agreement with the BPU. NJNG remains our core business, and it continues to be characterized by strong retail customer growth, a stable customer base, and excellent demographics.

On customer growth, NJNG added 10,159 new customers in fiscal 2006, of which 34% converted from other fuels. NJNG also added natural gas heat and other services to 874 existing customers during the year. NJNG expects to maintain an approximate 2.2% annual customer growth rate in fiscal 2007, which is above the national average for natural gas distribution companies.

The weather in fiscal 2006 was 9.9% warmer than normal, and 11.4% warmer than last year. And normal weather is defined as 20 year average temperatures. Now the impact of the weather is offset by NJNG's weather normalization clause, which is designed to smooth out year-to-year fluctuations on both NJNG's gross margin and customers' bills that may result from changing weather patterns.

Included in the WNC is the assumption that usage per degree day is equal to the average over the last 4 years. As a result of the warmer than normal weather, NJNG did accrue $10.3 million of gross margin during the fiscal year to be collected from customers in the future. However, gross margin was negatively impacted by that lower usage per degree day, which was 5.6% lower than the 4 year average. We believe that this resulted mainly from the impact of the decreased customer usage caused by higher wholesale natural gas prices. As we said, earlier this month we received approval from the BPU for the new CIP, which replaces the existing WNC.

I'd like to ask Mark Sperduto, our VP of Regulatory Affairs, to give you some of the highlights of the new program.

Thanks, Glenn, and good afternoon. We are very pleased to have in place a new program which addresses customer usage [inaudible] we have been seeing at NJNG. The BPU approved the stipulation agreement for the Conservation Incentive Program, or the CIP, on October 12th, 2006, adding a 3 year pilot program which is in effect beginning with fiscal year 2006.

The CIP replaces the existing weather normalization clause, and will adjust NJNG's gross margin for the impact of changes in average customer usage from a negotiated benchmark level that is attributable to weather and other factors. The residential heating benchmark for NJNG, which encompasses about 90% of our total customer base, is 1,113 therms annually. There are separate benchmarks for residential non-heating customers and commercial customers. Gross margin deficiencies attributable to conservation and other non-weather related factors will be recovered from customers in the subsequent year. However, any non-weather related deficiencies will be limited to a level of agreed upon gas supply savings.

The stipulation acknowledged an initial level of agreed upon savings of $10.6 million for each year of the pilot. This amount has been realized by releasing certain capacity with BPU approval, from NJNG to NJRES, the wholesale energy services subsidiary of NJR. During each year of the pilot program, the non-weather related CIP charge, if any, will be compared to the BGSS cost savings during the period that the charge would be in effect. Specifically, the impact of non-weather related changes in customer usage for the period October 1, 2006, through September 30th, 2007, will be eligible for recovery in the subsequent year, provided that this impact is less than or equal to the value of the 10.6 million BGSS savings discussed previously.

Any portion of the non-weather CIP value that exceeds the available gas cost savings in 1 year would be deferred and recovered, subject to the same eligibility test in the subsequent period. Deferred CIP charges may be recovered in a future period to the extent that available gas cost savings are available to offset the deferred amount.

As with the WNC, the CIP includes a return on equity test. The ROE limit will be set at 10.5% for the CIP, compared with 11.5% for the WNC. The test will operate identical to the WNC and will not permit the utility to recover any portion of a CIP deficiency or charge that will cause NJNG to earn in excess of a 10.5% ROE during the period. As with the WNC, ROE for this program excludes margin from incentive programs and certain other items.

If NJNG has not filed for a review of its base rates by October 1, 2008, the ROE used in the tests will be reduced to 10.25%. Also as part of the agreement, NJNG will fund the additional customer conservation programs during the term of the pilot. In fiscal 2006, NJNG recorded a charge of $1.8 million for the conservation program funding. This amount represents the present value of the minimum level of funding for the conservation program.

I'd like to turn the call back over to Glenn.

Thanks, Mark. Turning to those incentive programs, during the fiscal year, NJNG incentive programs, which include off system sales, capacity release, storage optimization and financial risk management programs, totaled 38.4 billion cubic feet and 7.4 million of gross margin, compared with 52.4 Bcf and 6.1 million of gross margin for the same period last year. The increase in the gross margin was due primarily to the storage incentive and financial risk management programs, both of which are affected by the volatile wholesale natural gas commodity market.

For the 3 months, these programs totaled 8.4 Bcf and $876,000 of gross margin, compared with 13.7 Bcf and $1.3 million of gross margin. The decrease in gross margin in the quarter was due primarily to timing differences in that storage incentive program. NJNG shares the gross margin earned from these incentive programs with customers and share owners according to a gross margin sharing formula in effect through October of 2007. This fiscal year, customers have saved approximately $35 million in natural gas costs through these programs. And since the establishment of these programs in 1992, NJNG's customers have saved over $301 million on their natural gas bills or approximately 4% annually.

Turning to NJR Energy Services, they earned $28.1 million during fiscal 2006 compared with $16.5 million last year. NJRES has developed a portfolio of storage and transportation capacity in the Northeast, Gulf Coast, Mid Continent, Appalachia and Eastern Canada, and these assets become more valuable when prices change between these areas or between time periods.

The increase in earnings was due primarily to favorable time spreads on larger storage asset positions, as well as securing positive locational spreads on transportation capacity, which more than offset higher O&M, charitable contributions and interest costs. For the quarter ended September 30th, NJRES had a loss of $7.4 million compared with a loss of $2.2 million last year.

The loss in the quarter reflects the increased amount of demand, fees, and interest expense associated with NJRES's growing portfolio of storage and transportation capacity, and higher O&M expenses as compared with the same period last year. 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, consistent with the seasonality, a loss in the fourth quarter was anticipated.

Now, segue into our other business segment, NJR Home Services and other, where the balance of our earnings this year came from this segment, which consists of NJRHS, which provides service, sales, installation of appliances to over 148,000 customers, Commercial Realty and Real Estate, which develops commercial real estate, and NJR Energy, which consists primarily of a 5.53% equity investment in the Iroquois Gas Transmission System Limited partnership.

Earnings in this segment in fiscal 2006 were $3.6 million compared with $6.5 million last year. However last year's earnings included the gain on the sale of the commercial office building of $6 million, and the impairment charge of $2.5 million recognized in the fourth quarter last year, related to undeveloped land in our Atlantic County, New Jersey. Net of these items and this segment's portion of the early retirement charge, earnings last year were $3.3 million.

NJR Home Services reported -- and other have reported earnings for the 3 months ended September 30th of $2.4 million compared with a loss of $1.6 million last year, and that loss last year included the impairment charge discussed above. Excluding last year's gain on the sale and the impairment charge, the improvement for both periods was due primarily to improved results at NJR Home Services in this last segment.

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

Okay, Felicia, we would like to open the lines now for questions.

[OPERATOR INSTRUCTIONS] Jay Yannello, Pali Capital.

Could we have some sort of break down for the '07 guidance between NJNG, NJRES, NJRHS. Just, even if you can't give specifics, can you give us a little guidance there?

Yes, this is Glenn. We are comfortable, and our forecast is for NJR Energy Services earnings to be about 25% to 30% of the overall earnings guidance.

Okay. And I may have missed it, but I haven't seen a communication about the new rate structure as a customer. Did you send one out yet?

As a customer?

Yes.

No. We have not.

And when would that go out?

Well, we're still awaiting the final BPU order. Although they voted on it on October 12th, adopting -- or adopting as their own the stipulation that was entered into between the Company and the parties, the written order has not been issued yet.

Okay. And I know it's early, and I know the point may not be relevant, but have you seen continued elasticity of demand with the limited amount of heating load we've had so far?

It's too early to tell, Jay, going into this part of the year.

Okay. Thank you.

Dan Fidell, A.G. Edwards.

Just a couple of quick questions. First, just to clarify, there were no one-time items in the fourth quarter?

One-time as we talked about last year, no, we did think it was appropriate to point out the cost of the CIP program.

Right.

That was a fourth quarter charge.

Okay. Also, just to clarify, you're looking for -- or I guess the way it's written is, that you must file for a rate case by October 1st, '08. Is that correct?

Actually, all that requirement in the settlement deals with the ROE test, which is a test to gauge whether the Company can recover the calculated deficiencies that result from the CIP program. And the term is that unless we file for a review of our base rates by October of '08, I believe it is, that we will reduce the ROE test to 10.25%.

I see.

There's no requirement to file a base rate case.

Okay, and based on the way it's written and just sort of -- can you give us any kind of a feeling in terms of which way you might be leaning at this point, just with the way it's leaning? Because we are only a couple years off, and I guess potentially if you're leaning toward filing, that would potentially come sooner than later, and possibly impact our '08 modeling, which we would start to do now.

Dan, we haven't finalized anything like that. As we've said throughout the year, we're constantly looking at different regulatory strategies, but nothing in that regard has been finalized.

Okay. And in terms of the written order, you had mentioned on October 12th, they did adopt the stipulation. Is there any change planned in the written order? Can they change anything in the written order?

The commissioners adopted at the open public meeting without any change to the settlement, the presented settlement. So there shouldn't be any changes in the written order.

Very good. And then just a last question and I'll let someone else ask a question. On the dividend hike, very strong, very positive signal, I think. Should we assume this run rate going forward? Or do you think the Board will be looking at this on a year by year basis?

Well, I think it's fair to say the Board definitely looks at it on a year by year, basis but I think we've said quite often that we do look for consistency when adopting these recommendations and this dividend increase.

Terrific. Thanks very much.

[OPERATOR INSTRUCTIONS] Joanne Fairechio, Janney Montgomery Scott.

And I apologize if you mentioned this, because I was trying to write everything down, but do you expect to see additional costs similar to the ones you recorded in the fourth quarter related to implementation of the CIP? And then I just wonder if you could just update me and tell me what you still have in the Real Estate area? Do you still own undeveloped land? Thanks.

Sure, Joanne. I'll cover that. First, on the second question, with Real Estate, we still own some undeveloped land both in Monmouth County and Atlantic County. In total our assets, I think, are between $15 million and $20 million. That will be broken out in the 10-K and we'll file that toward the end of November.

On the first question, on the CIP cost, no. That amount of CIP dollars, that's our minimum level we agreed to in the CIP agreement. We would not have to record additional costs until and unless we spend more than that $1.8 million.

Okay. And that you do not anticipate at this time? Or is that something is ongoing, I guess, as you get through the program or -- ?

Joanne, we're committed to -- New Jersey Natural Gas is committed to fund the programs through means that wouldn't increase customers rates. So that's a long way of saying we're going to pay for all of the program costs.

Okay.

At the current time, we only have an initial estimate for year 1 of the program, But we, as Glenn has mentioned, we've agreed to put $2 million -- the $1.8 million is the present value for those program costs to recognize those currently.

Okay. Thank you.

Peter Hark, Talon Capital.

The first question is on the impact of lower usage. You talk about gross margin being negatively impacted by a 5.6% lower than the 4 year average. What does that translate into in gross margin in dollars?

Pete, we haven't broken that out that way yet. We have shown that the weather clause picked up $10.3 million. And we disclosed the specifics of how much warmer than normal it was. But we haven't broken out a specific dollar tag directly to lower usage.

Okay, Glenn, thanks. But whatever that is, wouldn't that be expected to be now recovered under the CIP plan?

If that same pattern happened next year, yes. Those dollars would be recovered from the CIP plan.

But what I thought it suggests that, based on a 4 year average, it would get you back to a normalized level here in '07 anyway. So, year-over-year, why wouldn't you pick up whatever that lost gross margin was?

Well, just to be clear, we don't retroactively catch up to what we've lost last year in '06. But your logic is that if in '07 we had the same problem that was in 06, yes, the CIP would pick up that margin that was "lost" due to conservation or lower usage.

Okay. Okay. And then again, on the cost side, just to be clear, this 1.8 million that you booked in the fourth quarter of 06 , that's just a one-time cost? Or is that something that you'll incur on a quarterly basis, let's say, to implement the program?

No. That is the present value of our minimum liability over the 3 year time period. So that's the cost today. The actual funding of it, the dollars going out the door, will happen over the 3 year time period.

Okay.

If there are additional dollars to be spent beyond that minimum level, that is when we would incur those costs from an O&M perspective.

Okay, okay. I got you. And then for the '07 guidance, I just wanted to see a few things. You had incentive gross margins of 7.4 million. Are you anticipating similar incentives for '07, or higher or lower?

We don't break out our projections in that much detail in our earnings guidance, Pete.

Oh, okay.

We do expect the -- the programs are in place through fiscal '07.

Okay. And then on the wholesale side. Oh, I'm sorry, did somebody have -- ?

No, I was just going to say, and we did point out that they were especially strong, those incentive margins, were especially strong in '06 because of the volatile gas market.

Okay. And then moving over to the wholesale side. Real good contribution year-over-year, and we were hopeful that you could continue this upwards trajectory. I know it depends on volatility in the markets, but you do make reference here to NJRES having a growing portfolio of storage and transportation capacity contracts. And I was hoping that you could kind of lend some flavor as to what we might be looking for in that subsidiary on a year-over-year basis. I know you made a general reference that 25% to 30% of net income would come out of the unregulated side. But more specifically to this contracting business?

Well, the 25% to 30% was for that one business.

Just for the one business?

Yes, the 25% to 30% is from the Energy Services marketing business. So any other non-utility activities and the utility would be the balance.

Okay. But in the past, Glenn, you've kind of said what some of the contracts were, whether it was Niagara Mohawk, or there were certain contracts that were pretty substantial to the business that were getting signed up. And I thought maybe there was some way you could kind of lend some flavor to this growing portfolio.

We would announce that publicly, if and when we entered any more of those types of contracts, Pete.

Okay. And then the last one is just a minor issue, or maybe not. I just want to know what the size of the charitable contribution expense was, and whether that was a one-time effort in '06?

Every year we make some level of charitable contributions. But every year we look at the overall performance of the Company and that number will fluctuate. We'll wait for the 10-K to break out the specifics of how much of that was part of the O&M in the quarter and in the year.

Okay, fair enough, Glenn. Thank you very much.

And gentlemen, at this time there are no further questions in the queue. Mr. Puma, I'll turn the conference back to you for any additional remarks.

Okay, we would like to thank everybody for being on the call, and we'll talk to you next quarter. Thank you very much, everyone.

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.