New Jersey Resources Corp (NJR) 2007 Q2 法說會逐字稿

Welcome to the New Jersey Resource quarterly earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Dennis Puma. Please go ahead, sir.

Thank you, Mel. Good morning, everybody, good morning to New Jersey Resource's second quarter fiscal 2007 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 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 readers of our news release and listeners to the 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 filed on Form 8-K, on Form 10-K filed on November 22, 2006, and on our quarterly report on Form 10-Q to be filed on or about May 2, 2007. All these items can be found at sec.gov.

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. I'd like to turn the call over to Larry Downes.

Thanks, Dennis. Good morning, everyone and, as always, thank you for joining us on the call. I think, as you all know, this morning we reported earnings for the first six months of fiscal 2007 of $108.7 million, which was $3.91 per basic share, and that number compared with $94.5 million, or $3.41 per basic share last year.

The increase in earnings was due primarily to strong performances from our principal subsidiary, New Jersey Natural Gas, and outstanding performance from NJR Energy Services, our unregulated wholesale energy services subsidiary.

For New Jersey Natural Gas, the improved performance was due primarily to our conservation incentive program. From a strategic perspective, the fundamentals of our natural gas distribution business remained strong characterized by steady customer growth in both residential and commercial markets at a rate that exceeds the national average.

In addition, our off-system sales and capacity release incentive programs continued to perform well and contribute to earnings.

NJR Energy Services earnings were driven by its growing portfolio of pipeline and storage contracts and the ability to take advantage of volatility. In a few minutes, Glenn will give you more of the details behind the numbers but before he does that, I just want to emphasize a few points.

First of all, based upon our performance, to date, and our current view of market conditions, we are increasing our earnings guidance for fiscal 2007 by an additional $0.05 to a range of $2.95 to $3.05 per basic share.

As you know, this is the second time this year we've raised our guidance. We currently expect to record our 16th consecutive year of higher earnings in fiscal 2007. That is the longest streak among all natural gas and electric utilities in the country and reaffirms our reputation for delivering consistent performance.

Also, through March 31, 2007, our shareholders have been rewarded with a one-year total return of 13.8% and on a longer-term basis, we have enjoyed a five-year average annual total return of 13.3%. Each of those results compares favorably with the S&P Index return of 11.7% and 5.8%, respectively, during the same period.

Earlier this year we raised our dividend for the 12th consecutive year to a new annual rate of $1.52 per share, representing a 5.6% increase. In addition, once again, we were named to the Forbes Platinum 400 list of America's best big company. That happened for the fifth consecutive year and currently rank is number 606 in the Fortune 1000.

In addition, to support future growth, in March we announced that the company had entered into agreements with Spectra Energy Corporation to form a joint venture limited partnership, which we call Steckman Ridge. Steckman will acquire, develop, and operate a natural gas storage facility in Bedford County, Pennsylvania, which will have access to the Texas Eastern pipeline system.

This access will enable Steckman to serve the Northeast and Mid-Atlantic regions of the United States. I think as you look at our results today, they clearly indicate that our fundamentals remain strong, and we expect to continue our record of consistent annual performance again this year.

And, finally, as always, I want to extend a special thanks to all of our employees. They are the ones that drive our performance and allow us to carry out our primary mission of providing our customers with safe, reliable, and affordable service while, at the same time, meeting the needs of all of our stakeholders.

And, as always, I want to thank all of our investors in NJR and the fact that you've committed your capital to our company. I want you to know that we're grateful for that.

And, with that, I would like to turn the call over to Glenn.

Thanks, Larry. Good morning, everyone. As Larry mentioned this morning, we reported earnings for the six months ended March 31, 2007, of $108.7 million, or $3.91 per basic share compared with $94.5 million, or $3.41 per basic share last year, representing and increase of 14.7%. Diluted earnings per share increased at $3.89 for the same period compared with $3.37 last year.

NJR earned $80.5 million with $2.89 per basic share for the three months ended March 31, 2007, compared with $60.2 million, or $2.16 per share for the same period last year, a 34% increase. Diluted earnings per share also increased 34% to $2.87 compared with $2.14 last year.

Breaking our earnings down by operating segment, NJNG earned $53.1 million for the six-month period ended March 31, 2007, compared with $52.2 million last year. Gross margin for the six months included $14.3 million accrued for future collection from customers under our conservation incentive program, or CIP.

As you know, for the past two years, NJNG's earnings have been negatively impacted by declining usage patterns, which the old weather normalization clause did not cover. The new CIP accounts for changing usage patterns as well as weather.

The weather during the six months ended March 31, 2007, was 7% warmer than normal, and 1% warmer than last year. Normal weather is based on 20-year average temperatures. As with the weather normalization clause, which preceded it, the impact of weather is significantly offset by the CIP, which is designed to normalize year-to-year fluctuations on both NJD's gross margin and customers billed that may result from the changing weather and usage pattern.

Included in the CIP accrual was $8.4 million associated with the warmer-than-normal weather, and $5.9 million associated with lower usage.

Through the CIP, customers will realize annual savings of $10.6 million in fixed-cost reduction. Additionally, the lower level of gas usage through March represents another estimated $27 million in commodity cost savings achieved by customers.

During the six months of fiscal 2007, NJNG added 4,333 new customers, 36% of which converted from other fuels. In addition, 230 existing customers added natural gas heat to their service. We continue to anticipate a customer growth rate of approximately 2% in fiscal 2007, which exceeds the national average.

During the first six months of the year, NJNG's gross margin shared incentive program, which include office and sales, capacity management, storage optimization, and financial risk management programs, totaled 20.3 bcf and $4.2 million of gross margin compared with 21.7 bcf and $6 million of gross margin for the same period last year.

But at three months these programs totaled 9.8 bcf and $906,000 of gross margin compared with 11.5 bcf and $2.9 million of gross margin for the same period last year.

The decrease in gross margin in both periods was due primarily to lower margins in the off system sales, the financial risk management programs partially offset by higher margins in the storage and incentive program.

NJNG is currently seeking regulatory approval for an extension of these programs through October 2010.

Through March, customers saved approximately $19.6 million in natural gas costs through these programs, and since the establishment of these incentive programs in 1992, NJNG customers have saved over $321 million on their natural gas bills, or approximately 4% annually.

Switching to NJRES, they earned $55 million during the first six months of the fiscal year compared with $41.9 million last year. For the three months ended March 31st, NJRES earned $47.2 million compared with $27 million last year.

The increase in both periods was due primarily to higher gross margin generated by its diverse portfolio of pipeline and storage capacity contracts. NJRES has developed a portfolio of these contracts in the Gulf Coast, mid-continent, Appalachia, Northeast regions of the United States, and Eastern Canada, which become more valuable when there are price changes between these regions.

NJRES engages in primarily hedge positions to optimize its storage and pipeline portfolio. After the original hedges are established, market conditions can change, which allows NJRES to adjust its original purchase and sales plan to recognize additional gross margin. This process maintains its hedge position while extracting the greatest value from its physical assets.

The results for the six-month period are not indicative of results for the fiscal year, as gross margin in both NJNG and NJRES is generally greater in the winter months while fixed costs are spread throughout the year.

The balance of our earnings for the six months comes from our home service and other segments where earnings for the six months ended March 31, 2007, with $518,000 compared with $377,000 last year, and that increase was driven primarily by strong results from our 5.53% investment in the Iroquois gas transmission system.

This is also the segment that an indirect wholly owned subsidiary of NJR, NJR Steckman Ridge Storage Company resides, which formed a partnership with subsidiaries of Spectra Energy so, as Larry mentioned, acquired, develop, and operate a storage field in Western Pennsylvania.

NJR Steckman Ridge has a 50% ownership interest in that partnership. The partnership has commenced preliminary engineering studies and expects to invest a total of about $250 million in the project.

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

Okay, Mel, we're ready to open the lines now.

Thank you. (Operator Instructions) Dan Fidell, AG Edwards.

A good start, I guess -- or finish, rather, the March winter period. The marketing numbers sure did come in pretty well.

Just a question for you, I guess, on a separate issue on the extension of the incentive programs. I think, in most cases, with gas utilities, both the company and customer groups seem to support these kinds of programs. They seem to benefit everyone. Are you getting any kind of an early feel for whether or not an extension will be granted, and, time-wise, do you think we'll know before October whether or not that does happen?

Dan, it's Larry. I'll make a quick comment, and then I'm going to ask Mark Sperduto, our Vice President of Regulatory Affairs to answer.

As you know, we have had those programs in place now, I guess, going on 15 years. As Glenn indicated, the benefits have been meaningful for both our shareowners and for our customers, and I think there is really a recognition of that.

Those incentives, when we first put them in place were pretty straightforward, and they have really evolved as the market has evolved so that, you know, our track record has been good with the regulators in that regard and getting them extended.

But I'm going to ask Mark to give you some more information on that. Mark?

Dan, we are actively in the process of discussing the extension with the parties, those being the BPU staff and the Division of Rate Council, a division of the Public Advocate's Office in New Jersey.

And, you know, they expire October of this year, and we expect to have that resolved prior to October of this year. Other than that, I don't think I can comment on any particulars about it -- of the negotiation.

Okay, thanks, and maybe just another question on the Steckman Ridge. Good announcement, and I thought that looks like a pretty interesting project. Can you give us a little bit more in terms of how this is going to lay out timing and hurdles to get from here to 2009 in the operation?

Yes, I'm going to ask Rick Gardner, who is Vice President at NJRES to answer that.

We actually have that meeting with FERC. We have another pre-filing meeting the beginning of May. We would file for the FERC certificate. I hope to receive that FERC certificate sometime in early '08, maybe in April-May timeframe, begin construction, and then be able to accept supplies for service in that summer of '09 period.

Got it, so construction would basically run from summer '08 to spring '09?

Correct, and maybe there could be some overlap with the end service, some additional drilling.

Very good, and then maybe just a last question about these kinds of projects. Are you interested -- I guess, will Steckman pretty much take most of your attention for the next year or two or are there other storage or other kinds of projects that you've got your eye on right now?

Dan, we're constantly looking at new opportunities, so I wouldn't say, you know, Steckman is the only one, but there is not one that we'd be prepared to comment on right now.

These are, I think, from a strategy perspective, they fit in very nicely with the way we've positioned the company between the distribution business and then the wholesale and energy services business. When you look at the way NJRES has developed over the last -- well, almost 10 or so years, the strategy has been such that we've continued to get into new markets, and we think that this type of investment is a logical extension for us. Rick, I don't know if you want to add anything to that?

Agreed.

(Operator Instructions) Oliver King, Zimmer Lucas.

Hi, it's actually Mike Weinstein. About the nat gas storage project -- is that a 50-50 partnership?

The Steckman Ridge partnership?

Yes.

(inaudible)

I guess it's going to operate as a non-regulated storage project, or is it going to FERC-regulated for tariff?

Well, it is FERC-regulated, but we are filing for market-based rates.

Market-based rates, okay. So it's not -- you wouldn't anticipate to be, I guess, stuck to a certain ROE, if that was the case, right?

We are filing for the market-based rates.

Okay, and just in terms of the volatility in quarterly earnings from RES, is there an indication of extraordinary volatility in the basis swap market right now.

Well, there's a lot of factors to the increased earnings that NJRES experienced, and one is the portfolio size was mentioned. Our storage position, over this period, compared to the same period of last year was 40% to 50% higher in storage capacity and the transportation portfolio was probably 10% greater on our ability to deliver gas to market.

There was some volatilities when you compare quarter-over-quarter, second quarter fiscal '06 to '07 -- relatively the same, but we did see a period in the market area where we had higher volatility once that cold weather -- finally, we got a winner at the tail-end of January in through March.

But on the whole, through our whole business footprint, volatilities were similar to the year prior.

The remainder of the year, the costs, I guess, the fixed costs are pretty well known at this point, right? We wouldn't expect to see any further -- I mean, you should pretty much know exactly what your costs are for this next half of the year, right?

That's right, unless -- we're constantly reviewing the additional assets for the portfolio, so we couldn't definitively say that we wouldn't add any other transportation or storage between now and the end of our fiscal year, but we definitely have a handle on our portfolio now and its cost for the remainder.

You're saying that your guidance should have a high level of confidence at this point, right?

We factored that information in our guidance.

Okay, and one last question would be do you still have a target for what percentage of overall earnings New Jersey RES is going to be?

This year we are currently anticipating it to be between 40% and 45% of book.

Do you have a long-term target for that?

No, we haven't disclosed the long-term target yet.

(Operator Instructions) Gentlemen, it appears there are no further questions at this time.

Thank you, Mel.

Okay, thank you, Mel, we'll see you next quarter.

That concludes today's teleconference. We'd like to thank you all for your participation. Have a wonderful afternoon.