New Jersey Resources Corp (NJR) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the New Jersey Resources conference call. For opening remarks and introductions, I would like to turn the call over to Mr. Dennis [Malone ] Please proceed, sir.

Thank you, James. Welcome to our quarterly conference call. I'm joined 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 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 statement section of today's news release filed on 8-K, on Form 10-K filed on November 22nd, 2006, and on our quarterly report on Form 10-Q to be filed on or about August 2nd, 2007. All of these items be found at SEC.gov. 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. With that being said, I'd like to turn the call over to our chairman and CEO, Larry Downes.

Thanks, Dennis. Good afternoon everyone. As always, thanks for joining us on the call. This morning as you know we reported earnings per basic share for the nine month ending June 30, 2007 of $3.72, that compared with $3.25 last year. Happy to report that all of our businesses recorded higher earnings. However as you saw the overall increase was due primarily to the strong performance of NJR Energy Services. NJRES earnings growth was driven by a larger portfolio of pipeline and storage contracts and our ability to take advantage of market volatility. New Jersey Natural Gas Company also showed improved performance due primarily to higher margins with sales to firm customers. Also in New Jersey Natural, our off- system sales, capacity released and storage incentive programs all continue to perform well.

Now from a strategic perspective, the fundamentals of our natural gas distribution business remains strong, characterized by steady customer growth in both residential and commercial market and further supported by a healthy conversion market. This growth combined with our ongoing system and pipeline integrity expenditures have led to healthy levels of capital spending and our strong financial profile has facilitated our ability to access the capital needed to support these budgets.

Glenn is going to give you more of the details behind the numbers in just a moment here, but before he does that,. I just want to emphasize a few points. First of all and very importantly, based upon our performance to date and our current view of market conditions, we are again increasing our guidance for fiscal 2007 from a range of $2.95-$3.05 per basic share to a range of $3.10-$3.15 per basic share. As you know, this was the third time this year we've been able to raise our guidance based upon our performance. This year, we expect to record our 16th consecutive year of higher earnings., and we believe this is the longest streak among all natural gas, electric and water utilities in the country.

Also earlier this year, we were pleased to announce that through a wholly owned subsidiary, NJR had entered into a series of agreements of subsidiary of Spectra Energy to form a joint venture of limited partnership, which we refer to as Steckman Ridge LP. Steckman will acquire, develop, and operate a natural gas storage facility in Bedford County, Pennsylvania, and we'll have access to the Texas Eastern and Dominion pipeline systems. This facility will serve the Northeastern and Mid-Atlantic regions of the United States. Now I'm pleased to report to you that Steckman's nonbinding open season resulted in interest from customers that far exceeds the facility's proposed working capacity.

Later this year, we expect to submit an application to the (inaudible) and currently expect that the project will be in service by spring of 2009. And finally, before I ask Glenn to give you more details, I again want to thank our employees. They're the reason that we've been able to carry our primary mission of providing customers with safe, reliable service while at the same time providing consistent results for our shareholders. And finally, I want to thank all of you for your interest in NJR, your commitment to our company and the fact that you've given us the opportunity to work with your capital. We appreciate that. And with that, I'd like to turn the call over to Glenn.

Thanks, Larry. As Larry mentioned this morning, the reported earnings for the nine months ended June 30, 2007 where NJR earned $103.7 million or $3.72 per basic share, compared with $90.5 million or $3.25 per basic share last year. Diluted earnings per share increased to $3.70 compared with $3.22 last year.

Consistent with the seasonal nature of its businesses, NJR posted a loss of $5 million or $0.18 per basic and diluted share for the 3 months ended June 30th compared with the loss of $4 million or $0.14 per basic and diluted share for the 3 months last year. The increase loss was due primarily to larger seasonal losses at NJRES. NJNG earned $55.7 million for the nine month period ended June 30th, 2007, a 3% increase over $53.9 million during the same period last year.

For the three months ended June 30th, NJNG earned $2.6 million compared with $1.7 million during the same period last year. Gross margin for the nine months ended June 30th, included $15.6 million accrued for future collection from customers under our conservation incentive program or CIP. As you know for the past two years, NJNG's margins have been negatively impacted by declining usage pattern, which the old weather normalization clause did not cover. The new CIP accounts were changing usage patterns as well as weather. And the weather during the nine month period ended June 30th was 5.4%warmer than normal, while it was 2.8% colder than last year. And, our normal weather is based on a 20-year average temperature. As with the weather normalization clause, the impact of weather is significantly offset by the CIP, which is designed to normalize (inaudible) fluctuations on both NJNG's gross margin and customers' bills that may result from changing weather and usage patterns.

Included in the CIP accrual was $8.2 million associated with the warmer than normal weather and $7.4 million associated with the lower usage. Through the CIP, customers will realize annual savings of $10.6 million and fixed cost reductions. Additionally, the lower level of gas usage through June represents another $33.6 million in commodity cost savings achieved by customers. Turning to customer growth, during the first nine months of fiscal 2007, NJNG added 5,645 new customers, almost 39% of which converted from other fuels. In addition, 357 existing customers added natural gas heat to their service. For the year, NJNG currently expects to add approximately 9,000 new customers and convert 700 existing customers to natural gas heat. This equates to a 1.9% customer growth rate in fiscal 2007.

During the first nine months of the year, NJNG's gross margin sharing incentive programs, which include offsets of sales, capacity release, capacity management, storage optimization, and financial risk management programs totalled 26.9 billion cubic feet and $6.4 million of utility gross margin, compared with 30 BCF and $6.5 million last year. For the three months ended June 30th, these programs totalled 6.5 BCFs and $2.2 million of gross margin, compared with 8.3 BCF and $0.5million of utility gross margin for the same period last year. And the increase in the quarter was due primarily to timing differences in a storage incentive program. NJNG shared these gross margins earned from these programs with customers and shareholders according to margin-sharing formulas in effect through October '07. NJNG is seeking regulatory approval for an extension of these programs to coincide with the end of the CIP pilot program in October, 2009. Through June, customers saved approximately $29 million in natural gas costs because of these programs. And since the establishment of these incentive programs in 1992, NJNG's customers have saved over $330 million on their natural gas bills, which equates to about 4% annually.

Switching back to NJRES, they reported a 29.9% increase in earnings for the nine months ended June 30th, to $46.1 million compared with $35.5 million last year. And for the three months ended June 30th, NJRES reported a loss of $8.9 million compared with a loss of $6.4 million last year. The increase loss in the quarter was attributal to lower gross margin generated from the capacity portfolio as a result of decreased opportunities available to improve our existing gas and storage position and higher compensation expense associated with NJRES' increased year-to-date performance.

The balance of our earnings for the nine months came from our home services and other segment, which consists of NJR home services, which provide service, sales installation of appliances to over 148,000 customers, commercial realty and resources, which develops commercial real estate, NJR Energy Corp which consists of a 5.53% equity investment in Iroquois Gas transmission in system LP, and a 50% equity interest through to two wholly owned subsidiaries in Steckman Ridge GP. The Steckman Ridge facility that Larry mentioned earlier. Now earnings in that segment for the nine months were $1.9 million compared with $1.1 million last year and for the three months, this segment earned $1.4 million compared to earnings of 724,000 last year. The segment's earnings increased over the prior year due primarily to greater appliance service revenues at home services and increased earnings from our investment in Iroquois. And with that, I'll turn the call back over to Dennis.

Okay. James, we're ready to open the lines for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from Joann [Fermeckio]. Please proceed with your question.

Good afternoon, you guys. I actually have four questions. I wanted to know if you bought back any shares this quarter. Didn't look like it and I was just wondering if you're still expecting to go along with the plan or if there's been any changes?

There have been no repurchases during the quarter, Joann

Okay. And my second question, have you already launched some of the new conservation programs? and what might they be? And, assume they're targeted towards your customers.

Joann, we've launched all the programs that we committed to back in the fall of '06. And we just recently filed back in June to expand some of the programs and cut back on a few of the others. But we haven't received any feedback yet from the regulators on the new slate of programs.

How about some customers? Is it too early also to hear any of their comments?

It's generally favorable comments, especially with some of the customized materials that help customers know exactly how much they might save from doing certain actions.

Okay.

Also, we have an etips website, updated every month with a new tip and that's received favorable response, as well.

Okay. And can I assume that you made the two filings on June 1st too that you were supposed to?

Yeah.

And is that basically what you were just speaking about? And then my last question, you mentioned you had higher earnings from Iroquois, was there anything in there extraordinary? Or what were the higher earnings from?

Joann, nothing extraordinary that I can think of. The-- our 5.5% interest didn't change. So it's just a normal operation of the pipe.

So the revenue from the home services side of the business, was that basically because of more contracts or have you raised the price?

a little of both.

Okay. Okay. Thank you.

Sure.

and your next question comes from Jim [Laken]. Please proceed.

Good afternoon, everyone.

Hi, Jim.

Just a couple of questions. First of all, we've not taken any hurricanes this summer and we've had some pretty mild weather too. I'm just wondering if this continues, does guidance stay the same? Or are you assuming at least some minimal level of volatility for the price of gas?

the current guidance assumes the current forward market in the gas markets.

Okay.

So the current market, if you will, of our future positions is what's considered in the guidance.

Okay. You also tightened your guidance from $0.10 to a nickel. I'm wondering if this is -- maybe more than what's predictable like your fixed costs in Q4, or is it based more on the confidence of your assumptions for NJRES?

It's mostly just practical,three less months to worry about and three months left to go. We're that much more comfortable with the assumptions.

Okay. And I know this may be very early to be asking this question, but regarding Steckman Ridge, I'm just wondering if there's anything that you're willing to say at this point just to kind of give us at least a little bit of a feel for the impact could be (inaudible) once it's up and running.

We don't have specific guidance on that. What we have done is disclose the overall capital project expectation of $250 million. So we own 50% of it. So dependent on some of these factors, its ultimate project financing levels, things like that, you'd have to come up with your own model with respect to a return on that investment.

Okay. Thank you, gentlemen.

Thanks, Jim.

and our next question comes from [Steckman Ackel]. Please proceed with your question.

Thank you, good afternoon.

Hey, how are you?

On the $2.2 million that you saved from storage incentive programs, does that represent your portion of it, I believe about 20% overall? Does that imply sort of $11 million?

the 2.2 was total programs.

It was the total program?

Not just storage incentive. That was the biggest driver for the quarterly change.

Okay.

But-- , and not all programs have the exact same sharing, some are 80/20, some are 85/15. But you can do the math to back out--- to back into the approximately 80 to 85% factor of that number, grossing it up, to get to the amount customer saved from those activities during the quarter.

and then the other question that I had for you, just related to interest expense. Do you have like average balances during the quarter? Or ending balance?

Our 10-Q will be filed later tonight or tomorrow, so the actual balance, I don't have off the top of my head will be out there. But the interest expense year-over-year obviously reflects higher short-term rates. And I don't have off the top of my head what the average balances were quarter to quarter.

Okay. Thank you very much.

Our next question comes from James [Heckner]. Please proceed with your question.

Hi, good afternoon.

Hi.

I have a few questions around energy services. And I was wondering to start with, if--- how should we think about what a normalized earning power for the storage and transportation assets is. Is there -- should I think about a particular return on the investment in your owned and leased storage and transportation capacity? and a capital base, is that a way to think about a normalized sort of earnings power?

It's not that simple. Actually what we've done is taken our existing position. We do hedge accounting. So we have a sense of margin in the future based on current prices and current futures prices, which we, of course, include in our assumptions and earnings guidance. We have talked about, we believe, a range of 40-45% of our overall earnings we expect from this business this year.

We have not yet come out with the guidance for next year or what that percentage we expect next year. But it is so many factors that go into the different storage positions and pipeline positions we have. It's not that simple. We do disclose (inaudible) the level of dollars committed to our capacity position. But again, that's in dollars and it's not by pipe or by storage contract.

Can you -- do you recall what that invested capital is offhand?

Again, that commitment will be in the Q filed later tonight or tomorrow morning.

Okay. Can you talk about -- is there a normalized return that we might think about on that investment when you sort of factor in all the various aspects of this particular business that sounds kind of complex given all the different pieces. Is there a target for return on the capital that's invested there?

Well, it's an interesting business. The capital investment is mostly working capital because we don't have any long-term assets in the business. So that's a tough way of trying to model the business. There's not a lot of -- in fact, no long-term assets per se in the business. Unlike Steckman Ridge and midstream assets that we've looked at, where we would have an invested base where we can calculate those types of returns.

Okay. But there's a cost associated with that working capital?

Correct.

and I'm guessing you'll probably try to target some kind of return above that cost.

Yeah, obviously. The--- any transactions taken to the account the cost of capital, whether it be storage positions, what have you, take into account that cost of capital.

Okay. Are there any particular-- particularly material or large storage or contracts on transmission capacity that are in place right now that are set to expire in any-- in the next couple of years?

Well, we do have -- this is Rick Gardner, we have somewhat of a transient portfolio. We've discussed this at other meetings where we do have various pieces that are 12 months and last one to three years, greater than three years. And over the last few months, there was one piece of transportation, which will make the entire portfolio look a little smaller.

I caution you as much as one contract might have expired, it was something we say is short-haul, allowed us to move gas around New York State and into Pennsylvania from Niagara to New York. So that's 200,000 [decatherms] that goes away. It wasn't a high value contract for us. So, it's hard to just judge it on what contracts go in and out of the portfolio. Storage positions for next year, capacity wise, are just about the same as they were going into the season this year.

Okay. Is the plan going forward to sort of expand your positions and keep growing this business in proportion to the other businesses?

James, this is Larry Downes. Obviously the plan is grow all of the business segments as aggressively as we can. We think obviously the demographics in the regulated business and the fundamentals there are strong. We also think, in a disciplined way there are opportunities to continue to grow. And, I think what we do with Steckman is a good example of looking for investments that would represent a logical extension of the platform that we've already been able to develop through our portfolio of transportation storage contracts.

Thank you very much.

[OPERATOR INSTRUCTIONS] And our next question comes from Jay [Yanello]. Please proceed.

Good afternoon. Larry, I think it's been a while since I asked you this annoying question. But can you --

Let me look at my list.

All right. Well I've got an even more annoying one after this. But-- any update on sort of the background feeling about M&A in the group? All the stocks have come down a lot. I realize there's a lot of issues in the credit markets. But as you run into CEOs or go to these meetings and things like that, what are people saying and kind of what are you seeing?

As you know, Jay, you know what my answer's going to be that M&A is something that we don't comment on. ,

Well, is there any sort of change -- never mind specifics with you, are you sensing anything in the industry in general here? Or as far as maybe striving for better economies, with higher commodities components or is there any comment you can make on that?

I haven't had that conversation or heard that conversation among any of my peers. I can't say that one way or the other.

All right. The other question is, I think you're replacing a pipe outside of my development. Can you make sure you pave that road nicely because I just put a new set of Michelin's on the car. Good-bye.

Thank you and our next question comes from [Brooke Gwen Mullen]. Please proceed with your question.

Brooke?

Your line is open.

Oh, thank you. Could you remind us of the timing for Steckman and also the size of the project that relates to the 250 that you've talked about on the capital side?

Well, we look to file for the certificate sometime later this year, most likely November. We'd expect to have it in service in spring of 2009. With injections taken at that place. That 250,000 is to support up to 12BCF of working capacity. $250 million, I'm sorry.

and what is the likelihood, or can you give us any color after you have the open season on the potential to expand that project going forward?

Well, there really aren't expansion capabilities at Steckman Ridge. The only thing you can do, once you find a reservor., if it's the only reservor there, (inaudible) unless you can do something called delta pressure, that's putting gas under greater pressure to increase capacity. Right now there's no plans to do that.

Okay. And also just on the guidance. Can you walk us through a little bit what -- I'm sure it's not one item, but what's changed in your view on the unregulated businesses? Obviously volatility really hasn't been better than it was last year, some of the opportunities were actually, probably worse than they were last year. Can you talk about what the up side drivers are in that business?

As far as guidance go again. The improvement from last quarter was just, again at that time based on the current at that time with the current-- future of the markets and the expectation, it was just an update on that. So nothing dramatic other than just our larger portfolio contributed to us doing a little bit better than we internally had forecast. And we're obviously taking that into consideration and looking at the next three months.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] And it looks like we have no further questions, sir.

Okay, thanks, James. We'll see you next quarter. Bye bye.

Thank you, everyone, this concludes the New Jersey Resource quarterly earnings conference call. The call has concluded. You may now disconnect.