New Jersey Resources Corp (NJR) 2007 Q4 法說會逐字稿

At this time I would like to welcome everyone to the fiscal 2007 year-end conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Puma.

Thank you, Michelle. Good afternoon, everybody, and welcome to New Jersey Resources' fiscal [2000] year-end 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 or 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 the results to materially differ from the Company's expectations. (inaudible) can be found, but is not limited to, items in the forward-looking statements of today's news release filed on Form 8-K, on Form 10-K to be filed on or before November 27, 2007, and on our quarterly report on Form 10-Q filed on August 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.

With that said, I'd like to turn the call over to our Chairman and CEO, Larry Downes.

Thanks, Dennis. Good afternoon, everyone, and thank you again for joining us on the call. I think as you know this morning we were proud to report earnings for fiscal 2007 of $3.17 per basic share. That performance represented the 16th consecutive year of higher earnings, which we believe is the longest streak in our industry. It compares favorably with last year's performance of $2.82 per basic share.

Overall, all of our businesses turned in strong performances. The increase in earnings was due primarily to improved results at NJR Energy Services. NJRES has proven itself to be a strong contributor to our overall earnings, and we expect that to continue in the future. As you examine the results of NJRES, you will find that we have taken a disciplined approach to this business, which is clearly reflected in our performance.

From a strategic perspective, the fundamentals of New Jersey Natural Gas remain strong, characterized by steady customer growth in both residential and commercial markets at a rate that exceeds the national average. In addition, our incentive programs in New Jersey Natural Gas were recently extended by our regulators there, are performing well, and they were higher than last year.

Our commitment to customer satisfaction remained strong in fiscal 2007, and for the 15th consecutive year we had the fewest number of complaints per thousand customers with the New Jersey Board of Public Utilities of any of the State's major electric and natural gas utilities. We were also recognized by J.D. Power and Associates as best among the State's natural gas utilities in both residential and business customer satisfaction. In just a few moments, 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, through the end of fiscal 2007, our shareowners were rewarded with a five-year average total return of 14%, which compares with 10.8% for the Standard & Poor's 500. Second, and for the fifth consecutive year, New Jersey Resources was named to the Forbes Platinum 400 list of best publicly traded companies in America. Third, I'm also pleased to report to you that our board has approved a 5.3% increase in our quarterly dividend rate to $0.40 per share from the current level of $0.38 per share. That new quarterly rate will be effective with the dividend that will be payable on January 2nd, 2008 to shareowners of record on December 15, 2007.

This will make our indicated annual dividend rate $1.60 per share. We've now been able to increase our dividend in each of the last 13 years and have paid quarterly dividends since we became an independent company in 1952. In fiscal 2007, our dividend payout ratio was 48%, and our focus continues to be on maintaining a healthy balance between dividends that we pay to our shareowners and earnings that we reinvest into our business to support future growth in earnings per share. In addition, we remain focused on making sure that we have appropriate access to the capital that we need to support our growth.

Fourth, and reflecting the strength of our financial profile, our board of directors yesterday authorized another increase in our share repurchase plan, from 3.5 million to 4.5 million shares. As you know, this plan, which we originally put out in 1996, authorizes us to purchase shares on the open market or in negotiated transactions based upon prevailing market prices. During fiscal 2007 we purchased 340,000 shares under that plan. And since the plan began in 1996, we've invested over $144 million to repurchase almost 3.5 million shares at a split-adjusted average price of $34.72.

Fifth, our first storage investment, Steckman Ridge LP, continues to move forward towards its projected in-service date of spring of 2009. In an open season that was held earlier this year, Steckman Ridge received bids for storage services that totaled almost five times the proposed working capacity of the project, and in early November we filed for FERC approval. We'll continue to keep you updated on the progress of this project.

Sixth, as we look forward to 2008, and assuming the continued positive impact of the CIP, stable economic conditions, continued customer growth of New Jersey Natural Gas, continued volatility in wholesale natural gas markets, which affects NJRES, and subject to all of the other factors discussed below under forward-looking statements, we're pleased to introduce earnings guidance for fiscal 2008 of $3.20 to $3.30 per basic shares.

And as always, before I turn it over to Glenn, I want to say thanks to our employees. Everything that I'm able to report to you here today is because of everything that they have done, and I am grateful for their efforts.

And finally, I just want to say thanks to all of our shareowners for your investment in the Company. We're grateful for the fact that you've given us your capital to invest.

Thanks. I'll turn it over to Glenn.

Thanks, Larry. Good afternoon, everyone. As Larry mentioned, this morning we announced a 12% increase in earnings for fiscal 2007 of $88.4 million, or $3.17 per basic share, compared with $78.5 million, or $2.82 per basic share last year. On a diluted basis, earnings per share were $2.15 compared with $2.80 last year. The increase was driven primarily by a 42.8% increase in earnings at NJRES, our wholesale energy subsidiary.

Consistent with the seasonal nature of our primary businesses, which typically generate a loss in the fourth quarter, we did post a consolidated loss of $15.3 million, or $0.55 per basic share, compared with a loss of $12 million, or $0.43 per basic share last year.

Breaking our earnings down by operating segment, earnings decreased at NJNG, which earned 44.5 million in fiscal 2007, compared with 46.9 million last year. And in the quarter NJNG lost $11.2 million, compared with $7 million last year. As previously disclosed, the increase in the loss during the quarter was driven primarily by a pre-tax settlement charge with the New Jersey Board of Public Utilities of $4 million related to certain previously deferred remediation claims associated with litigation and related insurance settlement associated with a manufactured gas plant in Longbranch, New Jersey. This amount was determined to be related to personal injury, and therefore, not recoverable under our remediation adjustment clause. All other costs associated with the NGP sites were recoverable.

Switching to the weather for the year, it was 5.6% warmer than normal and 2.6% colder than last year. Normal weather is based on 20-year average temperatures as calculated based on three different reference areas in our service territory. As with the WMC which preceded it, the impact of weather is significantly offset by the Conservation Incentive Program.

In addition to the weather, the CIP also normalizes year-to-year fluctuations on NJNG's gross margin and customers billed that result from changing usage patterns. Included in the total CIP accrual for the year was $16.5 million, of which $8.2 million was associated with that warmer weather. $8.3 million is associated with the lower customer usage. And on October 3, 2007, the BPU provisionally approved CIP recovery, reflective of the actual balances that we had through June of '07 and the estimated levels through September of '07.

Now, on the customer side, they have already (inaudible) annual gas cost savings of $10.6 million in lower demand fees that were negotiated as part of the CIP agreement itself. Additionally, we estimate that customers saved $37.6 million in commodity costs during fiscal '07.

From a growth perspective, NJNG added 8421 new customers in fiscal 2007, of which 39% converted from other fuels. NJNG also added natural gas heat and other services to 770 existing customers during the year. Despite the problems in the housing market, we continue to expect to be able to maintain an approximate 1.8% overall annual customer growth rate in fiscal 2008 with that continued healthy mix of new construction and conversion customers. We believe that that overall customer growth rate is above the national average for a natural gas distribution company.

During the year, NJNG's gross margin sharing incentive programs, which include an off-system sales, a capacity release, a storage and a financial risk management program, totaled 36.5 billion cubic feet and generated $8.1 million of gross margin, which compared to 38.4 Bcf and $7.4 million of gross margin for the same period last year. During the quarter ended September 30th, these programs totaled 9.7 Bcf and generated $1.7 million of gross margin, compared with 8.4 Bcf and $876,000 of gross margin last year.

NJNG shares the margin generated from these programs with customers and shareowners according to share (inaudible) that have been established since 1992, which over that time period NJNG's customers have saved over $338 million, or 4%, annually on their natural gas bills. Recently, in October of '07, the utility received regulatory approval for an extension of these programs through October 31, 2008, with all but one of the mechanisms remaining at the existing (inaudible). The only minor change is with the financial risk management program, which changed from an 80/20 sharing to an 85/15 sharing, effective November 1, 2007.

Switching to Energy Services, NJRES earned $40.1 million during fiscal 2007, compared with $28.1 million last year. The increase is due primarily to the results of favorable market related conditions during the year. These conditions included the ability to arbitrage our storage positions and capitalize on seasonal pricing fluctuations, as well as optimize our pipeline capacity over different geographic areas in our portfolio. The increase in the margin was generated by specifically especially colder-than-normal weather in the Northeast during the second fiscal quarter, and that increase helped offset higher labor costs and other operating expenses.

For the three months ended September 30th, NJRES reported a loss of $5.9 million compared with a loss of 7.4 million last year. The improvement in the quarter was driven by a slight increase in our margins resulting from the impact of warmer-than-normal weather on electric demand in the Southeast, and a decrease in our interest costs in that segment. The balance of our earnings came from our Home Services and other segment. This business segment consists of NJR Home Services, which provides service, sales and installation of appliances to over [149,000] customers; NJR Energy, which consists of a 5.53% equity investment in Iroquois Gas Transmission System, LP, a partnership of subsidiaries of energy companies that owns an interstate natural gas pipeline in the Northeast; a 50% equity interest through two wholly-owned subsidiaries in a natural gas storage facility called Steckman Ridge, which is under joint development with a partner in western Pennsylvania; and Commercial Realty & Resources, which develops commercial real estate.

Earnings in this segment in fiscal 2007 were $3.7 million compared with $3.5 million last year, as a result of a combination of additional contracts in Home Services and improved performance from our Iroquois investment. And for the quarter ended September 30th, the segment earned $1.8 million, compared to 2.4 million last year. And the decrease in the fourth quarter year-over-year was due to greater corporate overhead allocations, which increased -- which were partially offset by increased earnings from that Iroquois investment and, again, greater earnings in Home Services.

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

Michelle, we're ready to take questions now.

(OPERATOR INSTRUCTIONS). Joanne Fairechio.

You indicated previously that you might need to file a rate case. Is there anything new on that thought? And are there any updates or changes to the CIP now that you've gone through a full year of operating under the new mechanism?

On the rate case, the situation is the same as we previously disclosed. We do currently expect to file a rate case in fiscal 2008, but we would not expect any impact of a rate case in fiscal 2008, just based on the timeline that a (multiple speakers) filing would take. And on the CIP, Mark Sperduto is here; he can (inaudible)

On the CIP, we filed June 1st and, as Glenn indicated, we received provisional rates on October 3rd. There's no changes that have been proposed to the program by the Company, or from the intervening parties, which would be the New Jersey Board of Public Utilities staff, and the public advocates division of rate counsel at this time. That -- those hearings are still -- that process is still open, and it hasn't been finalized. But we would expect within the next three months that that would be finalized.

Have you gotten any feedback from customers, or they don't really realize what goes on in the rate case (inaudible) anyway?

Generally, the feedback on the Conservation Incentive Program has been very favorable. We've run several different types of programs with enhanced rebates for high-efficiency equipment, as well as providing new communication vehicles for customers to understand their gas bill and to take appropriate action. In fact, some of the new programs will be coming out soon, which will enable people to assess their usage almost on a real-time basis so they can see how much is reflective of weather conditions and/or other factors in their home life, or in their business.

Okay. I just wanted to ask you also -- conversions rose up to 39% or so of your total customer additions last year. Do you see that jumping up more in '08 now that residential housing has slowed?

In the -- that's kind of next year, which we overall have at 1.8%. We see about a 35% mix of conversions to new construction.

Thank you.

[Chris Shelton].

Was wondering if you could give us an idea of what the -- for the '08 guidance, what the contribution of each of the segments are.

Similar to fiscal '07, we are forecasting about 40 to 45% of that earnings guidance coming from that business segment.

From Energy Services?

Correct.

Thanks.

[James Heckler].

It's actually Neil Stein from Levin Capital. I actually had a follow-on from Chris Shelton's question with respect to the percentage of your earnings that come from trading and marketing. Of that 40 to 45%, how much of that would you regard as spec trading?

De minimis if zero. That business is not a speculative operation betting on directional price of the commodity. It is built on physical -- of capacity contracts, both pipeline and storage. And we are (inaudible) on hedge accounting, which allows us to be able to forecast where -- to the extent we have hedged out our assets, we can project minimum margins from those positions. So, while volatility helps us improve the margin on those positions, we do not rely on speculation per se to drive that business.

Could I ask you, should we assume that 100% of that 40 to 45% is locked in? There's no risk associated with it?

No, I didn't say that. I said that we, from a forecast perspective, internally have projected what we think is appropriate to project as part of being that 40 to 45% of the overall earnings. (inaudible) do better when there's more volatility than less volatility. But again, it's not based on speculation; it's based on improving existing positions on those assets I mentioned.

I just find from the outside looking in, these businesses are very difficult to model. How should we think about the risk and variability associated with that earnings stream?

The way we've handle that again -- and we think we've been pretty upfront about this -- is we actually give that range of the percent we believe internally, based on all the information we have in our assets, what we expect to earn from those businesses. And you can look at our track record and our ability to grow that business segment's results. And again, we give you a range of earnings guidance, but a range of that guidance coming from that business.

Okay. How do you go about -- is it just a matter of you have a certain amount of contracts and positions, and that generates a certain percentage of earnings? How much do market conditions have to do with it? Just trying to understand what are the variables that -- is it just volatility that impacts the volatility of earnings, or are there any other factors that might create volatility in earnings?

Before I hand it over to Rick Gardner from our Energy Services group, there are decisions that are made throughout the year as to when to move positions around that then will dictate whether a subsequent market event is going to be able to be taken advantage of. So there is some obvious subjectivity as to exactly the impact of volatility on our positions. But as we look at the business, and based on our history and the knowledge of the types and the storage facilities that we have, we are comfortable giving you the guidance that we're giving you. I don't know -- Rick, do you want to add anything to that?

There's not a whole lot to add to that. When (inaudible) volatility, there might be some of the marketplaces saying volatility is down a little bit (inaudible) have the same earnings, but volatility alone doesn't generate the margin and net income. But it does have to do with the portfolio, and we do have a very diverse portfolio. We're able to move gas in from the Chicago regions, from the Mid-Continent up to the Southeast. And it's the ability of the changing prices between them where we can actually decide where we're going to sell our gas and move it to a different location. So the changing prices, the decisions we make when we first put those hedges on, and what physical options they create thereafter, meaning what can we change around -- that's what generates the margin.

What about the sustainability of earnings beyond 2008? Are your earnings dependent on certain contracts that might fall away? Do those contracts need to be replaced? And did those contracts [reflect] a certain set of market conditions where, if those market conditions weren't replicated, there might be issues with the sustainability?

The portfolio does have some terms in there where we'll have some pieces that expire. What we do have on some of our contracts, we have right of first refusals, some (inaudible) pipeline [tariffs] where we can roll contracts over. Some of it is going to be dealt with at market conditions. Certain storage facilities, as you're aware, in the marketplace do have marketplace base rates. So as some of those contracts expire, we may have to pay different rates for those.

Would you say the '08 level of Energy Services earnings that you're forecasting is a good base that we should just assume you'll grow off of?

I think the farthest we would do is what we've already publicly disclosed, that on an annual basis we come up with our internal forecast and give overall guidance and a percentage that we believe is, in our best estimate, what we should expect from that business segment.

I'll leave it at that. Thank you very much.

Selman Akyol.

A couple quick questions, if I may. In terms of the sharing programs, the ones you said that reset, one from 80/20 to 85/15 -- first of all, do all those reset annually?

This renewal was kind of set a one year renewal on all the programs. In prior years, sometimes we've got two or three-year extensions. But at this timeframe, it was a one-year extension.

With you filing a rate case in 2008, then, would we be at higher risk going into the renewals of these for compression?

I'll ask Mark to comment on that.

We would expect that these programs would be subject to review in any future base rate filing. And at that time, there would be a re-look at the programs. The Company would have the ability to propose expanded or modified programs at that time as well.

Thanks.

You have to keep in mind, these programs have worked very well for customers we've been through multiple extensions over the more than 10 years that they've been in place.

Thanks. Just one question as it relates to Steckman. I know you have it coming on early in 2009. As we think about that and it's hitting the income statement, are you going to be bringing that in through, I guess, Home Services and other, or is that going to come in through the equity earnings line?

Two things. One, we have previously disclosed that we -- while the product is expected to go online sometime in the middle of our fiscal 2009, we would expect some earnings streams to actually start in 2010 on a fiscal year basis.

Secondly, the answer is yes to both, actually. On the income statement, any earnings from that investment you would see in that equity and earnings line on the income statement. And then when we break out the results by business segment, we'll, as currently set up, include those results in what is currently called the Home Services and other business section, which is exactly -- which is where Iroquois' earnings right now are reflected as well.

Thanks.

[Paul Justice].

Can you give me some color on the projected bad debt expense for currently compared to last year?

One of the signs of our strong service territory is that we have historically had a fairly low bad debt write-off experience. And I don't have the exact percentage off the top of my head, but it's a fairly low percentage of our revenues that we set aside for bad debt reserves, and we have seen no evidence that we need to change that percentage. We don't see any impact from that perspective.

Okay.

(OPERATOR INSTRUCTIONS). [Annie Sau].

My question has been asked. Thanks.

(OPERATOR INSTRUCTIONS). [Julia].

(inaudible). You talked about a share repurchase program that the Board of Directors has authorized. I was wondering, for fiscal 2008 guidance, what are you assuming? What is your share repurchase assumption?

From a guidance perspective, there is no assumed earnings growth from accelerated repurchases.

There are no further questions.

Thank you very much. We'll see you next quarter.

This concludes today's conference call. You may now disconnect.