New Jersey Resources Corp (NJR) 2008 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the New Jersey Resources second quarter fiscal 2008 conference call. All line have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you,

Mr. Puma, you may begin your conference.

Thank you, good afternoon everyone, and welcome to New Jersey Resources second quarter 2008 conference call and webcast. I'm joined by Larry Downes, our Chairman and CEO; Glenn Lockwood, our CFO as well as other members of our 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 of forward-looking statements include many factors that were beyond NJR's ability to control our estimate precisely which could cause results to materially differ from the Company's expectations. A list of these 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 December 10, 2007, and on Form 1(Q) which we expect to file within a day. All these items can be found at SEC.Gov. NJR does not by including this statements assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. With that being said I would like to turn this call over to our Chairman and CEO, Larry Downes.

Thanks, Dennis, good afternoon, everyone and thank you for being with us hear today. As you know this morning we released our earnings for the first six months of fiscal 2008 and I am pleased to report that we are on track to report another year of excellent financial performance this fiscal year. On a GAAP basis our earnings which include the impact of changes in the value of the derivatives that we use in our nonutility businesses increased by 14% to $42.7 million for the six months and that was $1.02 per basic share. That number compares with $37.4 million which was $0.90 per basic share for the same period six months last year.

Our net financial earnings which is a non-GAAP measure that excludes the impact in the value of the derivative instruments that are used in our nonregulated subsidiaries rose by 5.2% to $114.3 million which was $2.74 per basic share. That number compared with $108.7 million which was $2.61 per basic share during the same six-month period last year. We believe that as you know that net financial earnings is a better measure for assessing our financial performance. Our results this quarter and for the six months were driven by the strong results of NJR Energy Services which recorded higher earnings due primarily to a larger portfolio of transportation capacity as well as lower state taxes and as we have reported previously, it's our current expectation that NJRES will contribute between 40 and 45% of our total earnings during fiscal 2008.

I just want to update you on a couple of other items before I turn it over to Glenn. During the quarter we completed our 3 for 2 stock split in which shareholders of record received 1 additional share of NJR stock for every 2 shares of common stock owned. On April 1, 2008, we paid an increased post split dividend of $0.28 per share. Thus far this year we've increased our dividend by 10.2%. And as we noted in today's press release, we are maintaining our net financial earnings guidance for fiscal 2008 of a range of $2.17 to $2.23 per basic share. You will recall that earlier this year we had increased our guidance. Now based upon the midpoint of our guidance and our current annual dividend rate, our dividend pay out ratio remains in the low 50% range. That allows to us maintain a healthy balance between the balance we are paying to our share owners and the balance we are reinvesting in the Company to support future growth in earnings per share and net financial earnings.

I think as everyone knows, conditions in the financial market have been volatile this year but our strong financial profile has given us the flexibility that has allowed us to access the resources that we need to support our capital and operating requirements. Also the national slowdown in the housing market has been well documented but we are still experiencing steady overall new customer growth. In fact we expect that this years customer growth will contribute about $4 million in annual gross margin.

The new construction market not surprisingly has slowed. However our conversion and commercial markets in our service territory have remain resilient. We continue to be optimistic about the longer term prospects for continued growth in our service territory. I would also point out to you that our regulated incentive programs, our margin sharing programs in New Jersey Natural Gas Company continued to perform well and to contribute to our profitability. Now I think as everyone also knows, we currently have a base rate case pending before the New Jersey Board of Public Utilities which we filed last November. That case is proceeding with the filing of testimony and we are responding to discovery requests. Currently hearings before an administrative law judge are scheduled for June and July. And another point about NJRES the time table for our Steckman Ridge storage project remains on track and we are currently waiting our FERC certificate.

Finally as I turn it over to Glenn, thank you for your interest in the Company and the confidence in capital that you've committed to New Jersey Resources. We will continued to our best to reward your support. Thanks, Glenn?

Thanks, Larry, and good afternoon everyone. As Larry mentioned this morning on a GAAP basis we announced the 14% increase in earnings for the six months fiscal 2008 of $42.7 million, or $1.02 per share, compared with $37.4 million or $0.90 per basic share last year.

On a net financial earnings basis our non-GAAP measures which exclude certain mark-to-market activities related to derivative instruments in our nonregulatory operations earnings increased to $114.3 million, or $2.74 per basic share, compared with 4108.7 million or $2.61 per basic share in the same period last year. We believe that net financial earnings which exclude unrealized gains or losses related to the Company's unregulated subsidiaries and certain realized gains and losses related to natural gas and storage at NJR Energy Services are more reflective of operations, provide transparency to investors and enable period to period comparability of financial performance. We have included a definition of this measure as well as reconciliations to the most comparable GAAP measures in our news release which I encourage you to read closely. For the remainder of the call we will discuss all financial terms in net financial earnings.

Fiscal 2008 year to date earnings at New Jersey Natural Gas our utility subsidiary were $50.8 million compared with $53.1 million last year. The primary reason for the lower earnings were lower gross margin from incentive based programs and higher operation and maintenance expenses which offset higher firm gross margin. For the six months ended March 31, 2008, gross margin from our BPU approved incentive programs which include all system sales, capacity release, storage optimization and financial risk management programs totaled $3.6 million compared with $4.2 million for the same period last year. The decrease was due primarily to opportunities that existed in the first quarter of last year to generate margin from the storage incentive program that did not exist this year. Operation and maintenance expense increased about 11% due primarily to higher compensation costs associated with an increase in the number of employees and annual wage increases.

NJ&Gs earnings rose slightly during the three months ended March 31, 2008, to $34.2 million compared with $33.2 million last year. The increase was due primarily to higher utility firm gross margin reflecting our customer growth as well as incentive based programs. During the second quarter of fiscal 2008, the margin from incentive programs totaled $2.2 million compared with $905,000 in the same period last year. We added 3,125 new customers during the first six months of fiscal 2008 which are expected to contribute about $1.7 million to annual utility gross margin. Looking at the full year NJ&G expects to achieve a customer growth rate of approximately 1.6%.

The weather during the six-month period ended March 31 was 7.3% warmer than normal and [0.3%] cold than last year. Again normal is based on a twenty-year average temperature as calculated based on three reference areas in our service territory. We significantly offset the impact of weather through our conservation incentive program which is designed to normalize the year to year fluctuations on our margin and customers bills that result from both the change in weather and usage patterns.

Some numbers from the CIP program this year included in the year to date utility gross margin for fiscal 2008 was $16.2 million related to do CIP in total. Included in this amount was $7.4 million associated with the warmer than normal weather and $8.8 million associated with nonweather factors. During these six months ended March 31, customers realized commodity cost savings of approximately $35.5 million due to their reduced natural gas usage. And in addition, customers will realize and continue to realize annual savings of $10.6 million fixed cost reductions as a result of lower demand fees.

As you know and as Larry mentioned we are seeing an increase of up to $58.4 million at our base rates based on a request filed with the BPU in November 2007 and as Larry said, we believe the review process is progressing on westerly. I remind you we do not believe any base rate increase would affect this year's earnings forecast.

Turn to NJR Energy Services again from a net financial earnings basis the Company continues to write solid earning. I want to remind you again that financial margins is a non-GAAP measure which analyzes the segments operating results. We calculate financial margin by excluding the impact of unrealized gains or losses from derivative instruments and certain realized gains or losses from those derivative instruments that are designed to hedge natural gas that is still in storage.

Management believes that financial margin is better reflect the economic performance of NJRES prior to the actual settlement of certain forecasted transactions. The net financial earnings in this segment for the six months totaled $62.6 million compared with $55 million in the same period last year. Again, due to higher financial margin and lower taxes. YTD financial margin at NJRES increased $5.2 million to $109.1 million compared with $103.9 million for the same period last year. The increase is due primarily to new transportation capacity contracts.

During the second quarter of fiscal 2009 net financial earnings were $43.5 million compared to $47.2 million during the same three-month period last year. This decrease is due primarily to lower financial margins on a quarter partially offset by lower income taxes. Financial margin at NJRES decreased $12.5 million to $73.3 million in the quarter due primarily to fewer arbitrage opportunities to optimize existing assets. This decrease was partially offset by the new capacity contracts noted above. The relatively mild winter season provided minimal opportunity to capture additional margins on market positions when compared to the same period last year.

On the tax side NJRES' effective tax rate decreased in fiscal 2008 to a change in the apportionment of taxable income for state tax purposes. The impact which was recognized in the second fiscal quarter included a one time reduction of $1.8 million which is associated with deferred tax liabilities at the end of last fiscal year, end of fiscal 2007, and the reduction of $2.2 million associated with the impact on fiscal 2008 operations. So excluding the one time benefit of the $1.8 million NJRES' estimated statutory tax rate of 38.9% compares with the 41.1% in the prior year. And finally, in our retail and other segment which consists of NJR Home Services which provides service, sales, installations of appliances to over 145,000 customers, commercial realty resources which develops commercial real estate, and NJR Energy Holdings which consists primarily of a 5.53% equity investment in Iroquois Transmission Systems, and owner of Interstate Natural Gas pipeline in the Northeast and our 50% equity interest in the Steckman Ridge project a natural gas storage facility under joint development with a partner in Western Pennsylvania which is expected to contribute earnings again in fiscal 2010.

In this segment earnings for the six-months ended March 31, were $4.7 million compared with $720,000 in the same period last year. These results include after tax unrealized gains on two long-term gas contracts, NJR Energy Corp. which totaled $3.8 million and $202,000 respectively for the six-month ended March 31, 2008, and 2007. So on a net financial earnings basis this segments results were $860,000 for the six months compared to $518,000 last year. And that increase was due primarily to the performance of our Iroquois investment. With that we will hand it back to the operator to own the line up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Jim Lykins.

Good afternoon everyone.

We didn't catch your name from the operator?

It's Jim Lykins.

Hi, Jim, I'm sorry.

Just a couple of questions, first of all regarding Steckman Ridge I was under the assumption that you guys would have received the FERC certificate by now. I was wondering if you are still on track to begin construction in June and then possibly injections in May of next year?

It's Rick Gardner here, how are you doing, Jim?

Good, Rick, how are you?.

We do think we are still on track although we weren't on the docket for the April meeting we do believe we are in the notational phase where they are walking around right now looking for the approval and we expect to have the FERC certificate any day now.

So that means that you do still think you will begin construction in June?

We are planning to have contractors there in June if we have that certificate and there is a rig lined up to begin drilling in July.

Okay. Great. And kind of switching gears, customer growth, I was wondering if you guys could break that down between what was, were the conversions and what you saw on the organic side and maybe if you could just give us a little color on what's happening with the conversions right now as well?

Jim, I don't have the conversion mix handy. We will make sure we provide that at the A.J. conference, make sure it's posted for FD purposes. I can tell you that the conversion market has continued and not, has not been impacted as much as the new construction market. And so we feel that is also true for other commercial market has been stronger than the impact that we are seeing on the new construction residential market.

Okay.

I think, Jim, the important point is, Larry, I think the important point is obviously we've seen the challenges nationwide for a variety of factors but we still feel pretty good about the longer term potential as we've said publicly and continue to spend a lot of time understanding what the longer term potential for growth is and when we look at the demographics in the service territory our outlook is still positive.

Okay. Great. All right. That's all I have for now and I guess I will see you guys down in Miami.

Thank you, Jim.

Your next question comes from the line of [Daniel Fielder] of Brean Murray Carat.

Good afternoon, guys.

Hi, Dan.

Just a couple quick questions. First in terms of the rate case, you said hearings this summer. Is the expectation to have an order/settlement some time in time for the bulk of fiscal 2009?

It would be premature to speculates on settlement or anything like that so I wouldn't go near that one Dan, but I would say we would expect impact in fiscal 2009 absolutely. I think we've said out there the procedural schedule assuming that the case went the litigated route.

Okay. Second question on the CIP. Is it functioning as intended, so far year to date is it matching up with what your internal modeling was telling you going in?

It is. It's working well not only from the rate design perspective but I think just as importantly the dollars and the savings that customers are receiving from both the fixed demand charges that they get annually at $10.6 million but even more significantly than that the commodity savings and, as Glenn laid out. The margin impact has been helpful as well to deal with the nonweather related issues, primarily usage.

Okay. Great. And can you just refresh my memory in terms of the CIP, is that something that's being reviewed as part of this rate case or is this extended for a longer period of time before it's looked at?

Yes, it will be, as part of the rate case and we expect the rate design coming out of the rate case to adjust if will you all the factors that currently are picked up in the CIP itself.

That's one of the proposals in the rate case, the CIP itself of course was a pilot that the regulators in the normal course would be looking at that as well. But your original question though is what it was designed to do to help a variety of stakeholders, that's certainly been the case.

And then maybe just a final question and I will let someone else ask a question, just in terms of your CapEx plans for the remained on 2008 on target with your previous expectations and how you think things will lay out for 2009 assuming Steckman Ridge and everything proceeds on track?

Right now what we've disclosed for 2008, 2009, we still think those are good numbers. So this year, Glenn, will be on the order of 80 million. That doesn't include NGP which is covered by a separate rider and I think next year we're what, in the high 70s again is the public disclosure. Right now those are still numbers we are working with. As far as the components of that it's what you heard us talking about, customer growth, system integrity, pipeline integrity, things like that and then Steckman of course.

Thanks for your comments. We will see you at the AGI.

Thanks.

Your next question comes from the line of Joanne Fairechio of Janney Montgomery.

Jim and Dan asked most of my questions but let me just follow-up on Jim's question on conversions. Would you anticipate maybe the rate of conversions to increase a little bit in the summertime as customers or consumers get ready for the upcoming winter in light of where oil prices have been in the past couple of months? Do you normally see a pick up in conversions in the summertime?

Joanne I am going to ask Tom Massaro who is our Vice President of Marketing to answer that one. Tom?

Joanne, traditionally we will see the number of conversions raise towards the end of the summer towards the fall heating season. We see that in new customer additions number in total, you usually start to see it peak up as you start to move toward the heating season.

One of the things that's interesting Joanne is that even with gas prices moving up we still have a price advantage over the competing fuels.

Okay. My second question is you mentioned there was an increase in employees. Was that at the gas company or at the energy services business?

It's been across the board. Dealing with growth of the overall business.

I know you also opened an office I believe in Houston this past quarter. How many employees do you have there?

Currently there's only one active employee in Houston. And as that business picks up down there we may increase it over time. But we are starting off slow.

Okay. Thank you.

Thanks, Joanne.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Brooke Glenn Mullin of JPMorgan.

Thank you. Most of my questions have been asked. Just one clarification, do you have the corporate tax rate for the year? I know you've put in what the adjustment would be for energy services but on a consolidated basis.

No, the only change from prior years would be this one segment but I haven't, we haven't figured out the impact on a consolidated rate. I can tell you that is the only segment we expect to have any change in the rate based on the state tax issue.

And would that tax issue extend beyond 2008.

Oh, yes, we release that. We expect on an ongoing basis the current estimate would be to use about a 38.9% overall effective tax rate in that business segment.

Great. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) There are no questions.

Okay.

Thank you.

Thank you all and we will see many of you hopefully in Florida. Thanks.

Thank you for participating in today's New Jersey Resource second quarter second quarter fiscal 2008 conference call. This call will be available for replay beginning at 4:00 p.m. Eastern time today through 11:59 Eastern time on Monday, May 5, 2008. The conference ID number for the replay is 42426095. Again, the conference ID number for the replay is 42426095. The number to dial for the replay is 1(800)642-1687, or (706)645-9291. Thank you. You may now disconnect.