New Jersey Resources Corp (NJR) 2008 Q3 法說會逐字稿

Good afternoon. My name is Janice, and I will be your conference operator today. At this time I would like to welcome everyone to the New Jersey Resources quarterly earnings conference call. All lines are placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I will now turn the conference over to Dennis Puma. Please go ahead, sir.

Thank you, Janice. Good afternoon, everyone. Welcome to New Jersey Researches' third quarter fiscal 2000 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 today's news release and on 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 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 statements section of today's news release filed on Form 8-K, on Form 10-K filed on December 10, 2007, and on our quarterly Form 10-Q to be filed on or before August 11,2008. All these items can be found at SEC.gov. NJR does not by including these statements assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. I'd also note that there are slides accompanying today's presentation, which are available on our website.

Given that I'd like to turn our call over to our Chairman and CEO, Larry Downes. Larry?

Thanks, Dennis. Good afternoon, everyone, and as always thank you for taking the time to join us on our earnings conference call. As you know we released our earnings for the first nine months of fiscal 2008 this morning and once again I am pleased to report to you that we are on track to record another year of excellent financial performance. Now as Dennis said, one thing that we're doing new with this conference call is we were using slides. Hopefully you able to access those, but I think that will help us as we explain the results for the quarter and for the nine months.

I want to begin first of all by reminding everyone -- and I think all of you know this -- that our primary financial objective is deliver value to our investors in two ways; consistent financial performance and superior long-term dividend growth. Also I want to remind everyone that we report our performance using net financial earnings, which is a non-GAAP measure and it excludes impact of changes in the value of derivatives that we use in our nonregulated subsidiaries. We believe, as you know, that the use of NFE's is a better measure or assessing our financial performance; however, the fact that we use that it is not intended to be a replacement for our GAAP results.

I want to start with slide four where we're outlining our net financial earnings per share. As you can see for the nine months ended June 3, 2008, NFE rose by 6.4% to $110.2 million, which equated to $2.64 per basic share. When we compare that with last year it's strong performance. Last year was $103.7 million, which was $2.48 per basic share and again, that was for the comparable nine month period in fiscal 2007. On a quarterly basis we reported a net financial loss of $4.1 million, but that was an improvement over the loss that we showed last year of $5 million, and on a per share basis that's an improvement of about 17%. For those that follow our Company I think you know a loss for us in the third fiscal quarter is typical. This morning we also reiterated our net financial earnings guidance for fiscal 2008 at a range of $2.17 to $2.23 per share and on that basis we expect to report our 17th consecutive year of higher net financial earnings growth.

Let me move to slide number five, where we just give you a quick summary of our dividend and payout ratio. We showed that since 2002. Based upon our strong performance combined with our healthy financial profile, this year we've increased our dividend twice for a total of 10%. I think the important point is that our ability to provide our shareholders with consistent dividend increases is supported by our record of consistent financial performance and the fact that our balance sheet is strong.

Slide six gives you details on our conservation incentive program, which continues to provide benefits to both our customer and our shareowners. Through the CIP we are able to encourage our customers to conserve, which certainly helps them, while at the same time protecting New Jersey Natural Gas Company's gross margin. If we look at the quarterly numbers related to the CIP there was a $4.4 million gross margin accrual related to CIP. There's two components to that that I want to take you through. The first is $1.7 million that was associated with the warmer-than-normal weather. During the three month period ended June 30, 2008 the weather was 15.5% warmer than normal and 15.1% warmer than last year. If we look at the weather on a fiscal year-to-date basis it was 8.3% warmer than normal and 2% warmer than last year. The remaining portion of the CIP is $2.7 million and that's associated with nonweather factors, such as usage. During the quarter, we estimate that our customers realized commodity cost savings of approximately $11.3 million due to their reduced natural gas usage.

Now if we move to slide seven I want to talk a little bit about our rate case and I'll say to you that we are still in active negotiations with the public advocate to the Division of Rate Council, as well as the staff of Board of Public Utilities to settle the case. We originally filed that case on November 20, 2007. I just want to walk through some of the major aspects of the case. First of all, I would point out that this was the first -- the Company's first base rate case filing in more than 14 years. In fact, the previous filing goes back to April of 1993 with rates that were effective in January of 1994. But the filing included an increase --request increase of $58.4 million. That would be in overall increase of approximately 7.5%. It included equity capital of about $500 million, which represented about 52% of total capital, and a requested return on equity of 11.375%. The proposed rate base in the case is $953 million.

Now I think there are few statistics that put the filing in context. First of all, since the time of our last base rate case we've invested more than $650 million for system improvements and expansion, as well as compliance with new federal pipeline regulations. And in addition to the normal cost increases associated with inflation during that time period, we've added over 1,500 miles of new main, we've installed more than 132,000 new services and we've added approximately 157,000 new customers. But at this point the case is progressing and we will continue to work closely with our regulators to reach a reasonable outcome that will best serve the interest of all of our stakeholders.

Let me move to slide eight and talk to you about some of the new margin opportunities associated with our customer growth. During the nine month ended June 30, 2008, we've added about 4,900 new customers and we've also added 505 existing customer who added natural gas heating to their existing service. I think importantly beyond the numbers is the fact that that growth is expected to add $2.8 million to our annual gross margin. Now like the rest of the country we have seen some moderation in our residential customer growth rate, but on balance when you look at our performance our service territory really has been resilient because we have continued to see steady growth in both the commercial and conversion markets. about Just to give you one statistic about the commercial market, the strength of that market can be seen by the fact that while commercial customer additions were about 13% of our total, they accounted for 40% of our gross margin. But given where we are right now I think it's important to look to the future as far as customer growth and in that regard we continue to believe that the potential for customer growth in the service area remains strong.

On slide nine we have given you a slide, which summarizes results of independent studies from both Arthur D. Little and Harte Hanks. Little helps us on the new construction markets, Harte Hanks helps us on the conversion side. And when you look at the two pie charts you can see that we currently estimate total market potential of more than 106,000 new customers and more than 140,000 conversions, so certainly the potential is there. I would also report to you that during the quarter we began construction on a new 16-inch main that will bring natural gas service to Whiting, New Jersey. Ultimately we think there may be several thousand potential customers there and the project really presents us with a long-term opportunity to provide service in that part of our service area.

If we move to slide ten, obviously, as everyone knows, price remains an important factor in our business, but as you look at where we are positioned relative to competing fuels you can see that natural gas continues to be the lowest cost fuel ino ur service territory. Even when you factor in the effect of the BGSS increase that we filed in May, natural gas remains an excellent value for our customers compared with those competing fuels, in particular electricity ,and that has helped our conversion marketing efforts.

Moving to slide 11, just as margin for new customers is an important part of our strategy, so are our incentive programs, which have been in place since 1992. You can see from the slide how these progress continue to perform and they continue to work well and contribute to our earnings, but they're also helping our customers save money, which is very important in this high-priced environment. During the third quarter of fiscal 2008 our incentive programs, which again as you will see, [we list off-system sales and capacity, release our storage and our optimization incentives and financial risk management programs] generated a gross margin of $1.2 million that compared with $2.2 million during the third quarter of last year. And if we look at the nine months ended June 30th, those incentive programs generated total a gross margin of $4.8 million, that compared with $6.4 million during the same period last year. But if we look at it over a longer-term time horizon, obviously they have contributed in a meaningful way toward profitable, but importantly our customers have saved more than $360 million through these programs.

Now in slide 12 I'd like to turn to NJR Energy Services, which continues to record strong financial performance, basically from the management of its portfolio of transportation and storage contracts. As the slide shows, NJRES net financial earnings for the first nine months for fiscal 2008 increased by almost 24% to $57 million. That compared with $46.1 million last year. In the third quarter NJRES showed net financial losses of $5.6 million, but that was lower than last year by almost 37%. The improvement that we experienced in the quarter was due primarily to increased demand for natural gas for our electric generation customers during the early part of June this year when temperatures were above normal ranges. But in general when you examine the results of NJRES what you see is that our portfolio of storage and transportation assets, which are managed by a very experienced team, continues to support our overall financial results.

Let me turn for a moment and just talk a little bit about our midstream assets starting with the Iroquois pipeline on slide 13. In general, as you know we have recently spoken about our plans to expand our presence in the midstream asset business. Actually, Iroquois is an interesting example because it is a midstream asset investment that came into service in the early 1990s. We participated in that project and you can see some of the results on the slide. Financially we are benefiting from our 5.53% ownership interest in Iroquois and in fact, because of a recent pipeline expansion, earnings of Iroquois increased 19% during the first nine months of this year.

Our most recent investment is Steckman Ridge. If you move forward to slide 14 you can see a map. As you know, Steckman we own jointly with Spectrum Energy and continues to make good progress. In June we were pleased that Specman received approval from the FERC to develop 12 billion cubic feet of natural gas storage western Pennsylvania. Now, if you look for a moment at the map, you can see the location of this facility and its strategic value because we believe that it will be positioned to serve markets in the New England and mid-Atlantic regions with potential interconnections to two major pipeline systems in the area. I can report to you that construction is underway and we currently expect that Steckman will begin to contribute to our earnings in 2010.

So finally just to close up before we take your questions, I again want to thank all of our investments -- all of our investors for their -- the capital that they've invested in NJR. We will continue to do our best to deliver value through consistent performance, as well as superior long-term dividend growth. We're going to do that by pursuing a very focused strategy; increased margin for new customers in our service territory, working constructively with our regulators and continuing a disciplined approach to our wholesale energy services business; growing our midstream asset business; and making sure that all of those activities are supported by a strong financial profile. We believe that this strategic focus will place us in the best possible position to continue our record of performance.

So I thank you for joining us here today and with that, we'd be happy to take your questions.

(OPERATOR INSTRUCTIONS) Your question is from Jim Lykins of Hilliard Lyons.

Good afternoon, everyone. And I like the slide presentation, I hope you'll consider using that going forward with your conference calls.

We will definitely do that, Jim. Thanks for sharing that with us.

I have a question about the new 16-inch main. You mentioned the potential for thousands of new customers. I'm wondering first of all if that was part of slide nine and also if you could quantify a little bit what you mean by thousands and what the timing could be for getting these new customers?

Let me take that in a couple of pieces. First of all, the work as far as quantifying the thousands are still ongoing and that's an area that does not currently have natural gas service and we have seen, at least in a preliminary sense, what I would call very good interest in customers wanted -- potential customers wanting natural gas service there, but the work of assessing the -- very specifically the size of that market is still ongoing. Tom Massaro, our Vice President of marketing is here, Tom, do you want to add anything to that?

No, I think when you look at where those customers would pop out on slide number nine, they would currently be in that nongas off main segment. of converts.

Okay. I was doing the math real quickly. It looks like you're going add about 40,000 customers between now and 2012, so it's like 6,000 a year. So I'm just wondering if you could maybe give us a feel for -- if you're going to stay at that -- you talked previously about being around 1.6% customer growth for the rest of '08, I'm just wondering if part of this is back-end loaded or if you're going to stay around that 1.6% or maybe if you changed your projections for customer growth for this year or what you see in '09, as well?

No, we haven't changed our projections. As I said, the residential side is a little soft right now. What we try do is -- obviously the customer numbers are important but the real important number I think is more the margin that we expect from those customers.

That's why we emphasize the commercial growth staying fairly strong while new constructions weakened a little bit and that we on average get at least three times the margin from a commercial customer we get from a residential customer. That's why you seen our projected margin for new customers stay relatively steady throughout the downturn.

And we have been stepping up our activities -- marking activities focusing on the commercial market as well as conversion market because the inventory -- potential inventory there is attractive for us.

Okay, and one last thing and I'll let someone else ask a question. Your O&M expense this quarter increased negligibility from the year-ago period, maybe if you could just talk a little bit about what's driving the O&M margin right now?

This is the time of year that we've had some -- a couple of things going on and on the O&M side, Jim. We have,on one hand, written off costs associated with some regulatory assets that we currently don't think we're going to recover. On the other hand we've had some lower-than-expected health claims through our medical programs, so we've adjusted accordingly our medical reserves for that. So the net effect has this being a little bit of an unusual quarter in O&M.

Okay, so it's more of a one-off thing than something to -- okay. All right, that's all I've got for now. Thanks, gentlemen.

Your next question is from Jay Yannello from Pali Capital.

Larry, you may have touched this with your marketing comments, but why is commercial so strong? Is it the marketing? Is it something else?

Combination of things. Let me ask the expert, Tom Massaro, to talk about that. (inaudible) marketing efforts than what you're seeing in the marketplace.

Jay, you're still seeing very strong commercial growth, especially in the retail sector, and a lot of that is on the feeder routes going to the Jersey shoreline and that's something we see continuing. There traditionally is a lag between the commercial development following the residential, so even though you see the residential slow down that commercial development is still forecasted to be holding steady or as we were saying resilient, especially in the retail sector and more specifically in the big box retail sector.

Okay. And as far as conversions, there is any way to gauge this, what percentage of it is from your marketing efforts or what percentage of it is from just people calling you up? I know a few people who are scared to death about their home fuel bills this season and I'm just wondering if you are getting a lot of cold incoming calls with people saying we want to convert.

Tom would have you believe it's because of his marketing efforts (LAUGHTER)

I'm sure he would.

Let him speak for himself.

There is a increase number of phone calls coming in as people are starting to either fill their oil tanks or their propane tanks and starting to get positioned into being locked into that fuel cost for the winter period, so we are seeing an increased number of potential customers calling in for a conversion.

And that's why, Jay, you see us including that slide on the price comparison to give you a sense of even in a high-price environment the relative advantage that we have versus the other choices out there.

Do you think the conversions would be stronger than they are if it wasn't for the economy and all of the issues associated with that? What sort of substitution are you providing or incentives to people that convert?

The first part is question, yes, the state of the economy is slowing down. In some respect the number of customers are putting hesitancy in some customers there's still a very strong market. Right now there is the -- the only offer on the street is the price differential between our fuel and the competing fuels and then the higher efficiency offers that are available through the state.

Okay. All right, thank you.

Thanks, Jay.

Your next question is from Oliver King of Zimmer Lucas

Hey, guys, how you doing?

Okay.

My first question is on the rate case, in terms of are there any other briefs or hearings or staff recommendations that are going to occur in the next couple of weeks?

I'm going to ask Mark Sperduto, our regulatory Vice President. to take that one. Mark?

Right now there are no additional hearings scheduled, where as Larry indicated we're in a negotiation phase right now with the case and there's no schedule. Our briefs or anything like that would only apply if we were fully litigating the case.

Does the staff issue a recommendation at all?

No, they have not.

Do they plan on it? Do they usually in these New Jersey rate cases?

Yes, if the case is fully litigated at the end of the process they would issue a recommendation. Public Advocates Division of Rate Council is the primary litigant and they previously issued a recommendation.

If no settlement is reached when will BPU make a final decision?

That's -- the schedule hasn't been established yet. It would have to -- first the administrative law judge would set a briefing schedule. Once the final brief was issued the record is considered closed and the administrative law judge would have 45 days to render her initial decision. Subsequent to that the BPU has 45 days to act on the ALJ's recommendation. So I can tell you it's 90 days from the last piece of paper being filed, but there has been no schedule established for that.

Okay. And in order for it not to go fully litigated when would you -- a settlement have to be reached by?

All we can say right now is we're actively negotiating the resolution of the case.

Okay. And then my last question is just on the buy backs, how much is left on your program and how many shares did you buy back this quarter, if any?

We have not bought back any shares this quarter and I don't have in front of me the number of shares left, but we have not bought shares back in the last couple of quarters.

Okay. Thank you.

Your next question is from Dan Fidell of Brean Murray, Carret.

Good afternoon, guys.

Hi, Dan.

Thanks for the call. A lot of my questions already have been asked and answered. I did have a question maybe from a broader sense. Can you give us a little bit of color on some of the opportunities you said you were exploring as it relates to renewables. You talk about the New Jersey Energy Master Plan and the RGGI in your release, can you just share with us the thoughts that you have on that side?

On the RGGI side I think there are -- there are probably two opportunities. One relating to solar investments and investment in efficiency and I think, as we said, we are considering those opportunities right now. The Energy Master Plan is still in process so there may be things related to the distributed generation, CHP, but that is still very much up in the air right now.

Okay. And then maybe just another question, switching topics quickly. On Steckman, can you just give us some idea what the next events we should be watching for? I know construction's underway, can you give us just a little -- maybe just refresh us in terms of the capital budget for that and then the timing for the in service? Are we looking at a year from now, is that right?

I'm going to ask Joe Shields to take that, Dan.

Great, thanks.

They've started the construction out there. The next period is going to be more of the construction work before the drilling starts. So the next major construction would be the drilling of the wells and we hope that starts by the end of this summer or beginning of fall and then we're hoping for injection next summer with fully service storage of the following winter.

Great. Okay. Thank you very much.

Your next question is from Eric Beaumont of Copia Capital.

Good afternoon, guys. Most of my questions were answered, but I guess one thing looking -- and I appreciate you guys doing the net financial earnings and realized the reason, and since restatement I've gone back through and there's been a pretty big gap in favor of net financials over actual earnings and I guess I'd expect to see more ebb and flow as unrealized gains of mark-to-market reversed. Can you just talk a little about if I'm -- not that you want us to be mired in this, but can you just talk how that should generally flow?

Yes, this is Glenn. A major variables, obviously, in how -- the direction of those unrealized gains and losses is going to be the general direction of the NYMEX and at any given time, especially on the unregulated side, are we hedging how much of our forward sales are we hedging. ISo in an environment, for example, that prices have been generally rising, yes, even as prior unrealized losses have turned around, even additional positions have been put off of future sales and as prices have been going higher and higher that's why you're seeing the unrealized losses just continue to increase.

So you're right. We try not to get mired into that because of the obvious impossibility of predicting the direction of the NYMEX and at any given time how much of our sales are hedged, but the important part from our perspective is that we are always 100% hedging our commodity risk. So that number will dramatically swing depending on, quite simply, the volumes of -- what volumes it takes, plus or minus the direction from the last reporting period of which way the forward market has moved.

In theory, so I think about this the right way, if gas were to go flat line forever here, you would slowly, as you basically deliver from your hedge position, be reversing the charges from the gas increasing and then there would be realistically no impact if gas were just to flat line going forward?

Again, assuming at all points in time you have the exact same amount of future sales hedged, but as sales actually occur and if you're not replacing him with future sales then, yes, they would over time just reverse themselves and go away.

Okay.

-- concern basis we would always have future sales that we're rising.

Okay, that's fine. I guess just given that it's like seven straight months it's been -- or the aggregate of seven straight months it's been a big gap there, so I didn't know if it had to do with the restatement or if it was just trajectory of commodity?

No, the trajectory of the commodity combined with the amount of gas sales hedged.

Okay. Thanks, guys, I appreciate it.

(OPERATOR INSTRUCTIONS) Your next question from James Mooney of Decade Capital Management.

Good afternoon, guys. Two quick questions. The first one is on the conservation incentive program. You said that $2.7 million is primarily related to other nonweather factors, such as usage. Is the lions share of that usage or there is other stuff in there?

It's fair to assume usage, yes.

Okay. And then the second question, can you give us a feel for underlying customer usage, excluding the effects of customer growth and a more normal weather environment? Like a same-store sales customers, are they -- have you seen -- is demand going up or is it actually going down because of your conservation efforts?

Usage has been going down, which is again what the CIP has been benefiting us on. If you go back to the time of the last rate case, the usage embedded in the rate design was down to 1,200 [DRMS], plus or minus. When we did the CIP, that number went down to 1,113, so we have seen it continue to go down.

Okay. Thank you.

We think it's probably down from that point probably another 45, but again that's where the CIP has been helpful because you see the obvious financial benefit but at the same time we've been able to proactively help our customers figure out how to use less in an environment of higher prices, which was good for them. So without getting too jargony it's been a win-win for both customers and shareowners.

Thank you very much.

You're welcome.

Your next question is from [Justin Motto] of Lloyd Abbott.

Good afternoon, guys.

Good afternoon.

Just follow up on the hedge on hedge. Is that -- for a FASB treatment you're unable to do it under FASB just because there's no way to match exact hedges to exact contracts?

That's correct. Reason for the statement, quite frankly, was that particular issue and in our case we cannot match to a level needed for FASB reasons the changes in derivatives with the underlying transaction.

Yes, okay.

That's why we report it both ways.

And do the hedges typically -- are they typically encapsulated within a fiscal year or do some actually -- can they bleed over either to the year prior or the year forward?

Yes, typically, for example, it's very common to have contracts going out to next winter, for example, so November '08 to March '09 positions are very common, for example. So as of today we would definitely have -- and any positions we're talking about are forward only. Any prior-period positions have obviously been terminated because they've matured, so everything we're talking about are forward looking and it is typical to go out at least one fiscal year.

Okay. And this applies both not wholesale business and midstream business, right?

In our midstream asset business we would not have any need for derivative issues -- instruments.

As a result of the equity investment.

Right, right. Got it. Okay, thanks a lot.

You're welcome.

(OPERATOR INSTRUCTIONS) There are no further questions. Do you have any closing comments, sir?

Yes, I just want to thank everyone for participating and if you have feedback on our use of the slides we'd love to hear that as well.

Thank you very much.

Thank you all.

Thank you for participating in today's New Jersey Resources quarterly conference call. This call will be available for replay begin agent 3 PM Eastern time today through 11:59 PM Eastern time on Monday, August 4, 2008. The conference ID number for the replay is 54817317. Again, the conference ID number for the replay is 54817317. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. You may now disconnect.