New Jersey Resources Corp (NJR) 2009 Q1 法說會逐字稿

Good morning.

My name is Catherine 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 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 Catherine.

And good morning everybody.

Thank you and welcome to New Jersey Resources first quarter conference call and webcast.

I enjoyed 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 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 the forward-looking statements section of today's news release file today on Form 8-K and on our Form 10-K filed on November 28, 2008 -- I'm sorry November 24, 2008.

All of these items can be found at SEC.gov.

NJR does not, by including this statement, assume any obligation to review or revise any forward-looking statements referenced here in the light of future events.

I would also like to point out that there are slides accompanying today's discussion available on our website.

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

Thanks to Dennis.

Good morning everyone.

Thanks for joining us today.

As you know, we announced our financial results for the first quarter of fiscal 2009 this morning and we also updated our outlook for the balance of the fiscal year.

As Dennis mentioned, there is a slide presentation I will be using as I discuss those results with you.

On slide one we have more detail on what Dennis was just discussing about forward-looking statements.

I will be giving some forward-looking statements today and slide one has all of the factors that could affect those statements.

And again I would refer you to the 10-K where they are laid out and read those carefully.

On slide two we have discussion regarding non-GAAP financial measures.

Those two are discussed in the 10-K.

I would just say that the nonfinancial measures, primarily the use of net financial earnings, are not intended to be a substitute for GAAP.

But we do believe that net financial earnings and the other non-GAAP measures that we describe provide a better basis for assessing our performance.

Let me start out on slide three talking about some of the -- some of our highlights.

You saw in addition to announcing our financial results we also increased our net financial earnings guidance for the year to a range of $2.32 per share to $2.42 per basic share.

We also reminded investors that earlier this year we had announced a 10.7% increase in our dividend and we did implement that in January.

We saw very strong results at New Jersey Natural Gas.

In fact New Jersey Natural Gas NFE increased by 38%.

At the same time given some of the challenges that we're all familiar with in the economy, we were able to record continued steady customer growth.

We did make two filings with the BPU, two new programs that are aimed at stimulating the economy, creating jobs and moving forward with the state environmental goals.

NJR Energy Services this year is estimated to account for 30 to 35% of our net financial earnings, and in doing that, achieved the third highest level of earnings in their history.

Finally we've been able to maintain a very high customer satisfaction rate.

Going to the first quarter results, our net financial earnings for the quarter were $32.5 million or $0.77 per share compared with $36.3 million or $0.87 per share last year.

As I said, New Jersey Natural Gas had a very strong quarter.

Earnings were $23.1 million compared with $16.7 million during the same period last year.

That increase, which I said was about 38%, reflected primarily the impact of new base rates and higher incentive margins.

NJRES for the quarter net financial earnings were $9.4 million compared with $19.1 million during the same period last year.

That difference is attributed primarily to narrower summer/winter spreads entering the winter and less contracted transportation capacity in the Northeast.

As we know, NJRES earnings are seasonal in nature and as I said earlier, our expectation is that for the full year NJRES will contribute between 30 and 35% of our consolidated net financial earnings.

On slide 5, we did update our earnings guidance, increasing it to the range of $2.32 to $2.42 per basic share in fiscal 2009.

If we are able to achieve that, that would be 18 consecutive years of improved financial performance for the Company.

I just want to touch on some of the reasons why we are able to do that in the challenging macroenvironment that we find ourselves in now.

First of all is the impact of new base rates at New Jersey Natural Gas.

Also, gross margin from our incentive programs increased by 62% over last year and we expect those levels to be above last year for the entirety of fiscal 2009.

Our customer growth rate, we see that continuing in excess of 1% in this year.

We will see some increase in pension and OPEB, about $1.8 million in 2009.

That reflects increases in the discount rate, which has primarily offset losses in the planned asset value.

And our expectation as far as that higher pension expense is included in the updated guidance we're giving here today.

From a financing point of view, we have no current plans to access the long-term markets and certainly the relatively low interest rates we are seeing are helping our bottom line.

What we will see when we factor in NJRES net financial earnings this year is a mix of earnings that is returning to more historical levels.

Let me get into some of the specifics.

On slide six we talk about our customer growth.

During the quarter we added 1763 new customers.

That was a slight increase over 2008.

About 50% of that growth is coming from conversion markets.

And that is a trend that we expect to continue throughout the year.

In fact, margin from conversions is about 45% of the total.

Growth has remained strong at the conversion market despite the recession and despite the decline in oil prices.

Most of the conversions are coming from oil but we are also getting some from electric and propane.

In addition to that activity in the commercial market remains steady.

Moving to slide 7, just to give you an update on the regulatory front, we did file a new program with the Board of Public Utilities on January 20.

We refer to it as our accelerated infrastructure program for AIP.

Basically the proposed rate recovery of the capital spending would be at our weighted average cost of capital.

And what the program actually does in its simplest terms is to accelerate system reliability spending that we had originally planned for 2010 and 2011.

We believe that that will create up to 100 new jobs, which will hopefully help the state's economy.

We will have AFUDC treatment.

Those accruals will eliminate income statement effects associated with that spending.

And the way the proposal is structured, the cash recovery would occur on an annual basis.

Moving to slide 8, we continue to invest heavily in our core business.

In fiscal 2009 we currently expect capital spending of about $77.5 million.

You can see on the pie chart there the various components.

But you can see the major focus remains on customer growth, system integrity and replacement.

I will just make a comment that our automated meter reading project does remain on track.

You can see the spending that is expected in fiscal 2009 with the AMR program.

Now obviously with that level of spending, our strong financial profile remains very important.

I would point out that demand for commercial paper at New Jersey Natural Gas remains strong.

Yesterday for example we issued a $7 million piece of paper for 35 days at 0.28%, 28 basis points.

So you can see the impact of lower interest rates.

Earlier in 2008 actually in May, we did issue $125 million of medium-term notes.

You can see very favorable rates there.

That 5.6% was a spread of about 180 basis points off of the ten-year Treasury.

As I noted, at the current time, we did not have any plans to issue any long-term debt for New Jersey Natural Gas Company.

Our committed bank facilities remain in place so our access to capital is occurring as needed because of the strength of our financial profile.

Now I want to -- moving to slide 10 and talking about NJRES, we continue our efforts to manage a diverse portfolio of storage assets.

You can see from the map where those assets, both storage and transportation, are located -- primarily in the Southeast, the Gulf Coast, the mid-Atlantic and the mid-continent.

As I noted, this year's results were affected by lower storage spreads and smaller levels of contracted transportation capacity.

However, on balance we expect NJRES will turn in an overall strong performance for the year in that 30 to 35% range for the total contribution to net financial earnings.

And our efforts right now remain focused on building the portfolio in a disciplined way, as we have done very successfully over the years.

Going to slide 11 just a brief update on the Steckman Ridge storage project.

The project remains on plan for an in-service date of spring of this year.

We expect that additional wells will be added throughout the summer.

With regard to marketing, we are in the process of finalizing contracts with customers for the first year's available capacity and we will make those customers known -- we will make them public when the field is placed into service.

But as we evaluate the supply additions in the region, we believe that they continue to support storage values.

With regard to spending we are in line with the $132.5 million budget and it remains our expectation that Steckman will contribute to earnings in fiscal 2010.

Moving into slide 11, I want to talk about another regulatory filing related to energy efficiency that was also filed with the Board of Public Utilities on January 20 of this year.

Its objective was not only to stimulate the economy but also to support New Jersey's of environmental goals.

We believe from a jobs perspective that program will also add an additional 100 jobs and that is on top of what I discussed would be with the AIP.

The recovery includes the overall weighted cost of capital.

The program itself establishes a number of new offers for the installation of energy efficient equipment and includes enhancements to current rebates that are available to customers through the Clean Energy program.

There is a total of $15.3 million of potential customer rebates and incentives and that would be over a four-year period with the expectation of earning our full rate of return at the existing weighted average cost of capital.

Moving to slide 13, as I mentioned, the dividend increase that we announced in November was effective on January 2 of this year.

It was 10.7%.

That was the second year in a row of greater than 10% increases in the dividend.

And when we look at that from a longer-term perspective it represents the 16th time in the past 14 years that we have been able to increase the dividend.

But I think with all of the discussion that has been out there with regard to the dividend, it is important to look at our dividend rate a little more closely.

So if you move to slide 14 you will see that our one year dividend growth rate was 10.5%.

That compared with our peer average of about 4.4%.

And if we look at that over a slightly longer-term we can see that the dividend growth rate for New Jersey Resources was 6.3% compared with a peer average of 3.7%.

However, as we know, increasing the dividend is one thing but making sure that an appropriate financial profile is there to support it is something else.

So if we go to slide 15 you can see that our one year dividend payout ratio is about 50%.

So we are reinvesting a good amount of our earnings back into the company to support future earnings-per-share growth.

That compared with our peer average of 58.8% and at the same time we look at a five-year average our payout ratio is just below 50%.

The peer average is above 60%.

I think what that tells us is not only the -- underscores the financial strength of our company but also the safety of the dividend.

And then on slide 16, we give you an update on our total return for calendar 2008.

As we all know, it was a difficult market environment but we were able to turn in a very strong performance of a total return including dividends of more than 21%.

Our peers were just about 2% and the S&P 500 of course was down by almost 36%.

So we have been able to continue to perform well in this market environment.

So in summary, we continue to be a company that is built upon performance.

Our financial profile remains strong.

We continue to experience steady core market growth.

Our regulatory relations are constructive.

We are executing a very disciplined strategy with regard to wholesale energy services business and again we are demonstrating as we have by increasing our guidance for fiscal 2009 demonstrating again our record of providing consistent financial performance.

So, with that I will open the lines to questions.

(Operator Instructions).

Jim Lykins.

Good morning everyone.

First of all, you commented on the lower gas volatility in the quarter.

I was wondering if you could give us a feel for what you are seeing so far into Q1 as well.

I'm going to ask Rick Gardner to take that question.

Well we have seen the volatility in -- January it did show us some good volatility in the market area in relation to Appalachia pricing.

Right now we're going to take a look at the weather and see how February shakes out.

Okay.

I was also wondering if you might be able to tell us what your assumption is and guidance for gas volatility as well.

I think that is embedded in the 30 to 35% of the total and how we expect that volatility will affect the results of NJRES.

Having said that, can you at least say whether you are assuming something similar to Q4 or if there is an improvement there?

Again, seasonality will always be an issue in this part of the business based on when certain positions are put on and when certain assets are hedged.

I can tell you that as usual we will look at the current market for storage spreads for example when valuing any unhedged position and we do not assume unusual weather or other events that would cause tremendous upside on margin.

Okay.

And the $77.5 million in CapEx, does that include the AIP or will there be some additional CapEx spend there?

That would be incremental to the $77.5 million -- the AIP.

Can you give us a feel for maybe what you are anticipating there?

Or is it too early to tell?

The total over the life of the program would be an additional $70.8 million.

Okay.

Jim that would unfold over -- that is not all in one year.

Okay.

And lastly, there was about a 22% drop in depreciation this quarter.

Maybe if you could comment on that and if that is -- maybe -- or what we should expect over the next few quarters, the depreciation?

The depreciation rate was lowered as part of our rate case, which is why you are seeing that number go down.

Okay, so should we assume depreciation more in line with Q1 for the next couple of quarters then?

I think it is important to look at it over the course of the year so there is no skewing because of timing differences in the capital expenditures.

But generally because of the lower rate you will see that tend continue.

But it is indicative of the trends that we would expect obviously with our entire rate base now being depreciated on an average of 2.4% instead of 3%.

You can come up with your own estimates of how much that would equate on an annual basis.

Okay, great.

Thank you gentlemen.

Dan Fidell, Brean Murray.

Thanks for the call.

Just the following on one of Jim's questions on the accelerated infrastructure program and energy efficiency projects.

Can you give us a little more color on what those energy efficiency projects might be?

And any additional detail you could give us in terms of how we ought to be thinking about the CapEx spend would be helpful too.

Basically as we said, the program is structured around the use of incentives.

What we're trying to do is to build upon existing incentives that the state offers for the use of more efficient equipment.

So if you have a customer, for example, whose equipment breaks, he or she has a choice between higher energy efficient equipment or the lower efficiency equipment.

The lower obviously costs less.

What we're trying to do through the program is to provide additional incentives on top of those which are already available through the state to make the purchase decision, make that economically feasible for the higher energy equipment.

What we would do then is in providing those incentives we would actually recover those and earn on those at our weighted average cost of capital.

Equipment is one element of it.

We expect as part of the program we will offer we will have audits done of the different houses and identify other opportunities for increasing the efficiency of the home and use then rebates to help the customer make the purchase decision to make that investment to reduce their use of energy.

But the bottom line I think from your perspective is those incentives we would be offering, we would effectively recover those and earn on those.

That is on the energy efficiency side.

Did you want to add something, Mark?

I would just add that the way we would recover that is similar to our current riders in that accounting wise we would earn that return real-time; in effect as we spend the money and as any assets going to service, for example on the ASE program or if you spend the money on the environmental programs.

And then from a cost recovery perspective, you have your slight lag as to when the customers actually then pay us for whenever regulatory asset has been created through that real-time recovery.

Now on the second part of your question, Dan, with regard to the AIP, as you know, we maintain healthy capital budgets.

The two main drivers of those budgets are customer growth and what I would call in general terms system integrity, system replacement.

What we are doing -- and our budgets have been as we have disclosed north of $70 million -- roughly $25 million to $30 million of that is customer growth related.

The rest is in a variety of pipeline and system integrity/replacement projects.

What we are talking about here is accelerating some of those system replacement/integrity projects which enhance the reliability of the entire system, to accelerate those dollars in order to create jobs and obviously stimulate the economy through the purchase of materials, reinvestment of dollars.

As Glenn noted, with regard to the regulatory treatment of the costs associated with those investments it would be similar at or weighted average cost of capital.

Thank you.

That is helpful.

Probably, what, Mark -- nine or ten discrete projects (multiple speakers)

Actually 14 projects occurring over 2.5 years approximately.

I would just added that just based on the timing of getting approvals for the program and then permitting, et cetera it's fair to say the majority of the actual spending and related recovery would start in fiscal 2010 for us, not in the next 7 or 8 months.

Thanks.

Maybe one other question on Steckman Ridge.

Can you maybe just comment on your overall level of satisfaction with that project, how it has progressed and maybe your appetite for additional kinds of projects going forward?

You're certainly going to be busy with some of these other projects.

I'm just wondering how you feel about Steckman in the future (inaudible)?

Let me ask Rick Gardner to comment on that.

We're very satisfied with the progress at Steckman.

We are on plan, both timing and expense wise.

We're very excited about it.

As you mentioned, NJR is continuing to build their projects as opportunities become available and bring those to management.

There are some opportunities out in the marketplace right now.

So, as always we're going to keep an eye on those and review them as they become available.

Can you give us any more specifics on that side just kind of press the case a little bit?

Should we be looking for any specific announcement in the next couple of quarters in that regard?

No, Dan you should not be looking for that.

Okay, thanks very much for your comments today.

(Operator Instructions).

Ryan Rosenthal, Sidoti Company.

Couple of questions for you.

Going back to the accelerated infrastructure program, when you suggest that you will be earning your weighted average cost of capital, in terms of the equity component of that, is that based on your regulated ROE?

Is that what you're expecting?

That is correct, the 10.3%.

I think you mentioned, to reconfirm, that would most likely begin in fiscal 2010.

I think you said the three-year -- in terms of a three-year basis that you earn on those projects.

Is that kind of the timeline in terms of implementing them?

I'm going to ask Mark Sperduto to comment on that.

The way it will work is (technical difficulty) that occurs between as a fiscal year closes will be reflecting in an October 1st rate change.

So as Glenn mentioned, because of permitting and material acquisitions, not much other than design work and some construction, minimal amount would occur in fiscal '09.

Then it accelerates in fiscal '10 and fiscal '11.

And I know you guys generally have discussed storage by margins going forward, but do you guys have any comments on the recent -- it looks like there's been a nice widening of spreads for fiscal 2010.

Is that something you are witnessing and are you considering hedging more of your storage capacity now because of that?

Brian this is Steve Westhoven speaking.

We are certainly keeping an eye on that looking forward.

And obviously we have a lot of storage we manage and we're looking at spreads for not only this coming year, but the next years to follow and looking to put some hedges in our book accordingly.

And it terms of this quarter you mentioned that there was less contracted transportation capacity in the Northeast.

Is that a onetime event or is there some kind of fundamental change to the business there?

No, there hasn't been any fundamental change to the business.

It is just a matter of having contracts that come into our book.

And as they rolloff we look to renew, we look for the right assets for the right future period and it's been a continuous change for us.

So it's not something unusual and our business really hasn't changed at all and we still have the same focus.

One final question regarding the home services business.

I noticed that was significantly weaker year-over-year.

Was there any particular item that caused the weakness this quarter?

You know they -- (technical difficulty) up here in the Northeast we have a very cold winter so far.

So some of their labor costs are a little bit higher than planned because of overtime dealing with servicing customers.

And we are seeing some impact from the economy on the level of service contracts being either renewed or new sales.

So and that all of course is factored into our overall guidance.

Okay, thanks for your time everybody.

At this time, I have no further questions in queue.

Okay, thank you very much.

We will see you next quarter.

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