New Jersey Resources Corp (NJR) 2009 Q2 法說會逐字稿

Good morning.

My name is Keyshawn and I will be your conference operator today.

At this time, I would like to welcome everyone to the New Jersey Resources second-quarter 2009 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) Mr.

Puma, you may begin your conference.

Thank you Keyshawn.

Good morning everybody.

Welcome to Jersey Resource's second quarter fiscal 2009 conference call and webcast.

I'm joined by Larry Downs, 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 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-Q filed on February 6, 2009 and on Form 10-K filed on November 24, 2008.

A list of these items can be found on 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.

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 Downs.

Thanks Dennis.

Good morning everyone and thanks for joining us.

We appreciate your taking the time to listen to our presentation and discuss what is shaping up to be another strong year for our Company.

As Dennis mentioned, I have a slide presentation that I will be using and hopefully you have been able to access that on our website.

The first slide, just to reiterate what Dennis said, does discuss our forward-looking statement.

I will be discussing aspects of our strategy today which will be affected by future developments.

A list of the factors that could influence our actual results are included here in the 10-K, the other areas that Dennis mentioned and I would be please ask that you read them.

On the second slide, we have a disclaimer regarding non-GAAP financial measures.

I will be referring to certain non-GAAP financial measures specifically net financial earnings which we believe provides a better indication of our overall financial performance.

Net financial earnings or losses exclude unrealized gains and losses on derivative instruments related to our unregulated subsidiaries, also includes certain realized gains and losses on derivative instruments related to natural gas that has been placed into storage as NJRES.

But I would stress that while we do believe that net financial earnings is a better indication of our financial performance, it's not intended in any way to be a substitute for GAAP.

So let me move into the presentation on slide three and give you some of the highlights.

The key theme here is strong overall performance this morning in conjunction with the announcement of our earnings.

And for the second time this year we increased our net financial earnings guidance for the year to a range of $2.35 to $2.45 per basic share.

Earlier this year, I think as you know, we implemented a 10.7% dividend increase.

It was the second consecutive year of a greater than 10% increase in our dividend.

We are experiencing strong results from New Jersey Natural Gas.

In fact year-to-date earnings are up by 27%.

Just about a week or so ago, our accelerated infrastructure program was approved by the Board of Public Utilities.

Our customer growth remained steady thus far this year.

We've added over 3000 new customers and I think that is a good number in the face of the economic slowdown that is currently going on.

And then finally, NJRES will account for between 30 to 35% of our net financial earnings in fiscal 2009.

That is in line with our expectations as we've previously discussed it.

On slide four, we have a chart with our fiscal year-to-date results.

Net financial earnings per basic share for the six months were $2.48 compared with $2.74.

I want to make just a couple of comments on that.

First of all, as I just said, despite the lower numbers, we have increased our guidance for the year.

Our results again as we have said publicly are affected by seasonality.

What the numbers are telling us though is earnings at New Jersey Natural Gas have substantially increased.

NJRES remains on target to contribute 30 to 35% of our net financial earnings.

New Jersey Natural Gas earnings are being driven by the resolution of our base rate case, strong performance for our basic gas supply service incentives and the steady customer growth.

NJRES earnings have been affected by a contract expiration as well as lower spreads.

On slide five, we talk a little bit more about our earnings guidance which we did raise to a range of $2.35 to $2.45.

The next two quarters of our fiscal year, the third and fourth quarters, are expected to be substantially better than last year.

So the question may come up, why are we increasing guidance?

Well there's a number of factors.

First of all is the new base rates that are in effect.

Secondly, our incentive programs continue to perform very, very well.

Customer growth is continuing to contribute margin in line with our expectations.

Interest rates have been lower as we all know.

Then finally, we are expecting improved results from NJRES when you compare with last year.

So the key point there is as you look at the next two quarters, you will see substantial improvement and that is what's driving our decision to increase NFE guidance for fiscal 2009.

Moving on slide six, I want to talk about some of the key fundamentals driving our Company, starting with our net financial earnings.

Performance, you can see the midpoint of the range that we have put out this morning would be $2.40.

That would be the 18th consecutive year of improved financial performance by the Company.

And again, what we are experiencing is strong New Jersey Natural Gas performance as well as a continued contribution to net financial earnings from NJRES.

From the perspective of our dividend, earlier this year we increased the dividend for the 14th consecutive year.

You can see in the last two years the increases have been greater than 10%.

The annualized rate right now is $1.24.

But importantly, if we look at slide eight, when you look at our dividend growth rate, you can see that our record for dividend increases versus our peers is strong.

On a one-year basis, you can see where our 10.7% increase compares with our peer average of 3.2% and even on a longer-term basis, looking out over the last five years, you can see our increase rate of 7.3% compared with our peers at 3.5%.

Now going to slide nine, our payout ratio remains relatively low and we believe that provides the opportunity for continued dividend growth while maintaining proper levels of earnings retention to support future earnings per share growth.

Right now we are in the 50% range as far as our payout ratio.

And moving to slide ten, you can see when we compare that with our peers, both our earnings retention and dividend growth rates are strong.

Based upon our current indicated dividend, the payout ratio would be about 52% compared with our peers of just below 61%.

And again, looking on a longer-term basis, you can see our payout ratio in the 50% range compared with our peers at about 61%.

So what you see is that we've been able to achieve a balance of strong dividend increases and at the same time reinvesting back into the Company to strengthen our overall financial profile.

Now moving to slide 11, we all know that there are a lot of key issues that are facing the industry right now and when we look at where we stand from a strategy perspective on those key issues, it's very strong.

Liquidity, our balance sheet has always been strong.

We have no plans to access the capital markets in 2009 and 2010.

So long-term financing -- our $325 million credit facility is in place at the parent until 2012.

Demand for our commercial paper remains strong.

Although we are in a net invested position right now, the last piece of commercial paper we issued for a month was at 0.20%.

So demand has been strong and rates have been attractive.

In terms of interest rates, short-term rates remain low.

Our pension costs in fiscal 2009 were aided by a higher discount rate but the plan was also funded at healthy levels prior to the decline in the markets.

So as far as the pension goes, we are in good shape there.

In the industry, there's concern about slowing customer growth and clearly there have been issues in the new construction market.

But overall, our growth rate has been steady.

We're forecasting between 12,000 and 14,000 new customers over the next two years.

We're also seeing strong levels of additions from existing customers who do not use natural gas for heating and the conversion market is also strong.

Other issues that are of concern I think to the industry, increased bad debt expense.

What we are seeing is lower commodity prices like everyone else.

That is mitigating higher write-offs because of the revenue impact of the lower cost of gas and our expectation is that the basic gas supply service prices will fall even further.

And then finally from a regulatory perspective, we completed our base rate case in October 2008 with a fair outcome.

That included an expansion and extension of our incentive programs and most recently our accelerated infrastructure program was approved.

So when we look at the key issues that I think are on the minds of many investors, New Jersey Resources is positioned very, very well.

Slide 12, I'll just give you a little more insight on customer growth.

As I said through March -- the six months ended March 31, 2009 we added 3147 new customers in addition to 366 additional existing customer [heat] conversions.

That equates to an expected customer growth rate of about 1.3% for this fiscal year and we currently expect that should contribute about $3.6 million in new margin.

If you look at the two pie charts, I think some interesting information.

When you look at where the margin is actually coming from, we expect that more than half will come from residential customers.

The commercial market remains strong and will account for more than 40%.

And then the existing customers conversions, I've mentioned those at about 5%.

But if you look at where the new customers are actually coming from, with the downturn that we have seen in new residential construction, it's just about an even split between residential customers and conversions which I think is telling us not only the strength but also the importance of the conversion market that we have in our service territory.

Moving to slide 13, just details on our accelerated infrastructure program that was approved by the Board of Public Utilities on April 16 nd it calls for investment of up to $70.8 million on what should be considered non-revenue-producing infrastructure projects.

We expect that that will create up to 100 new jobs and the rate recovery of the program spending, the dollars that we are investing, will happen annual at our weighted average cost of capital that was included in our last rate case.

Basically it helps us with expanding the system, continuing safe and reliable delivery.

We expect it's going to be a two-year program and it will have obvious economic development benefits for our state as well.

Slide 14, just a reminder on the importance of our BGSS incentives and what they mean for our earnings.

This year we are poised for a record year as you can see from the bar chart and we also give you a little description reminder of the main components of the BGSS incentives.

These programs have been in place going back to 1992.

They have evolved and expanded over the years and clearly have been a win-win for both our customers in terms of savings on their bills, but also shareowners receiving margins.

So they've worked very, very well for us.

Slide 15, just to focus on liquidity since that is such a critical issue.

Our balance sheet is strong and as people I think know who know the Company, maintaining a strong financial profile has always been a key element of our strategy.

And as a result of that, we have really felt no impact from the challenges in the financial markets.

Demand as I said earlier for commercial paper is strong.

Just about a year ago, we issued $125 million of medium-term notes at a rate of 5.6% of this 10-year piece of paper.

We use that to pay down short-term debt and that has served us very, very well because we do not currently expect any long-term debt issuance either this fiscal year or in 2010.

Our cash flow is very strong.

Our committed bank facilities are in place.

We have given you some information about the size of those facilities and we are confident that the banks would even lend us money if we needed it.

Turning to slide 16, as you know, we've continued to make very good progress on Steckman Ridge.

That's a project that was approved by our Board back in January 2007 and is generally in line with our expectations.

Our investment, $134 million, is a 50% joint venture with Spectra Energy for a facility that could be up to 12 BCF.

You see on the map where it is located in Southwestern Pennsylvania and importantly where it's positioned relative to many of the major pipelines in that area.

We currently expect that Steckman Ridge will add to our earnings in fiscal 2010.

And then on slide 17, just to give you a sense of our total return to shareowners and I think the numbers are telling us that in these challenging times, our return numbers remain very solid for both the one-year and five-year time horizons.

We have outperformed both our peers as well as the S&P 500 and the Dow Utilities and I think that really is an indication of the resiliency of our strategy and our team's ability to execute.

So in closing, on slide 18, we believe that the Company represents an excellent value proposition.

We run the Company based upon conservative business practices.

And when you examine the key elements, the key strengths of the Company, we have got the fundamentals in place to increase earnings in our core businesses.

We have because of the strong financial profile as well as the performance of our businesses, the ability to increase dividends given the relatively low payout ratio.

A strong financial profile remains at the center of our strategy.

That will give us the access that we will need for new capital.

Our relationship with our regulators is strong if you look at that over the years.

And I think an important element of our relationship has been the recognition of the need for balancing the needs and the interests of both our customers and our shareowners and I think we have been able to do that.

Our service area demographics are strong.

That supports our expectation of steady growth particularly in the conversion market, discipline in terms of how we allocate capital which guides our investment decisions.

And I think when you look at that over a long period of time, we have achieved a track record of growth and consistent results which we believe is second to none.

So I want to say thank you to our employees.

They continue to do a wonderful job in the face of a lot of challenges.

Our numbers are strong.

I think our strategy is sound as well.

So with that, we will open it up for questions.

Thanks.

(Operator Instructions) Dan Fidell.

Just a quick question or two.

You increased your annual earnings guidance for fiscal '09 by $0.03 -- or the guidance range rather by $0.03 or so.

I just wanted to make sure -- as part of your comments, you talked about a stronger Q3 and Q4, in part tied to improved marketing results.

Was the Q2 results here on the marketing side just sort of a timing issue?

In other words, I see that you haven't really changed your total contribution from marketing to the total pie.

So was just wondering if this was really more of a timing issue than anything else.

It is a timing issue, but I guess what we are saying is this is as expected by us when looking at the year-to-year comparisons.

So factoring in what we knew about the timing of losing the contract and the way spreads were looking at the beginning of the year versus later in the year, what we are seeing is in effect right in line with what we expected all along.

So we do now expect based on the current forecasts, better comparisons in both -- in oil segments this year versus last year.

Okay, great.

Can you just give us an update sort of where you are on your CapEx spend year-to-date and where you think you will finish overall?

I don't have the exact number in front of me on year-to-date.

But we are in line with the estimates we have had for the year which in total was around $78 million or so which included about 10 to $12 million related to (inaudible) special project for automatic meter readers.

So, we are on target with that for the year as well.

And, Dan, just one point on the AMRs.

That was included in the rate case.

Very good.

I have several more questions but I will wait until I think later this weekend and ask them more directly.

But thanks very much for the call.

Jim Lykins.

Another question about guidance.

I'm wondering if you can talk about any of the assumptions from energy services.

And in your press release, you said that you think 60 to 70% of NFE might come from the utility.

So what I'm wondering is if the guidance kind of assumes the worst case, maybe 70% of the earnings are going to come from the utility.

There might be some opportunities to again raise guidance further out into the year.

I mean we're saying between 60 and 70% for the utility and 30 to 35% for energy services.

I think it's fair to say the way we look at it, the mid-range of both is what we expect and dependant on variables.

You could go within that range for each of the segments.

As far as our assumptions, we look at the current market and do not as we talked about going into the year, we don't count on extraordinary weather events or hurricanes or anything like that to assume some unusual volatility that's not currently seen in the forward prices.

So we -- you look at your own NYMEX screens and see what we see as far as spreads, what we have already hedged in our book and that's what we base our forecast on.

Can you also tell us what the impact was from the incentive programs this quarter?

I'm sorry, can you repeat that?

(multiple speakers) for the quarter, the incentive in the utility generated $4.1 million of margin versus last year at $2.2 million of margin.

Ryan Rosenthal.

A couple of quick questions here.

First concerning your utility earnings, during the first quarter of the fiscal year, there was a 38% increase year-over-year compared to Q1 fiscal '08; this quarter, a 22% increase.

Can you talk a bit about the methodology in terms of the rate increase and what we can expect over the last two quarters of the year in terms of what the opportunity is for additional increases year over year?

I guess the way I would answer that, Ryan, is if you looked at our guidance -- and if you again took the midpoint of the utility guidance of 65% with our guidance on the earnings per share range, you would see for the year an increase when compared to last year's results.

I think it was about $42 million.

I think you can calculate the range, if you will, of the amount we see for the year, the utility growing year over year.

So look at our guidance, look at the 65% as our midpoint of our estimates and then I would suggest you look at that versus last year's $42 million or so of earnings in the utility.

That certainly makes sense.

My interest here is in the sense that I guess this quarter would generally be the strongest quarter for the utility business and we see a smaller actual increase.

So what I'm trying to line up is the actual percentage that you -- in terms of how the rate increase is implemented.

Is it distributed in terms of actual usage or is it based more on just a simple flat increase each quarter?

No, it's a rate per customer, if you will.

So it's hard to look at it that way.

The important thing is that our new rates came into effect effectively right at the beginning of the fiscal year.

So while there is seasonality year-over-year and there are other factors other than just revenues and margin, movements in interest rates and timing of customer additions and things of that nature; you know, the quarter to quarter won't always line up to be the exact same percentage each quarter and that's why we give as direct guidance as we can for you to calculate the expectation for the entire year.

Thanks.

Then moving on to just to the small segment, the NJR Home Services segment, obviously business conditions are difficult for this segment year-over-year.

Can you discuss the business fundamentals here and when we might be able to expect a turnaround in this division?

Sure, I can tell you right -- the economy has hurt that part of the business, specifically more the part of the business that is more the discretionary installation part of that business model.

Good for us, the service contract part of the model has held up fairly well but that discretionary replace the condition, replace the heater type money is being spent a lot more cautiously by consumers out there.

We still expect that that segment [total] could be about 2% of earnings for the year.

But we have clearly seen a decline this year versus last in that segment.

We still expect profitable results and like I said for the entire year, we would see about 2% of our earnings coming from that segment.

Annie (inaudible)

Good morning everyone.

Can you -- you talk about your pension is in good shape.

Can you explain in a little bit more detail as to how should we think about that?

If the market continues to be weak, why did you say it was in good shape?

Well I think kind of going into the market turmoil, we were very strong.

We were 100% funded in our pension plan going into the -- six, eight months ago when the market really started getting weak.

So for fiscal 2009, being a fiscal year-end, we benefited in looking at our pension costs being at fiscal year-end and only had at the time seen a little bit of the market turmoil on our pension assets.

Looking forward, you're right.

Like anybody else, our pension assets have been hurt by what's happened since September.

But the good news for us is having such a strong balance sheet and access to capital, we will work with our actuaries to see what contributions, for example, tax efficient contributions we might be able to make into the pension plan that would mitigate what would clearly be a big down year on the return on asset side.

So what we are talking about is our flexibility, given our strong balance sheet and access to capital to mitigate what will be a bad year for anybody with a pension plan return on assets this year.

I think if you look at where we are funding levels relative to a broader group of peers, both electric and gas companies, there has been a number of studies that have been done on that.

We look very strong, tied back, as Glenn said, to the overall strategy of maintaining a strong balance sheet.

So we are in a position that if we need to contribute, we can do that.

What kind of assumptions do you use in the guidance then for pension?

I'm sorry?

Do you have any assumption for your pension in your guidance?

Yes, well we've only given guidance for this fiscal year and in effect the way the accounting works, the cost in our profit and loss statement for this year is really determined at the beginning of the year.

And the way it works next fiscal year will be this year we need to mitigate with potential contributions.

So the guidance this year includes our -- in effect what are going to be our actual pension costs for this fiscal year.

You also talked a little bit about the energy services as to with all the commodity coming down and the demand coming down.

I'm not talking about just our area.

How should we think about that going forward especially -- particularly how should we think about that will be affecting to your business?

I'll start and I'll have Steve or Rick jump in as well.

But on low commodity costs on an absolute basis, remember we do not speculate on which way NYMEX prices are going to go.

So we didn't win or lose, if you will, because they went down versus going up or anything like that.

Secondly, a positive of low commodity costs is that the amount of working capital the Company needs to fund its investment in inventory of (inaudible) is dramatically lower.

So from a balance sheet perspective, that's a major positive.

From a credit risk perspective, lower gas prices, credit exposure to counterparties likewise is a lot lower.

So those from more of the financial side are the -- really the positives or the neutral impact of lower commodity costs.

I'll let Steve talk about what's going on in the markets and demand and things like that.

This is Steve Westhoven.

On the business side of things, there's still a need for natural gas.

Electric generators are still burning natural gas.

Everybody has seen in the marketplace that producers are producing gas at record numbers.

So there's still a need to handle gas through assets, through storage and transportation.

So we expect our business to continue to grow.

We expect to continue to grow our footprint and we expect to have a strong contribution to earnings for this year and next year.

And lastly, can you comment on your uncollectible?

Like Larry mentioned in the presentation; yes, we've seen an increase in write-offs and aging of our receivables just as an impact of the economy.

From an absolute cost perspective, the amount of the increase has been mitigated because our commodity prices have been dropping with the lower wholesale costs.

So another example where revenue is coming down because of lower gas prices actually helped the Company both in working capital needs and in this case our level of bad debt.

So we are seeing a slight uptick in the percentage of revenues that we need to put aside for bad debt.

But again, that's all baked into our guidance for the year.

Eric Beaumont.

Just a couple of quick questions.

First on the accelerated infrastructure spend, how should we think about how that flows this year and will there be any earnings contribution this year or is it just a return of capital based on (inaudible)?

No, the way it works -- first of all for this fiscal year, we would expect to spend less than $5 million out of the $71 million in total in the program.

So we are not anticipating any financial impact this fiscal year just because of the size.

But the way it works is as we invest the money in these approved projects, we will be able to accrue what is called (inaudible) debt and equity which -- so for the investor, they will see the return of not only debt but an equity cost of capital through our income statement as we spend the money.

And then in about one year and a half, we actually will be able to raise our base rate by a factor calculated to actually receive from customers the amount of revenue we need to actually collect the cash.

So you will see the positive impact and effect each quarter as we spend the money and then customers will see a slight increase in base rates starting in our fiscal 2011 to actually see the cash coming in to be collected.

The cash flow of impact of that (inaudible) will be minor in comparison with the overall cash needs of the Company.

The important thing, Eric, is that ultimately this is a base rate type project.

This is not a rider where after a couple of years it goes away.

This in effect is a permanent increase in revenue for us when the money is spent and in rates.

Okay, great.

And just secondly, if you could give kind of of a little backdrop.

Obviously we knew [energy resources], one contract rolled off and you guys have been I guess very strategic at times when you get contracts and generally not overpaying as -- when storage costs really went up.

Given a lot of people are getting out of kind of the trading and asset optimization and being more consolidated, are you seeing more opportunities to get contracts, less opportunities?

Anything you can say on that front?

This is Steve Westhoven again.

Yes, we are certainly seeing a lot of turmoil in the market as you can imagine.

A lot of the financial players have been exiting the market due to their credit conditions and we have seen a lot of contracts trading hands.

And I would say that we are still sticking to the same strategy, so that got us to where we are today in that purchasing contracts we believe are going to add value to our portfolio and are going to add earnings to us moving forward.

So I think generally speaking, yes, the market and its volatility is helping our business moving forward.

Eric, we're going to be careful not to get into the trap that others have of overpaying for assets.

That discipline has enabled us to grow the Company in a responsible way and we are going to stick to that.

No, I understand.

I was just trying to see if the opportunity is growing kind of about the same.

It's hard to say when players are -- you see some players leaving, what's naturally happened with the assets given you have a different business model than others.

I was just trying to see if I could get a read on what all the actions of others leaving kind of (inaudible) might mean for you.

Thank you.

At this time, there are no further questions in queue.

Thank you all.

Thank you very much.

Bye.

This concludes today's conference call.

You may now disconnect.