New Jersey Resources Corp (NJR) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the New Jersey Resources' Third Quarter 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)

At this time, it gives me pleasure to turn the conference over to the Director of Investor Relations, Dennis Puma.

Please go ahead, sir.

Thank you, Lori, and good morning, everyone.

Welcome to Jersey Resources' Third Quarter Fiscal 2009 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 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 to be filed on or about August 5, 2009, and on our Form 10-K filed on November 24, 2008.

All these items can be found at SEC.gov.

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

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

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

Larry?

Thanks, Dennis.

Good morning, everyone.

Thanks for joining us here today.

As Dennis mentioned, we do have a slide presentation that I will be using as I give you an update not only on the quarter but also the fiscal year to date.

So if we move to the slide two, which is the forward-looking statements, as Dennis mentioned, I will be using forward-looking statements this morning.

Slide two lists the factors that could affect those statements.

They're listed here, they're in our 10-K and our 10-Qs, and I would ask you to please take a moment to review them very carefully.

Moving to slide three, I'll also be referring to certain non-GAAP financial measures, mainly net financial earnings and financial margin.

And while we believe these metrics provide a better understanding of our performance, they are not intended in any way to replace GAAP.

Item seven of our Annual Report on Form 10-K provides a more detailed discussion of these measures, and I would encourage you to please review that so that you can understand the non-GAAP measures, as well as our GAAP numbers.

So with that, let me move to slide four and provide you with some of the highlights of what has been a strong performance by the Company thus far in fiscal 2009.

This morning, we reaffirmed our guidance for net financial earnings, a range of $2.35 to $2.45.

As you know, previously, we had increased that guidance on two occasions.

Earlier this year, we implemented a 10.7% dividend increase.

We've seen very strong results from New Jersey Natural Gas, reflecting both new base rates, as well as excellent performance of our incentive programs.

Working with not only the Board of Public Utilities but also Rate Counsel, we were able to put in place two important regulatory achievements -- our accelerated infrastructure program, as well as our energy efficiency program.

We're continuing to see steady growth despite some of the macro challenges in the economy, and we're currently forecasting 6,100 new customers in fiscal 2009,and NJR Energy Services is still having a strong year, which is in line with our previous forecasts.

So let me move to slide five and talk about some of the quarterly results.

As you can see on a net financial earnings basis, we achieved financial results of $0.03 per share.

That compared with a loss of $0.10 per share last year.

We saw improvement in all segments, but as you look at the numbers on slide five, you can see that New Jersey Natural Gas is having an excellent year, again driven by the two main factors that I mentioned -- the rate case, as well as the performance of our BGSS incentive programs.

When you look at that now in a longer context, first of all, we expect that this year will be the 18th consecutive year of improved financial performance, just looking at the midpoint of the guidance that we reaffirm today.

The drivers are straightforward -- the effect of the base rate case, steady customer growth, and the incentive margins.

As I said earlier, we estimate the net financial earnings to be in a range of $2.35 to $2.45 per share.

The number that you see for 2009 is, as I said, the midpoint of $2.40.

Moving to slide seven, to put that performance into some broader context and to compare it with our peers, you can see that we performed very well.

On a one-year basis, our earnings growth rate, based upon the net financial earnings, would be 7.1%, compared with our peer average of less than 2%, and if you look at a little longer-time horizon, five years, you can see our earnings growth rate of 6.7% compared with the peer average of just a little bit above 6%.

Our strong financial performance, moving to slide eight, the performance that we've had has allowed us to provide our shareowners with consistent dividend increases.

In November, we were able to put in place growth of more than 10%, which was the second consecutive year.

Our current annual rate is $1.24 per share.

But once again, if you focus on that, moving to slide nine, you can see how that dividend growth rate compares with our peers.

On a one-year basis, our number of 10.7% compares very well with the peer average of 3.1%, and again, with a little bit longer horizon, looking at it five years, you can see that we more than doubled the peer group average more than 7% compared with the peer average of 3.5%.

Now, looking at the dividend and the sustainability of that dividend, you can see on slide 10 we've given you our payout ratio.

So at the same time we've been increasing the dividend ratio -- or dividend rate, our payout ratio remains in the low 50% range, and what that means, as we all know, is that we are reinvesting almost half of our earnings back into the Company to support future earnings-per-share growth.

And looking at slide 11, again compared with our peers, you can see our payout ratio on a net financial earnings basis this year was just short of 52% compared with the peer average of almost 61%, and on a five-year basis, a little less than 50% for NJR compared with almost 61% for the peer group average.

So when we look at the dividend not only in terms of the growth rate but also the payout ratio, making sure that we're maintaining a strong financial profile, I think we compare very well with our peers, and obviously, the dividend is supported by our financial results.

Now, moving to slide 12, I want to talk about some of our other fundamentals, and as I said in the highlight slide, despite a challenging economy, our customer growth rate remained steady.

Obviously, new construction has slowed, but we have seen some resiliency in both the commercial and conversion markets.

If you look at the two pie charts on the right on slide 12, you can see that residential margin this year should contribute about 57% commercial, just less than 40%, but you'll see in terms of the new customers themselves almost half are coming from conversions.

We expect 6,100 new customers in fiscal 2009 in addition to 650 customer key conversions, and now we think that the margin that will come from those new customers on an annualized basis will be about $3.6 million annually.

Moving to slide 13, I mentioned some of the regulatory initiatives that we were able to put in place by working collaboratively with both the Board of Public Utilities and Rate Counsel.

Our Accelerated Infrastructure Program, or AIP, as we refer to it, that was approved by the Board on April 16 of this year, and it calls for an investment of almost $71 million in infrastructure projects, about $6 million this year, the bulk of it coming in 2010, and another $21 million just about in fiscal 2011.

It supports economic growth in the state, as well as job creation.

The rate recovery of the spending that will be received annually and our weighted average cost of capital, it obviously helps the reliability of the system, but I think it also supports the state's environmental goals.

It was, I think, a good example of our industry's ability to work collaboratively with our regulators in reaching agreement on this initiative.

Now, in addition to the AIP, moving to slide 14, we were able to gain approval of our Energy Efficiency Program.

That just happened earlier this month.

It's a $21.1 million program that, again, promotes the goals and policy direction of the Energy Master Plan and is generally consistent with the state's very strong focus on environmental stewardship.

We are able to recover costs again at our weighted average cost of capital.

That will be done to a rider that will be part of customer bills.

And assuming full participation -- that is the full amount of the $21.1 million -- the after-tax earnings impact will be about $1.2 million over a four-year period.

So we were able to put in place two important regulatory programs.

Now, moving on to our BGSS incentives, they continue to perform very well, having a record year this year.

These incentives, which have been in place since 1992, consist primarily of off-system capacity release programs, our storage incentives, and financial risk management programs, and it's important to note the benefit that they provide not only to our share owners but to our customers, as well, allowing us to credit dollars back to their bills to reduce their prices.

For the nine months ended June 30, total incentive margins were about $61 million, of which about $9.8 million was retained by the Company, and if you do the math on that, that equates to about $0.14 per share.

Now, let me turn to our non-regulated businesses, beginning with NJR Energy Services.

I'm on slide 16 right now.

First point I would make is that fiscal 2009 is forecasted to be NJRES's third best year of profitability in its almost 14-year history.

We think, as we've said previously, that that earnings level will contribute between 30% and 35% of our total fiscal 2009 net financial earnings.

And just a reminder, on some of the fundamentals of NJRES, we are primarily a physical gas marketer.

You can see some of the services that we provide.

We have a diverse portfolio of not only storage capacity but also transportation capacity, and our customer base is pretty well focused on marketers, LDCs, IPPs, industrials, and gas producers.

We're strictly a natural gas operation, no electric exposure, and the strong focus that we have had on dealing with creditworthy counter-parties has enabled us to deal with some of the economic challenges.

So NJRES is consistent, and importantly, is in line with our expectations.

Moving to slide 17, we're continuing to make progress with our midstream strategy.

Steckman Ridge, as you know, is a partnership that we have with Spectra Energy.

We've invested about $120 million and expect the ultimate number to be $132.5 million.

The storage facility itself, in Southwestern Pennsylvania, which you can see on the map, has up to 12 Bcf of storage capacity.

Good news is to report that it's currently in operation.

Customers have begun to inject natural gas for next season, and we expect that Steckman will contribute to our earnings in a more meaningful way in fiscal 2010.

And then just bringing all of that together is what has all this meant for our shareowners.

If we look at from a one-year perspective, you can see where New Jersey Resources is, at 17.2% return, compared not only with our peers but the S&P 500 and the Dow utilities, and again, looking at a little bit longer time horizon, the five years ended June 30, 2009, you can see where our return numbers compare favorably with our peers and with the S&P 500.

So our performance has been strong during the period of unprecedented challenges in the economy.

So to summarize, in announcing our results today, we are continuing what we believe is a very strong record of consistent performance.

Fiscal 2009 will be a strong year for us, and we think that the fundamentals that we have in place give us the opportunity to increase our net financial earnings.

Some of those fundamentals include our customer growth, the regulatory initiatives that we put in place in Steckman Ridge.

I think our performance and our payout ratio gives us the opportunity to increase our dividend.

We have always maintained a strong financial profile to facilitate access to capital, and in the context of what's going on in the markets right now, where we don't really expect any new long-term debt issuances either this year or next year, we've been able to take advantage of lower interest rates and help our bottom line.

Our relationship with our regulators remains collaborative.

Again, the Board of Public Utilities and Rate Counsel, we work very well with them, and when you put all of that together, I think that that has reaffirmed our track record of growth and consistency.

So, as always, as I close, I want to say thank you to our employees for everything that they do.

They're the reason that we're able to report these results today, and I want to thank our investors for their confidence in New Jersey Resources.

And with that, I will turn it back over to Dennis.

Okay, Lori, we're ready to open the lines for questions now.

Thank you very much, gentlemen.

(Operator instructions)

Our first question today will come from Jim Lykins with Hilliard Lyons.

Good morning, everyone, and congrats on the quarter.

Hi, Jim.

Thank you.

First thing I wanted to ask you is about the new energy rider mechanism.

It sounds like it's very similar to the AIP.

Maybe you can just comment on what the differences between the two might be?

Jim, I'll ask Glenn to answer that.

Well, first of all, the AIP program is a true rate base program, so our base rates actually get adjusted while the energy efficiency program, from a financial perspective, is a -- we will recover with the cost of capital our investment and costs over a four-year period.

So there is, in effect, a start and finish to the EE program, while the AIP is just like any capital investment for the utility, and base rates are adjusted.

Okay.

And regarding Energy Services, I know it's difficult for you guys to comment specifically on what's happening there, but just given that storage has been at all-time high levels and there may or may not have been any volatility there, maybe if you could just give us a feel for what you're doing to get to the third best year ever there?

Well, Jim, we have seen some lower volatility.

We also, as we've disclosed publicly, had a contract last year that was profitable for us that ran off.

But I have Steve Westhoven, who's the Vice President at NJRES, and I'll ask him to comment upon that.

Okay.

Hey, Jim.

This is Steve.

Good morning.

Good morning.

We continue to look for new opportunities in the marketplace.

There's certainly some new opportunities in some of the new shale plays that are coming online, and certainly, the volatility is -- as much it's been down in volatility due to some, I guess, cooler-than-normal weather in the Northeast and such, it's still given us those opportunities, so we still manage to trade our book and manage our assets in such a way to produce income and make some positive contributions to the corporation.

And I think, Jim, all of the factors that you're raising, they're embedded in the guidance and the specific range of earnings contribution that we expect from NJRES.

Okay.

And when you go down to the 30% or 35% overall contribution there, in the past you've been more 40% or 45%.

Is this a change in strategy, or is it more a product of market conditions?

No, it's more of the improvement in the utilities results.

Remember, the utility went through the normal regulatory process and came out of the rate case, so you're seeing more of the improvement in New Jersey Natural Gas that will get us back to what I think is a range that has been close to what we've seen historically.

Okay.

And one last question, and I'll let someone else ask one.

If you could just give me the CapEx numbers for the quarter?

We don't have the -- well, let me look at the Q.

The Q will be filed next week, but no -- for the nine months, I could say CapEx in the utility was 51 million.

51?

51 million for the nine months.

Okay.

And we invested 41 million for the nine months in our Steckman Ridge investment, 90 total.

All right.

Okay, thank you, gentlemen.

Thanks, Jim.

Our next question comes from Bryan (sic) Rosenthal with Sidoti and Company.

Morning, everyone.

Morning, Ryan.

Hi, Ryan.

My first question concerns the utility, certainly a significantly better performance year over year now largely as a result of the rate case.

Can you also discuss the incentive mechanisms during the quarter, including the AIP and the benefit that you receive there in terms of the net number?

Ryan, the AIP is just starting, so there's, in fact, no impact yet.

We'll see a very small impact in the fourth fiscal quarter, but for any noticeable numbers, that one's starting for fiscal 2010.

And on the incentive margins, again, we are taking advantage in the utility of dropping wholesale prices, which allows us through some of those mechanisms to lock in gas costs lower than some pre-established benchmarks.

So I would say really no AIP margins.

You can see in the press release the actual numbers that we earned in the incentive margins in the table.

We have a margin breakout on page nine of the press release, and you can see that in total, we, for the shareholders, earned $1.9 million of margin from those programs compared with $1.2 million last year in the quarter.

Okay, thanks.

And then jumping up to NJRES for -- in the press release, you mentioned that the current economic conditions resulted in a slowing of the wholesale market during the third quarter.

Could you discuss how sensitive the business is to power demands?

And it's been my understanding in the past that much of the transportation capacity is hedged well in advance and what the sensitivity may be on a -- just on a quarterly basis in that sense?

I'm sorry, could you repeat that?

I didn't catch a few words there.

It's Steve, Ryan.

Sure.

My question concerns a weakened demand for power generation and how that may affect NJRES in the next couple of quarters and looking forward, as well.

Yes, you were correct.

We do employ hedging in managing our assets in the short and the long-term portion of the markets, so we don't rely totally on the spot market when we're managing our assets, both with transportation and storage.

So, like I said before, we expect to contribute to the corporation and help the corporation hit their earnings targets for the year.

So all of those conditions again, Ryan, are built into, as I said earlier, the guidance and the percentage we expect from NJRES.

And I would just add but that decline in the economy and a lower demand when we do have any heat does impact the amount of volatility we're seeing, so it's one of the factors why this business is, in our forecast, not going to earn quite what it's earned in the last two years.

So that is one of the factors that has kept that volatility down.

And then during a particular quarter, such as the last one, given that much of the capacity is hedged in advance, is there any sensitivity to the current economic environment during a particular period?

Yes, you certainly have some impact.

It's gotten really hot, and we had the right positions in place, and certainly we could've profited from that, so it is going to have some impact, but we try to employ a disciplined approach to managing our assets, so we have some contribution coming from those assets during this period irregardless of the short-term impact of the market.

Very good.

Then I guess looking forward into fiscal 2010 and beyond, given the weak energy demand that we're experiencing now, has that deteriorated the locational spread opportunities looking forward?

No, we haven't come out with guidance yet.

Obviously, the amount of profitability we get from this business is somewhat dependent on how volatile the markets will be and how wide the spreads get.

So it will have an impact, but it will be obviously incorporated into our forecast when we come out with 2010 guidance.

Okay, thanks.

Then just one final question regarding non-regulated growth opportunities, as well.

I know that Steckman Ridge storage facility is slated for commercial operations by October.

Looking beyond that, are you guys considering any further non-reg growth projects at this point?

Well, we're constantly looking at opportunities, but we have not -- we've not announced, as you know, anything specific, but in all of the businesses, looking for potential growth opportunities and being mindful as to what that would imply for our valuation.

Okay.

Thanks for your time, everybody.

Thanks, Ryan.

Our next question comes from Dan Fidell with Brean Murray, Carret.

Morning, guys.

Morning, Dan.

Just a quick question or two.

Most of my questions have been asked and answered.

First, I guess, just if you could give us a little more detail on your request for extension of the [SIP], if you see any kind of issues there, and maybe just a broader kind of update on how things are looking with New Jersey's Master Energy Plan?

Right now, I think, as you know, Dan, the program will be automatically extended through the end of fiscal 2010 unless there was some action by the BPU.

We do not expect or have any indication that that's a problem.

We're in the process now working here in the state looking to get a more -- a longer extension but nothing to announce yet on that.

As far as the Energy Master Plan, that process is still unfolding.

We are actively participating in that, and our focus is really trying to define and identify what role that we can play in helping the state implement the goals of the Energy Master Plan.

As you know, there's been the Master Plan, but there's also been a number of other legislative and policy direction that has been put forward, one of the biggest ones being the Regional Greenhouse Gas Initiative, which gives natural gas utilities the opportunity to participate investing in solar and efficiency, and we're in the process now of trying to identify what those opportunities might mean for us.

Kathy, do you want to add anything?

Kathy Ellis, our Chief Operating Officer of the New Jersey Natural Gas, is here, as well.

I don't really have anything to add, Larry, except that we are constantly looking for opportunities which have a resident amount of [regi in managing master plan].

Great, thanks.

Great.

Maybe just one other question in terms of -- I know that with Steckman being completed here shortly, obviously, you're looking at probably some other opportunities, either storage or gathering, other kinds of areas, but can you just sort of give us an update on kind of where Steckman is at?

I think you said in the press release, there's about 4 Bcf or so currently stored at Steckman.

Can you just refresh us in terms of what the base level of gas is going to be in that facility and the ultimate expandability that Steckman could hold down the road?

Yes, I think -- to Dan's point, I think the total facility is 17 Bs, 5 Bcf of base gas.

That would be 12 Bcf of working gas.

But one of the reasons we're hesitating on that is that we have not finished construction yet of the full amount of wells we think would be needed to get to the 12 Bcf.

So from an engineering perspective, we have started the injection.

They're going to see how the field performs.

And we'll see how it performs to see (a) do we have to spend the rest of the money that we've committed to get to the 12 Bcf, or is the field working better than expected?

Do we need more compression and [inaudible] wells?

Things like that from an engineering perspective is why we're hesitating a little bit on what the final investment would be and why it won't be fully operational until next year.

Great.

Thank you very much for your comments today, and as always, for the call.

Thanks, Dan.

Thanks, Dan.

Our next question comes from Eric Beaumont with Copia Capital.

Morning, guys.

Congratulations on a good quarter.

Thanks, Eric.

Eric.

Have just a couple quick questions.

When we look at the level you guys have made on incentives this year, obviously, a very good year.

I'm just trying to reconcile if you could describe whether it's really the dynamics we're seeing in the gas market or is it the additional storage that went into the incentive program, or is it a combination of the two driving this here?

Eric, it's definitely a combination of both.

Having more storage in the program to make some profits in that part of the program, regardless of what happened in the markets, was definitely one contributor.

But I think a little bit more of a factor this particular year was the dramatic decline in gas prices and the ability to lock in gas through our FRM program because each quarter, a new benchmark is set by a third party, and during the quarter, if futures prices drop below that benchmark, we are allowed to lock in gas below that benchmark and then basically lock in that profit that gets shared between customers and shareholders.

So I would say this year that part of the program has been very successful, but I would also say that the extra 2 Bcf or so of storage helped, as well.

I would just add to that, Eric, adding the storage is one thing, but being able to manage it in a way that provides the benefit for customers and shareowners, that goes to the expertise of the team.

Absolutely.

And I guess just on a going-forward basis, until we know what the benchmark is and what forwards to, so it can be kind of hard to gauge what you're going to make out of that, is there anything you can point us to so we can think [inaudible] --

No, that's correct.

-- about that?

You're correct.

It depends on what each benchmark is.

Dependent on the view of the firms issuing that benchmark, if they see futures prices rising dramatically and the market actually stays down or goes further lower, there could very well be just as much opportunity next year as there was this year.

It depends on what those benchmarks are and obviously what happens with the market.

Great.

And, lastly, understanding that you, from short- and long-term contracts, do a lot of optimization around your assets, one thing -- you know, the question was asked on power generation how that's impacting you.

I guess the one thing I was curious about is that for one of the first times in a long time in the Northeast, we're hearing rumors of some basis compression for some of the transmission pipes.

Can you just comment on that, and is that having an impact on the business?

Yes, certainly, it's going to impact the business, and there have been certain basis differentials that have compressed, and there has been some volatility to that forward-looking market, and we're managing it like we usually do, and I don't think it's anything that is that unusual except for probably a little increased focus on it more than anything else.

And given how you guys work things, obviously, a base of compression in and of itself is maybe a neutral to slight negative, but the volatility around it might give you enough opportunity to offset that compression?

Yes, exactly.

That's exactly it.

Okay.

Great.

I appreciate the time, guys.

Thanks.

Thanks, Eric.

(Operator instructions)

We will take our next question from Mark Barnett with Morningstar.

Hi, guys.

Morning, Mark.

How are you?

How're you doing, all right?

I'm doing well.

Just a quick question.

Actually, most of what I'm curious about's already been mentioned.

But if you guys are out in the physical market, obviously, storage levels just across the US are pretty historically high levels.

Where do you see that going in the next three to six months, I guess, from the business that you're doing out there?

Mark, this is Steve.

You know, right now, it seems to be common consensus that your ultimate US natural gas storage levels are going to get to the very high 3.9, maybe 4 Tcf level, so obviously, they're going to get very full, and that's why you see some of the prices that you do in the front of the market.

So we try not to make too many predictions on where prices are going or where storage levels are going, but we'll continue to manage our assets around the situations and hopefully profit from them.

Okay, thanks.

Thanks, Mark.

Gentlemen, at this time, there are no further questions.

I would like to turn the conference back over to you for any additional or closing comments.

No, that's it.

Thank you very much, and we will see you guys next quarter.

Thank you.

Bye bye.

Thank you very much, ladies and gentlemen, for joining today's New Jersey Resources Third Quarter Financial Earnings Conference Call.

This concludes your conference.

You may now disconnect.