New Jersey Resources Corp (NJR) 2009 Q4 法說會逐字稿

Good morning, my name is Christie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the fiscal 2009 year-end conference call and Webcast.

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.

Dennis Puma, you may begin your conference.

Thank you, Christie.

I'd like to welcome everyone to New Jersey Resources' fiscal 2009 year end conference call and webcast.

I'm joined by Larry Downes, our Chairman and CEO, Glenn Lockwood, our Chief Financial Officer, as well as other members of our senior financial team.

Certain statements in our news release and in today's call contain estimates and 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 the items in the forward-looking statements section of today's news release, filed on Form 8-K and our Form 10-K filed on November 30th, 2009.

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

Many 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 there are slides accompanying today's discussion available on our website.

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

Larry?

Thanks, Dennis and good morning everyone.

We appreciate you taking the time to be us here this morning.

Just to build on something Dennis just pointed out, and before I get into the performance, I want to remind everyone that I will be making reference to forward-looking statements this morning.

On slide two of the presentation, you can see a list of the factors that could affect those statements.

They're here, and as Dennis mentioned in our 10-K, 10-Qs and you can get them on the web as well, so I would ask you to please take a moment to review those carefully.

On slide three, you see a disclaimer regarding non-GAAP financial measures.

I will be referring to certain non-GAAP financial measures, namely net financial earnings and financial margin, and while we believe that these metrics provide a better understanding of our performance, they are not in any way intended to replace GAAP.

Item seven of our annual report on Form 10-K provides a more detailed discussion, and I would encourage you to review that carefully as well.

So with that, let me begin with the highlights of fiscal 2009, which as you can see from our results this morning was another outstanding year for the Company.

We achieved our 18th consecutive year of net financial earnings growth per share, as you can see on slide four.

$2.40 per share compared with $2.24 per share last year, that represented a 7.1% increase.

This morning we also announced a 9.7% increase in our dividend.

That will be effective in January.

Our results were substantially driven by very strong performance from our main subsidiary, New Jersey Natural Gas, reflecting primarily the impact of new base rates, and very strong performance from our BGSS incentive.

We were able to add 5,841 new customers in fiscal 2009, and NJR achieved its third best year of profitability in its almost 15 year history.

And finally, Steckman Ridge, which we've been talking to you now over the last several years, became operational.

Moving to slide five, the drivers of our earnings, as I said, new base rates in New Jersey Natural Gas, margin from new customers and the BGS incentives, all of those came together to allow us to achieve our 18th year in a row of improved financial performance.

If we achieve the midpoint of our net financial earnings guidance, that will equate to a 6.4% compound annual growth rate since 2005 in net financial earnings per share, and you can see on the slide the progression in our net financial earnings per share performance since 2005.

Moving to slide six, talking a little bit more about our guidance, which we established this morning for fiscal 2010 in a range of $2.45 per share to $2.60 per share.

We give you a range where we think that will come from in our different businesses.

New Jersey Natural Gas is expected to be in a range of 55 to 65%.

That remains the largest component of our earnings.

Our midstream assets between 5 and 10%.

And NJR Energy Services, we currently expect in a range of 25 to 35%.

But we are guiding higher again this morning.

Now, I think to put that into context, if we move to slide seven, you can see our comparative growth rate in relation to our peers and that comparison looks very favorable to the Company.

When we look at that on a five-year basis you can see New Jersey Resources at 6.7% compared with our peer group of 6.3%, and on a one-year basis, despite many challenges in the market that we're all familiar with, our growth rate of 7.1% compares with the peer average of less than 3%.

Moving forward to slide eight, again, as we announced this morning, another increase in our annual dividend rate to $1.36 per share.

A combination of our strong financial profile, our strong results have allowed us to provide our share owners with consistent dividend increases, and again, the announcement today in the annual dividend rate will be effective on January 4th of 2010 and will represent the 15th consecutive year of dividend increase for the Company.

And just to put that into perspective as well, on slide nine you can see our record in the area of our dividend compared with our peers is strong.

For one year, growth rate of 10.7% versus the peer average of 3.1% and then if you look at that over a longer term five years, you can see our growth rate of 7.7%, again, compared with our peer average of 3.5%.

So clearly, the Company's performance and overall financial strength has allowed us to reward our shareholders in excess of our peers and those numbers, again, are shown by the percentage increases that you've seen in the dividend.

Now, if we look at slide 10 and we look at our payout ratio, not only have we been able to increase our dividend, but we've been able to do that by maintaining a payout ratio that is in the low 50% range, which is meaning that we are reinvesting a significant portion of our earnings back in the Company to support future growth.

That is obviously an important element when we think of sustainability with regard to the dividend and on slide 11 you can see when we're compared with our peers, our payout ratio is at the lower end, while our earnings retention rate is higher for both the one year and five-year periods that you see as I said on slide 11.

So let's go to slide 12 now, and talk about some of our other fundamentals.

During fiscal 2009 we added 5,841 new customers.

In addition, we had 709 existing customers seek conversions.

We think that on an annual basis, that will contribute about $3.4 million of new gross margin for New Jersey Natural Gas.

Our customer growth rate obviously has been challenged, but I think could be characterized as steady when we think of all of the things that were going on in the market.

Obviously, new construction has slowed, but the commercial and conversion segments of the market remain resilient.

You can see the two pie charts on slide 12.

The top one is the new customer breakdown, and if you can see an even split between new construction customers and conversions, and in the pie chart below that, you can can see the important contribution that the commercial market made to the utilities gross margin, about 40% compared with the residential contribution of 55%.

We had a very collaborative year with our regulators, as we announced earlier in the fiscal year.

Our Accelerated Infrastructure Program was approved by the Board of Public Utilities on April 16th.

That calls for an investment of almost $71 million on infrastructure projects, and we project by the end of fiscal 2010 about $48 million of that will have been spent.

It has important implications for economic development in New Jersey for the creation of up to 100 new jobs, rate recovery of the program spending will occur annually at our weighted average cost of capital, and again will help us ensure the continued safe and reliable delivery of natural gas.

It's a two year program and I think it's important to point out that we were able to work collaboratively with our regulators to reach agreement on this important initiative.

We had another important regulatory decision, that was the approval of our Energy Efficiency Program in July of this past fiscal year.

It's a $21.1 million program that will promote the goals and the policy direction of the New Jersey Energy Master Plan and similar to AIP, will be able to recover those costs at the weighted average cost of capital.

We assume that if the $21.1 million is fully subscribed, the after-tax earnings impact will be about $1.2 million over a four-year period.

Moving to slide 15, I want to talk about our BGSS incentives and we had a record year there.

The incentives continued to perform very well.

These programs have been in place since 1992.

They include our off system sales capacity release programs, our financial risk management program and our storage incentive.

And importantly, they benefit both our customers and our share owners.

For fiscal 2009, the total margins were $75 million, of which $7.1 million was retained by the Company.

That was about $0.17 per share.

The gross margin impact of those earnings was about $12.1 million, which means that customers benefited by about $63 million as well.

But you can see the progression since 2005.

Our team in gas supply has done an outstanding job with the incentive program, again, in a way that benefits our share owners and our customers.

Let me move to slide 16 and talk a little bit about NJR Energy Services.

As we had been reporting to you throughout the year, NJRES net financial earnings declined due to lower volatility in the expiration of a profitable transportation contract that we had in fiscal 2008, but still we achieved the third highest level of profitability in the Company's history.

That business goes back to 1995, and I think it really demonstrates the strength of the business model in a year that was characterized by challenging conditions.

But you could see for the year, we had net financial earnings of $31.2 million, and in 2010, we expect that NJRES will contribute between 25 and 35% to our consolidated earnings.

Moving to slide 17, through the years we've been keeping -- through the year, excuse me, that we've been keeping you posted on Steckman Ridge, this is a joint venture that we have with Spectra Energy.

As of the end of the fiscal year, we had invested $122.5 million.

We're happy to report that Steckman is in operations, customers have begun to inject their natural gas inventory, and we are able to give you a range of earnings contribution for Steckman for fiscal 2010, which we are currently putting at between 2 and 6% as the contribution to our 2010 earnings guidance.

So when we put all of this together and we look at the total returns to share owners, in what has been a difficult market, you can see that we performed very well not only in the past year with a return of 4.6% which compares favorably with our peers and the S&P 500, but also over the five-year period and annualized total return that outperforms again both our peer group and the S&P 500.

So to summarize, and before we take questions, and announcing these results today I think we're continuing to demonstrate a record of consistent financial performance.

We think we have the fundamentals in place to continue to increase our net financial earnings as indicated by our guidance this year.

That will come from a combination of our customer growth, a number of regulatory initiatives, and Steckman Ridge.

We think that that performance gives us the opportunity to continue to increase our dividend.

We have in place a strong financial profile that not only facilitates access to capital, but also supports our overall financial strategy.

We've been able to maintain a collaborative relationship with our regulators and basically execute a joint regulatory strategy that benefits, again, all of our stakeholders, importantly, including our customers.

And finally, when we put all of that together, a track record of growth and consistency in performance.

But as I close today as always I want to say thank you to the almost 900 women and men of New Jersey Resources because none of this is possible without their dedication and their passion for excellence, and they've demonstrated once again as they have over the years, that regardless of what the external conditions might be, they are able to deal with that and that is the reason that I am able to report these results to you today, and also to our investors, who have also shown quite a bit of confidence in our company over the years.

So with that, I would like to open up the lines for questions and answers.

(Operator Instructions).

We will pause for just a moment to compile the Q&A roster.

Once again, that is star one.

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

Good morning, guys, can you hear me?

Good morning, Dan.

Just a couple of quick housekeeping questions from me.

I guess first, you had mentioned that you've got about 325,000 shares remaining under your current buyback.

Are share repurchases something you're interested in going into fiscal 2010 and 2011?

In other words, could we see another reauthorization of a higher share number?

We haven't made that decision.

We do use it opportunistically.

It's been a tool that we've had in place since 1996, and I think for a Company of our size with our market cap and importantly our liquidity, it's just another tool out there, and it's also our ability to utilize it, which we have been able to do I think quite successfully over the years, is a function of the strength of the financial profile but we don't have any plans at this moment to increase it.

Okay.

And then just quickly on the equity and earnings of affiliates line, in the consolidated income statement, $4.3 million for the 12 months ended September 30th versus $2 million, I was wondering if you could give us just a little bit more color on that line.

I know or I believe a majority of that is Iroquois and Steckman, but is there something else in that line?

I'll ask Glenn to take that.

It's all Iroquois and Steckman.

The only thing I would caution you on is those are purely our 50%, especially with Steckman, 50% of the earnings from the partnership.

That does not include our internal financing or operating costs, when we talk about the bottom line of midstream assets.

So there's a little bit more work to do to get from that line to the ultimate bottom line in getting to the midstream asset contribution.

Okay.

But it's purely just that line on the income statement is just Iroquois and Steckman Ridge.

Got it.

Just the last question on O&M.

How should we be thinking about O&M as we head into fiscal 2010?

Any kind of color you can give us on that, just trend-wise?

The biggest issue we've been dealing with is obviously pension and OPEB cost with what's been going on in the markets and interest rates.

So we announced one of our mitigation strategies was to make a fairly large contribution into the pension plan.

So like everybody else, we're trying to manage those costs.

The rest of the business, we usually target to keep O&M within inflation type growth rates and we'll -- we can look at our track record as being able to manage that in good times and bad.

Great.

Thanks for the color and congrats on another solid year and looking forward to another good year here into fiscal 2010.

Thanks, Dan.

Your next question comes from Heike Doerr with Janney.

Good morning.

Good morning.

I'm wondering if there are any efforts under way to turn the AIP program or maybe a piece of it into something more permanent?

Yes, I think what's important is that we work through the program as it was approved by the BPU.

There was, as you know, a number of objectives there that tied in with state policy.

But I would ask, Mark Sperduto may want to comment on that.

He's with us here today.

Mark heads up our regulatory area.

As you know, the Governor's changed effective in January so it will take several months I would imagine for them to get comfortable with the policies at the BPU, and I would say kind of a wait and see attitude at this point.

Okay.

And we're expecting two commissioner changes, and possibly a changing of who the chair is here in the next six months at the BPU; correct?

Correct.

One commissioner is on a hold-over status, and he will be leaving sometime early in 2010 I imagine and then I believe by law, the Chairman or the President of the Commission would have to be from the party in the governor's office.

And after the governor makes his appointments, does the State Senate need to approve those appointments?

Yes.

So there would be a delay until those people took office, or how does that work?

They have to be confirmed first by the Senate, and that's all subject to the legislature's scheduling.

And can the remaining three commissioners still rule on decisions or do they have to wait until they have a full court.

One of the previous increases to five was to permit even if there's one vacancy, to permit a majority -- excuse me, a quorum to exist so they could still act with less than a full complement.

That's helpful.

Thanks.

(Operator Instructions).

Your next question comes from Ryan Rosenthal with Sidoti and Company.

Good morning, everyone.

Good morning, Ryan.

There was about $1 million jump, about 50% increase in your retail and other earnings this quarter versus the year earlier quarter.

Can you discuss what the positive catalyst was and if that's something that will be reoccurring going forward?

Well, in the past year, that increase is almost all related to our Iroquois investment and in prior years Iroquois was ground with retail and other.

So going forward as you know, we're going to break that out into a whole separate business segment and combine it with Steckman Ridge, so retail and other you're going to have to in effect become 1 to 2% of overall earnings and I would not have any expectations of anything unusual happening there.

So as you see today, we're giving overall guidance of that midstream asset segment, so you can model your numbers based on that.

Okay.

So is that midstream segment then separate from retail and other, you'll separate out into four segments overall?

Correct.

Yes.

Okay.

And then taking a look at your balance sheet and specifically your outlook for your interest expense for next year, can you give us an idea trend-wise what we can expect?

For interest expense?

Right.

Well, we don't have -- we currently don't have any long-term financing needs based on a strong balance sheet and cash flow.

And so it would be your own forecast if you will on our variable rate debt which is mostly sensitive within the utility.

We have $97 million or so of EDA variable rate bonds that are enjoying very low interest rates now.

We in effect pay 175% of one month LIBOR, so I would suggest you look at your own forecast as to what you would think would happen year-over-year on interest rate with those bonds.

Okay.

Great.

And then returning to the utility, in terms of the incentive program this year, looks like you earned $12 million in gross margin for those programs.

I know there was a benefit for the utility rate case but would you expect that would be a normalized number going forward or is that unusually strong this year?

Well, this year was an excellent year for the program, no doubt about it.

Our internal expectations are going forward, again, because of the increased levels that we were able to negotiate in the base rate case, that going forward we would internally expect margins to be closer to what we achieved in 2009 as opposed to prior years.

Okay.

Great.

One final question concerning your customer growth.

I know that you had guided for 12 to 14,000 new customers.

On a net basis, could you discuss what you expect that will do to your gross margin year-over-year just in terms of customer growth?

We disclosed that on a customer growth side, taking the midpoint of those, the numbers on an annual basis, that that growth would be in the 3, $3.5 million range of incremental gross margin year-over-year.

And that includes any lost customers as well?

No, you would have to -- again, your own forecast, you would have to estimate any attrition based on the economy, et cetera.

In the past, that's been at worse for us about 1,000 customers in the worst of the economy, so you have to use your own forecast to see or estimate what impact that would have.

Okay.

Thanks for your time, everybody.

No problem.

Thanks, Ryan.

(Operator Instructions).

There are no questions at this time.

Please proceed with any further comments or closing remarks.

Okay.

Just want to say thanks to everyone for joining us.

And have a wonderful holiday.

Thanks.

Thank you.

Bye-bye.

This concludes today's conference call and webcast.

You may now disconnect.