New Jersey Resources Corp (NJR) 2010 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the New Jersey Resources first-quarter fiscal 2010 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.

I would now like to turn our call over to Dennis Puma, Director of Investor Relations.

You may begin your conference.

Thank you, Chrissy.

Good morning, everyone.

Welcome to New Jersey Resources first-quarter fiscal 2010 conference call and webcast.

I am 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 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, items in the forward-looking statements section of today's news release, filed on Form 8-K, and in our 10-K filed on November 30, 2009.

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 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, which are 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.

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

As Dennis mentioned, I will be working through a slide presentation.

So starting with slide two, before I discuss our performance, I would like to remind everyone that I will be making reference to forward-looking statements.

On slide two, you see the factors that could affect those statements.

They are listed here and in our 10-K and 10-Qs, and I would encourage you to please take a moment to review them carefully.

Moving to slide three, I will also be referencing 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 intended in any way to replace GAAP.

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

With that, let me begin with the highlights of the first quarter of fiscal 2010.

We announced earnings this morning.

As you know, our net financial earnings for the quarter were $0.66 versus $0.77 last year.

As you know, we do not give quarterly guidance, but we are this morning reaffirming our net financial earnings for the year in a range of $2.45 to $2.60 per share.

We saw a larger contribution from New Jersey Natural Gas and our Midstream Assets business in the quarter.

As you know, we implemented a 9.7% dividend increase that was effective January 4 of 2010.

We announced last week that our share repurchase plan was being increased by 2 million shares.

Very importantly, our CIP was extended by the Board of Public Utilities.

And specifically with regard to our Midstream Assets, those earnings increased substantially, $1.9 million versus $500,000 for the same period last year.

Moving to slide five, you can see the net financial earnings for the quarter were $27.4 million, or $0.66 per share, compared with $32.5 million, or $0.77 per share, last year.

When you look at the numbers, you can see that both New Jersey Natural Gas and our Midstream business recorded improved results.

NJRES experienced lower earnings, which I will discuss in further detail in just a little while.

Moving to slide six, and very importantly, we reiterated our guidance for the year, and we estimate net financial earnings of $2.45 to $2.60 per basic share in fiscal 2010.

Now, how are we going to get there?

First of all, we expect improved results from New Jersey Natural Gas, reflecting the positive impact of our AIP program, our BGSS incentive programs.

We are still seeing good customer growth, with particular strength in the conversion markets, and New Jersey Natural Gas is benefiting from lower interest rates.

The improvement in our Midstream Assets, that is coming primarily from Steckman Ridge, but also Iroquois.

And we expect that these results will offset lower net financial earnings from NJR Energy Services.

Those results have been affected by lower volatility.

Now, if we achieve this, this net financial earnings performance will represent the 19th consecutive year of improved results for the Company.

Moving to slide seven, and if we look more closely at our guidance, you can see in the pie chart there the range of contribution to net financial earnings that we expect from our different businesses.

The combination of New Jersey Natural Gas and our Midstream investments will contribute between 65% and 80% of fiscal 2010 net financial earnings, while we expect currently that NJR Energy Services will be in a range of 20% to 30%.

Moving to slide eight, as I noted, our strong financial profile allowed us once again to increase our dividend.

We've now increased the dividend 17 times in the last 15 years.

The 9.7% increase in our annual dividend rate took the annual rate to $1.36, effective earlier in January.

Now going to slide nine, if you look at our growth rate compared with our peers, you can see that is very strong.

On a one-year basis, 9.7% versus 3.1%; and over the last five years, 7.7% versus 3.5%.

Moving to slide 10, if we look at our payout ratio, while we've been able to increase the dividend at a faster rate than our peers, at the same time, our payout ratio remains in the low 50% range, which means we are reinvesting a significant portion of our net financial earnings to support future growth.

And as is obvious from this chart, our record compared with our peers in terms of our earnings retention rate is very strong.

Going to slide 11, you can see that our share repurchase program, we increased that by 2 million shares.

There are now a total of 8.8 million shares authorized.

We've repurchased a total of 6.5 million at a split-adjusted cost of $28.90.

And you can see the activity going back to 1996, when we first put the plan in place.

The purchase program remains an important part, another tool if you will, as we execute our financial strategy.

Going to slide 12, I want to move on to some of our other fundamentals.

Our customer growth rate remains steady.

New construction has slowed, but the commercial and conversion markets remain resilient.

You can see for the quarter we added 1438 new customers and another 58 additional existing customer heat conversions.

We expect that those new customer additions will contribute approximately $700,000 of new margin to New Jersey Natural Gas each year.

And if we look at the pie charts, as you can see the breakdown between conversions and new customers, just about 50-50, again, showing the strength of the conversion market.

And looking at the contribution to gross margin, residential is about two-thirds, commercial, about 31%, and existing customers about 2%.

But despite some of the challenges that we've seen in the economy, I think our customer growth rate has held up quite well.

Moving to slide 13, on the regulatory front, we were able to extend our CIP program.

That has been a very successful program not only for our shareholders, but, very importantly, for our customers.

It was extended by the Board of Public Utilities on January 20.

It is now in place through September 30, 2013.

As you know, there is an alignment of this program with many of the state's policy initiatives in the area of what we like to refer to as environmental stewardship.

Basically, it gives us the incentive to encourage our customers to conserve, to use less energy, while protecting our gross margin from both declining usage and weather.

And I think the last bullet point you see there, that we've been able to save our customers over $135 million since that program was first put in place back in 2006.

On slide 14, we continue to make progress with our accelerated infrastructure program.

You will recall that the AIP includes incremental capital investment of up to $70.8 million on 14 projects.

We project in fiscal 2010 capital spending under the AIP of about $44 million.

We are expecting to create up to 100 new jobs, which is supporting economic development and job growth in the state.

And the rate recovery of the program spending is at our weighted average cost of capital of 7.76%.

And once again, those investments will help us continue our record of providing customers with safe, reliable service.

Turning to NJRES, that is slide 15, earnings for the quarter were $2.5 million versus $9.4 million last year.

Three primary reasons.

First was lower volatility.

Second, increased regional production and deliveries of LNG.

And then finally, the impact of the economy on core demand.

As I said earlier, we expect that NJRES will contribute between 20% and 30% of our net financial earnings in fiscal 2010.

Going to slide 16, we continue to make progress with our Midstream strategy.

Steckman Ridge is now operational and contributed $1.3 million to our first-quarter net financial earnings.

We expect for the year that Steckman will provide between 2% and 6% of our net financial earnings in fiscal 2010.

As you can see from the map, the positioning of Steckman Ridge relative to not only Marcellus Shale, but LNG and supply coming from the Rockies.

That has been a very successful investment, working with our partner, Spectra Energy.

So to summarize, in announcing our first-quarter results and reiterating our guidance for fiscal 2010, I think you can see that we are continuing our record of consistent performance.

As we look forward to the balance of the fiscal year, we've got the fundamentals in place to increase NFE, as our guidance indicates, a combination of customer growth, AIP and Steckman Ridge.

That, we think, supports our ability to increase dividends.

We continue to [maintain] a strong financial profile, which not only facilitates access to capital, but allows us to pursue other financial strategies.

Our relationship with our regulators remains strong.

And when you put all of that together, it supports our track record of growth and consistent results.

So as always, as I close, before we open for questions, I want to thank the almost 900 women and men of New Jersey Resources for their passions and their commitment to excellence.

They make these results possible.

And I also want to thank our investors for the confidence that has been placed in us.

And with that, I will open it to Q&A.

(Operator Instructions) Dan Fidell, Brean Murray.

Thanks, as always, for the call and the level of detail.

Just a couple of questions on my side.

First, can you give us a little bit of color of what you've seen on the energy marketing site in January?

Overall, the market has not been as volatile as we've seen in the past.

Larry mentioned some of the fundamentals on the supply and demand side.

All I will say as far as January itself goes is we factor that into the fact that we are still expecting 20% to 30% of the earnings to come from RES for the year.

So I'm sure you noticed that that is slightly lower than the original guidance we gave, and that basically is the cause, the lack of volatility.

Got it.

Okay.

Also, maybe you could just talk a little bit about Steckman.

It looks like we are off to a nice start with Steckman.

Can you talk a little bit about how we should be looking at the trend for earnings?

Is it mostly first and fourth quarters or is it a little more evenly split?

And then maybe as a second question, any expansion plans you can talk about for Steckman perhaps down the road?

No, it is way too early to talk about any expansion plans.

The engineers are analyzing how the field is operating in its first year of operations.

As we've talked about in the past, we still have to determine whether we need to drill additional wells or not.

And again, that's an operational question that the engineers will make the call on.

And as far as the seasonality, if you will, there is some seasonality in that business.

Based on the contracts we have, you would tend to see stronger pricing in the winter as opposed to summer.

Great.

And then one final question, and I'll let someone else ask a question.

Just on the CIP, good news on the extension of that through 2013.

That's terrific.

Can you talk about was there any kind of favorable benefit from the extension?

In other words, it had been a while since it had been in.

Was it trued up?

Was there anything beneficial that comes from that?

I'm going to ask Mark Sperduto to answer that question.

He heads our regulatory area.

Dan, the basic structure of the CIP remains intact, and there was no -- the benchmarks, I think is what you are referring to; they were updated in our last rate case.

So we are measuring off a lower benchmark that was established in our rate case going forward.

Very good.

Thanks.

(multiple speakers) basic structure remains the same.

Great.

Thank you very much.

Joanne Fairechio, Capstone Investments.

Good morning, everyone.

Actually, Dan asked all of my questions.

But let me just follow up on the question on the CIP.

You did mention when it was extended it would allow you to, I guess, more actively promote conservation.

What are you seeing there?

Are customers going to see more from you in the way of conservation, what they should do to save gas, to save money?

Or how are you marketing that to your average customer base?

Joanne, you've probably seen in our annual report our Conserve to Preserve program, which is really the umbrella for all of our efforts, programs and activities to encourage our customers to use less.

And it really runs the gamut of programs, from e-tips, just really increasing their awareness.

If you look on our website and go to the Conserve to Preserve dashboard, customers can really see how much energy they are using, where they are using it, how they compare with others.

So we will not only continue those efforts, but will expand those.

Because I think when we go back and look at 2006, the original program objectives, it was structured in a -- I think in a creative way, but it was structured to benefit both customers and shareowners.

And I think we've achieved that and we are certainly going to continue to press forward with helping our customers use less energy.

Thank you, Larry.

Heike Doerr, Janney.

I wondered if we could talk a little bit about AIP and how you see spending that $44 million.

Is it going to be fairly steady over the course of the year?

How should we be thinking about that and the impact we will see flow through on the income statement?

Just based on normal construction timetables, winter versus summer, you would see more of the spending towards the last two or three quarters of the fiscal year as opposed to the first.

So -- and the earnings related to spending, those track at the level of spending.

So you would tend to see it increasing over the year as we spend more money, again, towards the last two or three quarters of the year.

And until we adjust out base rates, which will happen on basically the first of next fiscal year, you are going to see the earnings impact in our Other income.

And we will disclose in the 10-Q the account called AFUDC equity, which is part of Other income, is reflected in the cost of capital earnings related to that spending.

Great.

I was wondering whether we were going to see that in the Q or not.

My last question is I know that the new governor has made his request as far as the appointment to the commissioner.

I'm wondering if you have gotten a chance to meet with Mr.

Solomon and if you know much about his background that you could maybe share with us.

We have not.

Judge Solomon is still completing his responsibility as a Superior Court judge.

But as everyone has seen, he has a very strong legal background.

The reaction to his appointment has been -- on both sides of the aisle has been very positive, and our view is that he will do an excellent job.

And Commissioner Butler will stay on until he is approved by the Senate.

How does that work?

That is correct.

Commissioner Butler will stay on until Judge Solomon is approved by the Senate.

And we expect that will probably happen later this month.

And there is another commissioner whose term ends this spring, correct?

I don't believe -- I believe it is a year from March.

Commissioner (multiple speakers).

Oh, a year from now?

Yes.

Okay.

Thank you.

That was all I had.

(Operator Instructions) Jim Lykins, Hilliard Lyons.

Good morning, everybody.

First, another question about Energy Services.

That segment was down this quarter due to market conditions, yet guidance stayed the same.

I am just wondering if you can give us a little more color on what your assumptions are.

Maybe as difficult as that quarter was, are you expecting things to improve on that front?

It looks like Q1 is not off to the best start in the world because of the lack of volatility.

But just anything more that you could say related to your assumptions from Energy Services.

Again, we are taking into account actual January activity in the current market for, obviously, February and the rest of the year.

If you do the math, we did adjust the business segments.

As Larry pointed out, we are having a very strong year, both the Utility and Midstream.

And so we upped the percentage contribution we expect from those segments, as opposed to obviously we lowered the percentage we expect from RES.

Obviously, we still expect a very profitable year, given the fact that we believe 20% to 30% will come from that business segment.

So if you do the math on our overall guidance in the 20% to 30%, you can get a good sense of the type of earnings contribution we still expect to get from RES this year.

Okay.

And one AIP question.

Was there anything spent for that program in Q1?

Yes.

There are two or three projects ongoing.

We, in fact, started some of them last fiscal year.

About $3 million, I think, was spent last year.

And there was a few million dollars spent in the first quarter out of that $44 million that Larry mentioned.

But the majority of the $44 million will be spent in the last two or three fiscal quarters.

Okay.

Thanks, Glenn.

Ryan Rosenthal, Sidoti & Company.

Following up on Steckman Ridge, I was trying to get a sense of kind of how the asset matched up to your expectations for earnings thus far.

And also, if you are fully leased out for both the winter and summer capacity.

Yes, I believe, again, with short-term contracts, we are fully leased for the short term here.

And as we pointed out in our guidance update, we did not change our Midstream segment.

So basically, both Iroquois and Steckman are right on our internal projections.

Okay, great.

And there is a variance range between 2% and 6%, I believe, for Steckman for this year.

Can you discuss some of the variability there and what might not cause it to go either direction?

Well, it is the first year of operations, so from an operating efficiency perspective, costs, the fact that the revenues are somewhat determined on the ability of the operator to take advantage of short-term issues in the market.

So we are very comfortable, as you can see from the first quarter, that we are going to have a strong year from it.

But there has to be some wiggle room, just based on the operational efficiencies, especially in the first year of operations.

Following up on that, is there then likely additional accretion potential in 2011, as you get a year under your belt, for the asset?

Well, we haven't -- we don't give fiscal 2011 guidance.

But in general, the amount of return we get from the investment ultimately will come from the types and lengths and pricing of contracts that the operator ultimately enters into.

And as we've been very clear, as for this first year, it is all short-term marketer type contracts.

No long-term, what I would call firm, attractive, long-term pricing yet in the field for this first fiscal year.

Great.

Then turning to the guidance, I know this has been asked a few different ways, but trying to get a sense of the utility operations, and I believe you mentioned that they performed a little bit better than you had initially anticipated.

I was wondering kind of what factors led to the stronger than initially anticipated utility earnings thus far.

Again, customer growth has been right on our internal forecast, so margin has been good, with the growth from customer growth.

The fact that we've been refunding and making credits back to customers because of lower gas prices has helped us from a bad debt expense perspective.

Larry mentioned lower short-term interest rates have been very attractive for the utility.

And just operational cost controls in general have been as good, if not better, than what we internally expected.

So all of those factors are rolling into the ability to actually increase the expected earnings from the utility.

Okay.

And one final question concerning the Energy Services business.

I believe there was -- some of the year-over-year decline in the earnings for that segment were due to timing.

Would you expect that would be kind of one-off in the next quarter, or would that be distributed throughout the remainder of the year?

Again, we don't give quarterly guidance.

We take the whole year into account when we give the updated guidance.

And as you can tell, we do expect -- if you do the math, we do expect the earnings contribution to be lower than what we expected and what we've seen in prior years from Energy Services.

Thanks for your time.

(Operator Instructions) There are no further questions at this time.

Please go ahead.

Okay, thank you for your time, and we'll see you next quarter.

Thank you.

Bye bye.

This concludes today's conference call.

You may now disconnect.