New Jersey Resources F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

New Jersey Resources Corporations (NJR)

F4Q07 Earnings Call

November 15, 2007 2:00 pm ET

Executives

Dennis Puma - Investor Relations

Laurence M. Downes - Chairman of the Board, President, Chief Executive Officer

Glenn C. Lockwood - Chief Financial Officer, Senior Vice President

Mark R. Sperduto - Vice President Regulatory Affairs, New Jersey Natural Gas

Richard R. Gardner - Vice President NJR Energy Services

Analysts

Joanne Fairechio - Janney Montgomery Scott

Chris Shelton

Neil Stein - Levin Capital

Selman Akyol - Stifel Nicolaus

Paul Justice

Presentation

Operator

Good afternoon. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal 2007 year-end conference call. (Operator Instructions) I would now like to turn the call over to Mr. Puma. Sir, you may begin your conference.

Dennis Puma

Thank you, Michelle. Good afternoon, everyone and welcome to New Jersey Resources fiscal 2007 year-end conference call and webcast.

I am joined today 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 the 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 of today’s news release filed on Form 8-K, on Form 10-K to be filed on or before November 27, 2007, and on our quarterly report on Form 10-Q filed on August 2, 2007. 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 statements referenced herein in light of future events. With that said, I would like to turn the call over to our Chairman and CEO, Larry Downes. Larry.

Laurence M. Downes

Thanks, Dennis. Good afternoon, everyone and thank you again for joining us on the call. I think as you know, this morning we were proud to report earnings for fiscal 2007 of $3.17 per basic share. That performance represented the 16th consecutive year of higher earnings, which we believe is the longest streak in our industry. It compares favorably with last year’s performance of $2.82 per basic share.

Overall, all of our businesses turned in strong performance. The increase in earnings was due primarily to improved results at NJR Energy Services. NJRES has proven itself to be a strong contributor to our overall earnings and we expect that to continue in the future. As you examine the results of NJRES, you will find that we have taken a disciplined approach to this business, which is clearly reflected in our performance.

From a strategic perspective, the fundamentals of New Jersey Natural Gas remain strong, characterized by steady customer growth in both residential and commercial markets at a rate that exceeds the national average.

In addition, our incentive programs in New Jersey Natural Gas were recently extended by our regulators, they are performing well, and they were higher than last year. Our commitment to customer satisfaction remains strong in fiscal 2007, and for the 15th consecutive year we had the fewest number of complaints per thousand customers with the New Jersey Board of Public Utilities of any of the state’s major electric and natural gas utilities.

We were also recognized by JD Power & Associates as best among the state’s natural gas utilities in both residential and business customer satisfaction. In just a few moments, Glenn will give you more of the details behind the numbers, but before he does that, I just want to emphasize a few points.

First of all, through the end of fiscal 2007, our shareowners were awarded with a five-year average total return of 14%, which compares with 10.8% for the Standard & Poor’s 500. Second, and for the fifth consecutive year, New Jersey Resources was named to the Forbes Platinum 400 list of best publicly traded companies in America. Third, I’m also pleased to report to you that our board has approved a 5.3% increase in our quarterly dividend rate to $0.40 per share from the current level of $0.38 per share. That new quarterly rate will be effective with the dividend that will be payable on January 2, 2008 to shareowners of record on December 15, 2007.

This will make our indicated annual dividend rate $1.60 per share. We’ve now been able to increase our dividend in each of the last 13 years and have paid quarterly dividends since we became an independent company in 1952.

In fiscal 2007, our dividend payout ratio was 48% and our focus continues to be on maintaining a healthy balance between dividends that we pay to our shareowners and earnings that we reinvest into our business to support future growth in earnings per share.

In addition, we remain focused on making sure that we have appropriate access to the capital that we need to support our growth.

Fourth, and reflecting the strength of our financial profile, our Board of Directors yesterday authorized another increase in our share repurchase plan from 3.5 million to 4.5 million shares.

As you know, this plan, which we originally put out in 1996, authorizes us to purchase shares on the open market or in negotiated transactions based upon prevailing market prices. During fiscal 2007, we’ve purchased 340,000 shares under that plan and since the plan began in 1996, we’ve invested over $144 million to repurchase almost 3.5 million shares at a split-adjusted, average price of $34.72.

Fifth, our first storage investment, Steckman Ridge LP, continues to move forward towards its projected in-service date of spring 2009. In an open season that was held earlier this year, Steckman Ridge received bids for storage services that total almost five times the proposed working capacity of the project and in early November, we filed for FIRC approval. We’ll continue to keep you updated on the progress of this project.

And sixth, as we look forward to 2008 and assuming the continued positive impact of the CIP, stable economic conditions, and continued customer growth at New Jersey Natural Gas, continued volatility in wholesale natural gas markets, which affects NJRES, and subject to all of the other factors discussed below under forward-looking statements, we’re pleased to introduce earnings guidance for fiscal 2008 of $3.20 to $3.30 per basic share.

And as always, before I turn it over to Glenn, I want to say thanks to our employees. Everything that I’m able to report to you here today is because of everything that they have done and I am grateful for their efforts. Finally, I just want to say thanks to all of our shareowners for your investment in our company. We are grateful for the fact that you have given us your capital to invest.

Thanks, and I’ll turn it over to Glenn.

Glenn C. Lockwood

Thanks, Larry and good afternoon, everyone. As Larry mentioned, this morning we announced a 12% increase in earnings for fiscal 2007 of $88.4 million, or $3.17 per basic share, compared with $78.5 million, or $2.82 per basic share last year.

On a diluted basis, earnings per share were $3.15 compared with $2.80 last year. The increase was driven primarily by 42.8% increase in earnings at NJRES, our wholesale energy subsidiary.

Consistent with the seasonal nature of our primary businesses, which typically generate a loss in the fourth quarter, we did post a consolidated loss of $15.3 million, or $0.55 per basic share, compared with a loss of $12 million, or $0.43 per basic share last year.

Breaking our earnings down by operating segments, earnings decreased NJNG, which earned $44.5 million in fiscal 2007 compared with $46.9 million last year. And in the quarter, NJNG lost $11.2 million compared with $7 million last year.

As previously disclosed, the increase in the loss during the quarter was driven primarily by a pretax settlement charge with the New Jersey Board of Public Utilities of $4 million related to certain previously deferred remediation claims associated with litigation and related insurance settlements associated with the manufactured gas plant in Long Branch, New Jersey.

This amount was determined to be related to personal injury and therefore not recoverable under our remediation adjustment clause. All other costs associated with the MGP sites were recoverable.

Switching to the weather for the year, it was 5.6% warmer than normal and 2.6% colder than last year. Normal weather is based on 20-year average temperatures as calculated based on three different references areas in our service territory. As with the WNC which preceded it, the impact of weather is significantly offset by the conservation incentive program.

In addition to the weather, the CIP also normalizes year-to-year fluctuations on NJNG’s gross margin and customer [sales] that result from change in usage pattern.

Included in the total CIP accrual for the year was $16.5 million, of which $8.2 million was associated with that warmer weather; $8.3 million is associated with the lower customer usage.

And on October 3, 2007, the BP provisionally approved CIP recovery reflective of the actual balances that we had through June of ’07 and the estimated levels through September of ’07.

Now, on the customer side, they have already realized annual gas cost savings of $10.6 million in lower demand fees that were negotiated as part of the CIP agreement itself. Additionally, we estimate that customers saved $37.6 million in commodity costs during fiscal ’07.

From a growth perspective, NJNG added 8,421 new customers in fiscal 2007, of which 39% converted from other fuels. NJNG also added natural gas heat and other services to 770 existing customers during the year.

Despite the problems in the housing market, we continue to expect to be able to maintain an approximately 1.8% overall annual customer growth rate in fiscal 2008, with a continued healthy mix of new construction and conversion customers. We believe that that overall customer growth rate is above the national average for a natural gas distribution company.

During the year, NJNG’s gross margin sharing incentive programs, which include an off-system sales, a capacity release, a storage and a financial risk management program, totaled 36.5 billion cubic feet and generated $8.1 million of gross margin, which compared to 38.4 bcf and $7.4 million of gross margin for the same period last year.

During the quarter ended September 30th, these programs totaled 9.7 bcf and generated $1.7 million of gross margin, compared with 8.4 bcf and $876,000 of gross margin last year.

NJNG’s shares the margin generated from these programs with customers and shareowners according to sharing formulas that have been established since 1992, which over that time period, NJNG customers have saved over $338 million, or 4% annually on their natural gas bills.

And recently in October of ’07, the utility regulatory approval for an extension of these programs through October 31st of 2008, with all but one of the mechanisms remaining at the existing sharing levels. The only minor change is with the financial risk management program, which changed from an 80-20 sharing to an 85-15 sharing, effective November 1, 2007.

Switching to energy services, NJRES earned $40.1 million during fiscal 2007, compared with $28.1 million last year. The increase was due primarily to the results of favorable market related conditions during the year. These conditions included the ability to arbitrage our storage positions and capitalize on seasonal pricing fluctuations, as well as optimize our pipeline capacity over different geographic areas in our portfolio.

The increase in the margin is generated by specifically especially colder-than-normal weather in the Northeast during the second fiscal quarter, and that increase helped offset higher labor costs and other operating expenses.

For the three months ended September 30th, NJRES reported a loss of $5.9 million compared with the loss of $7.4 million last year. The improvement in the quarter was driven by a slight increase in our margins resulting from the impact of warmer-than-normal weather on electric demand in the Southeast and a decrease in our interest costs in that segment.

The balance of our earnings came from our home services and other segment. This business segment consists of NJR Home Services, which provides service, sales, installation of appliances to over 149,000 customers; NJR Energy, which consist of a 5.53% equity investment in Iroquois Gas Transmission System LP; a partnership of subsidiaries of energy companies that owns an interstate natural gas pipeline in the Northeast; a 50% equity interest through two wholly-owned subsidiaries in a natural gas storage facility called Steckman Ridge, which is under joint development with a partner in Western Pennsylvania; and partial realty resources, which develops commercial real estate.

Earnings in this segment in fiscal 2007 were $3.7 million, compared with $3.5 million last year, as a result of a combination of additional contracts in home service and improved performance from our Iroquois investment.

And for the quarter ended September 30th, the segment earned $1.8 million compared to $2.4 million last year, and the decrease in the fourth quarter year over year was due to greater corporate overhead allocations, which were partially offset by increased earnings from that Iroquois investment and again, greater earnings in home services.

So with that, I’ll turn the call back over to Dennis and open up for questions.

Dennis Puma

Michelle, we’re ready to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joanne Fairechio.

Joanne Fairechio - Janney Montgomery Scott

Good afternoon. You had indicated previously that you might need to file a rate case. Is there anything new in that thought? And are there any updates or changes to the CIP now that you’ve gone through a full year of operating under the new mechanism?

Glenn C. Lockwood

On the rate case, the situation is the same as we previously disclosed. We do currently expect to file a rate case in fiscal 2008 but we would now expect any impact of a rate case in fiscal 2008 just based on the timelines that such a filing would take.

Joanne Fairechio - Janney Montgomery Scott

Okay.

Glenn C. Lockwood

And on the CIP, Mark Sperduto is here.

Mark R. Sperduto

On the CIP, we filed June 1st and as Glenn indicated, we received provisional rates on October 3rd. There are no changes that have been proposed to the program by the company or from the intervening parties, which would be the New Jersey Board of Public Utilities staff and the public advocates division of rate council at this time.

Those hearings are still, or that process is still open and it hasn’t been finalized but we would expect within the next three months that that would be finalized.

Joanne Fairechio - Janney Montgomery Scott

Have you gotten any feedback from customers, or they don’t really realize what goes on in the regulatory area anyway?

Mark R. Sperduto

Well, generally the feedback on the conservation incentive program has been very favorable. We’ve run several different types of programs with enhanced rebates for high efficiency equipment, as well as providing new communication vehicles for customers to understand their gas bill and to take appropriate action.

In fact, some of the new programs will be coming out soon, which will enable people to assess their usage almost on a real-time basis so they could see how much is reflective of weather conditions and/or other factors in their home life of in their business.

Joanne Fairechio - Janney Montgomery Scott

Okay, and I just wanted to ask you also, conversions rose up to about 39% or so of your total customer additions last year. Do you see that jumping up more in ’08 now that residential housing has slowed?

Mark R. Sperduto

In the [add plan] for next year, which we overall have at 1.8%, we see about a 35% mix of conversions to new construction.

Joanne Fairechio - Janney Montgomery Scott

Okay. Thank you.

Operator

Your next question comes from the line of Chris Shelton.

Chris Shelton

I was wondering if you could give us an idea of what the -- for the ’08 guidance, what the contribution of each of the segments are?

Glenn C. Lockwood

Similar to fiscal ’07, we are forecasting about 40% to 45% of that earnings guidance coming from that business segment.

Chris Shelton

From energy services?

Glenn C. Lockwood

Correct.

Chris Shelton

Okay. Thanks.

Operator

Your next question comes from the line of James Heckler.

Neil Stein - Levin Capital

It’s actually Neil Stein from Levin Capital. I actually had a follow-on from Chris Shelton’s question with respect to the percentage of your earnings that come from trading and marketing. Of that 40% to 45%, how much of that would you regard as spec trading?

Glenn C. Lockwood

De minimis, if zero. That business is not a speculative operation, bidding on a directional price of the commodity. It is built on physical of capacity contracts, both pipeline and storage, and we are on hedge accounting, which allows us to be able to forecast where, to the extent we have hedged out our assets, we can project minimum margins from those positions. So while volatility helps us improve the margin on those positions, we do not rely on speculation per se to drive that business.

Neil Stein - Levin Capital

So could I ask you, should we assume that 100% of that 40% to 45% is locked in, there is no risk associated with it?

Glenn C. Lockwood

No, I didn’t say that. I said that we, from a forecast perspective, internally have projected what we think is appropriate to project as part of being that 40% to 45% of the overall earnings. That business does do better when there is more volatility and less volatility, but again it’s not based on speculation. It’s based on improving existing positions on those assets I mentioned.

Neil Stein - Levin Capital

I just find from the outside looking in, these businesses are very difficult to model. How should we think about the risk and variability associated with that earnings stream?

Glenn C. Lockwood

Well, the way we’ve handled that, and we think we’ve been pretty up-front about this, is we actually give that range of percent we believe internally, based on all the information we have in our assets, what we expect to earn from those businesses and you can look at our track record and our ability to grow that business segment results. And again, we give you a range of earnings guidance but a range of that guidance coming from that business.

Neil Stein - Levin Capital

Okay, but how do you go about -- is it just a matter of you have a certain amount of contracts and positions and that generates a certain percentage of earnings? How much do market conditions have to do with it? I’m just trying to understand. What are the variables that -- is it just volatility that impacts the volatility of earnings, or are there any other factors that might create volatility in earnings?

Glenn C. Lockwood

Before I hand it over to Rick Gardner from our Energy Services Group, there are decisions that are made throughout the year as to when to move positions around that then will dictate whether a subsequent market event is going to be able to be taken advantage of, so there is some obvious subjectivity as to exactly the impact of volatility on our position.

But as we look at the business, and based on our history and the knowledge of the pipes and the storage facilities that we have, we are comfortable giving you the guidance that we are giving you.

I don’t know, Rick, if you want to add anything to that.

Richard R. Gardner

Not a whole lot to add to that but when you asked what else besides volatility, there might be some in the marketplace that say volatility is down a little bit and don’t have the same [earnings], but volatility alone doesn’t generate the margin and net income, but it does have to do with the portfolio and we do have a very diverse portfolio and we are able to move gas in from the Chicago regions, from the mid-continent up through the Southeast, and it’s the ability of the changing prices between them where we can actually decide where we are going to sell our gas and move it to a different location.

So the changing price and the decisions we make when we first put those hedges on, and what physical options they create thereafter, meaning what can we change around, that’s what generates the margin.

Neil Stein - Levin Capital

What about the sustainability of earnings beyond 2008? Are your earnings dependent on certain contracts that might fall away? Do those contracts need to be replaced? And do those contracts reflect a certain set of market conditions where if those market conditions weren’t replicated, there might be issues with the sustainability?

Richard R. Gardner

Well, the portfolio does have some terms in there where we will have some pieces that expire. What we do have on some of our contracts, we have right of first refusals to some of the pipeline [towers] were we can roll contracts over. Some of it is going to be dealt with at market conditions. Certain storage facilities, as you are aware, in the marketplace and do have marketplace base rates.

So as some of those contracts expire, we may have to pay different rates for those.

Neil Stein - Levin Capital

Would you say the ’08 level of energy services earnings that you are forecasting is a good base that we should just assume you’ll grow off of?

Glenn C. Lockwood

No, I think the farthest we would go is what we have already publicly disclosed, that on an annual basis we come up with our internal forecast and give overall guidance and a percentage that we believe and our best estimate could expect from that business segment.

Neil Stein - Levin Capital

I’ll leave it at that. Thank you very much.

Operator

Your next question comes from the line of Selman Akyol.

Selman Akyol - Stifel Nicolaus

Good afternoon. A couple of quick questions, if I may; in terms of the sharing programs, the ones you said that reset, went from 80-20 to 85-15. First of all, do all those reset annually?

Glenn C. Lockwood

Well, this renewal set a one-year renewal on all the programs. In prior years, sometimes it got two or three year extensions, but at this timeframe, it was a one year extension for all the programs.

Selman Akyol - Stifel Nicolaus

With you filing a rate case in 2008 then, would we be at higher risk going into the renewals of these for compression?

Glenn C. Lockwood

I’ll ask Mark to comment on that.

Mark R. Sperduto

Well, we would expect that these programs would be subject to review in any future base rate filing, and at that time, there would be a re-look at the programs. The company would have the ability to propose expanded or modified programs at that time as well.

You have to keep in mind these programs have worked very well for customers. We’ve been through multiple extensions over the more than 10 years that they’ve been in place, so --

Selman Akyol - Stifel Nicolaus

Okay, thanks. And then just one question as it relates to Steckman. I know you have it coming on early in 2009. As we thinking about that hitting the income statement, are you going to be bringing that in through I guess home services and other, or is that going to come in through the equity earnings line?

Glenn C. Lockwood

Two things; one, we have previously disclosed that we, while the project is expected to go online sometime in the middle of our fiscal 2009, we would expect some earnings streams to actually start in 2010 on a fiscal year basis.

Secondly, the answer is yes to both, actually. On the income statement, any earnings from that investment, you would see in that equity in earnings line on the income statement, and then when we break out the results by business segment, we’ll, as currently set up, include those results in what is currently called the home services and other business segment, which is where Iroquois’ earnings right now are reflected as well.

Selman Akyol - Stifel Nicolaus

Thanks, guys.

Operator

Your next question comes from the line of Paul Justice.

Paul Justice

Can you give me some color on the projected bad debt expense for currently compared to last year?

Glenn C. Lockwood

One of the signs of our strong service territory is that we have historically had a fairly low bad debt write-off experience, and I don’t have the exact percentage off the top of my head but it’s a fairly low percentage of our revenues that we set aside for bad debt reserves. And we have seen no evidence that we need to change that percentage. We don’t see any impact from that perspective.

Paul Justice

Okay.

Operator

(Operator Instructions) Your next question comes from the line of [Annie Sao].

Annie Sao

My question has been asked. Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Julia.

Unidentified Participant

You talked about a share repurchase program that the Board of Directors have authorized. I was wondering for fiscal 2008 guidance, what are you assuming? What is your share purchase assumption?

Glenn C. Lockwood

From a guidance perspective, there is no assumed earnings growth from accelerated repurchases.

Operator

There are no further questions.

Dennis Puma

Thank you very much. We’ll see you next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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