New Jersey Resources F2Q08 (Qtr End 3/31/08) Earnings Call Transcript

Apr.30.08 | About: New Jersey (NJR)

New Jersey Resources Corp. (NYSE:NJR)

F2Q08 Earnings Call

April 30, 2008 2:00 pm ET

Executives

Larry Downes - Chairman and CEO

Glenn Lockwood - CFO

Tom Massaro - Vice President of Marketing

Richard Gardner - Vice President

Dennis Puma - Investor Relations

Analysts

Daniel Fidell - Brean Murray, Carret

Joanne Fairechio - Janney Montgomery

Brooke Mullin - J.P. Morgan

Jim Likens - Unidentified Participant

Operator

I would like to welcome everyone to the New Jersey Resources second quarter fiscal 2008 conference call. (Operator Instructions) Thank you. Mr. Puma, you can begin your conference.

Dennis Puma

Good afternoon everyone and welcome to the New Jersey Resources second quarter fiscal 2008 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 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 of forward-looking statements and 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, or Form 10-K filed on December 10, 2007 and on Form 10-Q which we expect to file within a day. All of these items can be found in sec.gov.

NJR does not by including the statement assume any obligation to review or revise any particular forward-looking statement referenced here in light of future events. With that being said, I would like to turn this call over to our Chairman and CEO Larry Downes. Larry?

Laurence Downes

Thanks Dennis. Good afternoon everyone and thank you for being with us here today. As you know, this morning, we have released our earnings for the first six months of fiscal 2008 and I am pleased to report that we are on track to record another year of excellent financial performance this fiscal year.

On a GAAP basis, our earnings which include the impact of changes in the value of the derivatives that we use in our non-utility businesses increased by 14% to $42.7 million for the six months and that was $1.02 per base of share. That number compares with $37.4 million which was $0.90 per base of share for the same period of six months last year.

Our net financial earnings which is a non-GAAP measure that excludes the impact of changes in the value of the derivative instruments that are used in our non-regulated subsidiaries rose by 5.2% to $114.3 million which was $2.74 per basic share. That number compared with $108.7 million which was $2.61 per basic share during the same six month period last year.

We believe that net financial earnings is a better measure for assessing our financial performance. Our results this quarter and for the six months were driven by the strong results of NJR Energy Services which recorded higher earnings due primarily to a larger portfolio of transportation capacity as well as lower state taxes and as we have reportedly previously, it’s our current expectation that NJRES will contribute between 40% and 45% of our total earnings during fiscal 2008.

I just want to update you on a couple of other items before I turn it over to Glenn. During the quarter, we completed our three-for-two stock split with shareholders of record receive one additional share of NJR stock for every two shares of common stock owned and on April 1, 2008, we paid an increased post-split dividend of $0.28 per share.

Thus far this year, we have increased our dividend by 10.2% and as we noted in today’s press release, we are maintaining our net financial earnings guidance for fiscal 2008 of a range of $2.17 to $2.23 per basic share. You will recall that earlier this year, we had increased our guidance.

Now based upon the mid point of our guidance and our current annual dividend rate, our dividend payout ratio remains in a low 50% range that allows us to maintain a healthy balance between the dollars we are paying to our shareowners and the dollars that we are reinvesting in the company to support future growth in earnings per share and net financial earnings.

I think as everyone knows, conditions in the financial market have been volatile this year but our strong financial profile has given us the flexibility that has allowed us to access the resources that we need to support our capital and operating requirements.

Also the national slowdown in the housing market has been well documented but we are still experiencing steady overall new customer growth. In fact, we expect that this year’s customer growth will contribute about $4 million in annual gross margin. The new construction market not surprisingly has slowed. However, our conversion in commercial markets in our service territory have remained resilient. We continue to be optimistic about the longer-term prospects for continued growth in our service territory.

I would also point out to you that our regulated incentives programs or margin sharing programs in New Jersey Natural Gas Company continued to perform well and to contribute to our profitability. Now I think as everyone also knows we currently have a base rate case pending before the New Jersey Board of Public Utilities which we filed last November, that case is proceeding with the filing of testimony and we are responding to discovery request. Currently, hearings before an administrative law judge is scheduled for June and July and another point of that NJRES, the timetable for our Steckman Ridge Storage project remains on track and we are currently waiting our FERC Certificate.

And then finally as I turn it over to Glenn, thank you for your interest in the company and the confidence in capital that you have committed to New Jersey Resources. We will continue to do our best to reward your support. Thanks. Glenn?

Glenn Lockwood

Thanks Larry and good afternoon everyone. As Larry mentioned, this morning, on a GAAP basis, we announced the 14% increase in earnings for the six months of fiscal 2008 of $42.7 million or $1.02 per share compared with $37.4 million or $0.90 per basic share last year.

On a net financial earnings basis, our non-GAAP measures which excludes certain mark-to-market activities related to derivative instruments and our non-regulatory operations, earnings increased to $114.3 million or $2.74 per basic share compared with $108.7 million or $2.61 per basic share in the same period last year.

We believe that net financial earnings which exclude unrealized gains or losses related to the Company’s unregulated subsidiaries and certain realized gains and losses related to natural gas and storage at NJR Energy Services are more reflective of operations, provides some sound investors and enable period -to-period comparability of financial performance. We have included a definition of this measure as well as reconciliations to the most comparable GAAP measures in our news release which I encourage you to read closely. For the remainder of the call, we will discuss all financial terms and net financial earnings.

Fiscal 2008 year-to-date earnings at New Jersey Natural Gas, our utility subsidiary were $50.8 million compared with $53.1 million last year. The primary reason for the lower earnings were lower gross margin from incentive based programs and higher operation and maintenance expenses which offset higher firm gross margin.

For the six months ended March 31, 2008, gross margin from our BPU approved incentive programs which include office and sales, capacity release, storage optimization and financial risk management programs totaled $3.6 million compared with $4.2 million for the same period last year. The decrease was due primarily to opportunities that existed in the first quarter of last year to generate margin from historic incentive programs but that did not exist this year.

Operation and maintenance increased by 11% due primarily to higher compensation costs associated with an increase in a number of employees and annual wage increases. NJNG’s earnings rose slightly during the three month ended March 31, 2008 to $34.2 million compared with $33.2 million last year. The increase is due primarily to higher utility firm gross margins reflecting our customer growth as well as incentive based programs.

During the second quarter of fiscal 2008 margin from incentive programs totaled $2.2 million compared with $905,000 in the same period last year. We added 3,125 new customers in the first six months of fiscal 2008 which are expected to contribute about $1.7 million to annual utility gross margin. Looking at the full year, NJNG expects to achieve a customer growth rate of approximately 1.6%. The weather during the six months period as of March 31 was 7.3% warmer than normal and 0.3% colder than last year.

Again normal is based on a 20-year average temperature that is calculated based on three reference areas in our service territory. We significantly offset the impact of weather through our Conservation Incentive Programs which is designed to normalize the year-to-year fluctuations on our margin and customer bill that results from both the change in weather and usage pattern. Some numbers from the CIP program this year; included in the year-to-date utility gross margin for fiscal 2008 was $16.2 million related to the CIP in total. Included in this amount was $7.4 million associated with the movement in normal weather and $8.8 million associated with non-weather factors.

During this six months ended March 31, customer based realized commodity cost savings of approximately $35.5 million due to their reduced natural gas usage and in addition customers will realize and continue to realize annual savings of $10.6 million and fixed cost reductions as a result of lower demand fees. As you know as Larry mentioned, we are seeing an increase of that $58.4 million at our base rates based on a request filed with the BPU in November 2007 and as Larry say we believe the review processes is progressing on schedule, but I remind you we do not believe that any rate increase would affect this years earnings forecast.

Now, turning to NJR energy services, against the net financial earnings status the Company continues to launch earnings. I want to remind you again that financial margin is a non-GAAP measure which analyzes the segments operating results. We cap rate financial margin by excluding the impact of unrealized gains or losses from derivative instruments and certain realized gains or losses from those derivative instruments that are designed to hedge natural gas that is still in storage.

Management believes that financial margin is better reflected based on the performance of NJRES prior to the actual situation of certain forecast at transaction. The net financial earnings in this segment for the six months totaled $52.6 million compared with $55 million in the same period last year again due to higher financial margins and lower taxes. Year-to-date financial margin at NJRES increased $5.2 million to a $109.1 million compared with a $103.9 million for the same period last year. The increase is due primarily to new transportation capacity contracts.

During the second quarter of fiscal 2009 net financial earnings was $43.5 million compared to $47.2 million during the same three months period last year. This decrease is due primarily to lower financial margins on the quarter partially offset by lower income taxes. Financial margin at NJRES decreased $12.5 million to $73.3 million in the quarter due primarily to fewer arbitrage opportunities to optimize existing assets. This decrease was partially offset by the new capacity contracts noted above. The relatively mild winter season provided minimal opportunity to capture additional margins on market positions when compared to the same period last year.

On the tax side NJRES’ effective tax rates decreased in fiscal 2008 to a change in the proportion of that taxable income for say tax purposes. The impact which was recognized in the second fiscal quarter included a one time reduction of $1.8 million which is associated with deferred tax liabilities at the end of last fiscal year -- end of fiscal 2007 and the reduction of $2.2 million associated with the impact on fiscal 2008 operations. So excluding the one-time benefit of the $1.8 million NJRES did estimated statutory tax rate of 38.9% compared with the 41.1% in the prior year.

Finally in our retail and other segments which consist of NJR home services, which provides service sales inflation of appliances over a 145,000 customers, commercial reality resources which develops commercial real estate and NJR holdings which consist primarily of 5.53% equity investment in Iroquois Transmission System, an owner of interstate natural gas pipeline in the North-East and our 50% equity interests in the Steckman Ridge projects, a natural gas storage facility under joint development with a partner in Western Pennsylvania, which we’ve expected to contribute earnings beginning in fiscal 2010.

In this segment earnings for the six months ended March 31, 2008 were $4.7 million, compared with $720,000 in the same period last year. These results include after tax after-tax unrealized gains on two long-term gas contracts at NJR Energy Corp which total $3.8 million and $202,000 respectively for the six months ended March 31, 2008 and 2007 and so on a net financial earns basis this segment results about $860,000 for the six months compared to $580,000 last year and that increase due primarily to the performance of our Iroquois investments.

With that we will hand it back to the operator to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Likens.

Jim Likens

Just a couple of questions; first of all regarding Steckman ridge it was kind of an assumption that you guys would have received a FERC certificate by now. I am just wondering if you are on track with construction in June and then possibly injections in May of next year.

Richard Gardner

It’s Rick Gardner here, how are you doing Jim?

Jim Likens

Good Rick, how are you?

Richard Gardner

Good. We do think we are still on track although we went on the targets for the April meeting. We do believe we are in the notational phase where it’s working around right now looking for the approval and we expect to have the FERC Certificate any day now.

Jim Likens

Okay, so that means that you do still think you will begin construction in June.

Richard Gardner

We are planning to have contractors there in June if we have that certificate and there is a rig lined up that will begin drilling in July.

Jim Likens

Okay, great. And kind of switching gears, customer growth -- I was wondering if you guys could break that between what was the conversions and what you saw on the organic side and maybe could you just give us a little color on what’s happening with the conversions right now as well?

Larry Downes

Jim I don’t have the conversion mix handy. We will make sure we provide that at the AJ Conference and make sure it’s posted for FD purposes. I can tell you that the conversion market has continued and it has not been impacted as much as the new construction market and so we feel that is also true for the commercial market. It has been stronger than the impact that we are seeing on the new construction residential market.

Glenn Lockwood

I think that the important point there Larry -- I think the important point there is always -- I mean obviously we have seen the challenges nationwide for a variety of factors but we still feel pretty good about the longer-term potential as we have said publicly and continue to spend a lot of time understanding what the long-term potential for growth is and when we look at the demographics in the service territory, our outlook is still positive.

Jim Likens

Okay, great. All right, that’s all I got for now and I guess I will see you guys down in Miami.

Larry Downes

Thank you Jim.

Operator

And your next question comes from the line of Daniel Fidell of Brean Murray, Carret.

Daniel Fidell - Brean Murray, Carret

Just a couple of quick questions. First, in terms of the rate case; you said hearings are this summer. Is the expectation having worse last settlement sometime anytime for the bulk of fiscal 2009?

Larry Downes

It will be premature to speculate on settlement or anything like. So I wouldn’t go near that one Dan, but I would say, we would expect impact in fiscal 2009, absolutely. I think we have set out the procedural schedule assuming that the case weren’t the litigated rev.

Daniel Fidell - Brean Murray, Carret

Okay. Second question on the set; Is it functioning as intended? So far year-to-date, is it matching up with what your internal modeling was telling you going in?

Larry Downes

It’s working well not only from the rate design perspective but I think just importantly, the dollars and the savings that customers are receiving from both the fixed demand charges that they get annually $10.6 million but even more significantly than that, the commodity savings and as Glenn laid out, the margin impact has been helpful as well to deal with the non-weather related issues primarily usage.

Daniel Fidell - Brean Murray, Carret

Okay, great. And can you refresh my memory in terms of the set. Is that something that is being reviewed as part of this rate case or is this extended for a longer period of time before it’s looked at?

Glenn Lockwood

It will be -- its part of the rate case and we expect the rate design come out of the rate case to adjust if you will all the factors that currently are picked up in the CIP itself.

Larry Downes

That’s one of the proposals in the rate case. The CIP itself of course was a pilot that regulates us through a normal course, we will be looking at that as well. To come back the original question though is that it was designed to do -- to help a variety of stake holders and that’s certainly been the case.

Daniel Fidell - Brean Murray, Carret

Okay and then may be just a final question, I’ll let’s some one else ask a question. Just in terms of your CapEx plans for the remainder of 2008 on target with your previous expectations and how do you think things will layout for 2009 assumes stock in the region and if everything proceeds on track.

Larry Downes

Right now what we disclosed for 2008, 2009 we still think those are good numbers, so this year going will be a new order $18 million and that doesn’t include MGP which is covered by a separate writer and then I think next year we are what in the high 70’s again, it’s the public disclosure, so right now those are still numbers we are working with. As far as the component to that it’s what you first talked about before, the customer growth, system integrity pipeline, pipeline integrities and things like that and then segment of course.

Operator

Your next question comes from the line of Joanne Fairechio of Janney Montgomery.

Joanne Fairechio - Janney Montgomery

Good afternoon guys. Jim and Dan asked most of my questions but let me just follow up on Jim’s question on conversions. Would you anticipate may be the rate of conversion to increase a little bit in the summer time as customers or consumers get ready for the upcoming winter in light of where oil prices have been in the past couple of months and then do you normally see a pick up in conversions in the summer time.

Larry Downes

Joanne I am going to ask Tom Massaro who is our Vice President of Marketing to answer that one.

Tom Massaro

Joanne we will see the number of conversions rated towards the end of the summer and into the fall heating season, so that is driven. We see that in the new customer editions number in total. We usually see it peak up as you start looking towards the heating season.

Joanne Fairechio - Janney Montgomery

Right okay.

Larry Downes

One of the things that lets us enjoy it is that even with the gas prices moving up we still have a price advantage over the competing fuel.

Joanne Fairechio - Janney Montgomery

And my second question is you mentioned there was an increase in employees was that the gas Company or at the energy services business.

Larry Downes

It’s been across the board

Joanne Fairechio - Janney Montgomery

Okay

Larry Downes

It’s relative to overall business.

Joanne Fairechio - Janney Montgomery

Right. Now how many -- I know you also opened an office I believe in Huston this past quarter, how many employees do you have there?

Larry Downes

Currently there is only one active employee in Huston and as that business picks up then we may increase it over time, so that was still in our slow.

Operator

(Operator Instructions) and your next question comes from the line of Brooke Mullin of J.P. Morgan.

Brooke Mullin - J.P. Morgan

Thank you. Most of my questions have been asked, just one clarification. Do you have the corporate tax rate for the year? I know you put in what the adjustment would be for energy services but on a consolidated basis?

Larry Downes

No the only change from prior years would be this one segment but I haven’t -- we haven’t figured out the impacted on an consolidated rate. I can tell that it’s the only segment we expect to have any change in the rate based on the tax issue.

Brooke Mullin - J.P. Morgan

And would that tax issue extend beyond 2008?

Larry Downes

Oh yes, we have in the release that we expect on an ongoing basis the current estimate would be to use about 38.9% overall effective tax rate in that business segment.

Operator

(Operator Instructions) and there are no questions.

Larry Downes Okay, thank you.

Glenn Lockwood Okay. Thank you all and we will see many of you hopefully in Florida, thanks.

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