Feb 4, 2009
Executives
Dennis Puma – IR Larry Downes – Chairman and CEO Rick Gardner – VP, NJR Energy Services Glenn Lockwood – CFO, New Jersey Resources, and President, NJR Home Services Mark Sperduto – VP, Regulatory Affairs, New Jersey Natural Gas Steve Westhoven – VP, Energy Trading, NJR Energy Services
Analysts
Jim Lykins – Hilliard Lyons Dan Fidell – Brean Murray Ryan Rosenthal – Sidoti & Company
Operator
Good morning. My name is Katherine and I will be your conference operator today.
At this time, I would like to welcome everyone to the New Jersey Resources quarterly 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) Mr.
Puma, you may begin your conference.
Dennis Puma
Thank you, Katherine, and good afternoon, everybody. Thank you and welcome to New Jersey Resources first quarter conference call and webcast.
I'm joined by Larry Downes, our Chairman and CEO; Glenn Lockwood, our CFO, as well as other members of our senior management team. As you know, certain statements in our news release and in today's call contain estimates or other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
We wish to caution readers of our news release and listeners to this call that the assumptions forming the basis for forward-looking statements include many factors that are beyond NJR's ability to control or estimate precisely, which could cause results to materially differ from the company's expectations. A list of these items can be found but is not limited to the Forward-Looking Statements section of today's news release filed today on Form 8-K and on our Form 10-K filed on November 24, 2008.
All these items can be found at SEC.gov. NJR does not by including this statement assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.
I'd also like to point out that there are slides accompanying today's 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?
Larry Downes
Thanks, Dennis. Good morning, everyone.
Thanks for joining us today. As you know, we announced our financial results for the first quarter of fiscal 2009 this morning and we also updated our outlook for the balance of the fiscal year.
As Dennis mentioned, there is a slide presentation that I will be using, as I discuss those results with you. On slide one, we have more detail on what Dennis was just discussing about forward-looking statements.
I will be giving some forward-looking statements today and slide one has all of the factors that could affect those statements. And again, I would refer you to the 10-K over there laid out and read those carefully.
On slide two, we have discussion regarding non-GAAP financial measures. Those two are discussed in the 10-K.
I would just say that the non-financial measures, primarily the use of net financial earnings, are not intended to be a substitute for GAAP, but we do believe that net financial earnings and the other non-GAAP measures that we described provided better basis for assessing our performance. Let me start out on slide three talking about some of our highlights.
You saw in addition to announcing our financial results we also increased our net financial earnings guidance for the year to a range of $2.32 per share to $2.42 per basic share. We also reminded investors that earlier this year we had announced a 10.7% increase in our dividend, and we did implement that in January.
We saw very strong results at New Jersey Resources. In fact, New Jersey Resources NFE increased by 38%.
And at the same time, given some of the challenges that we are all familiar within the economy, we were able to record continued steady customer growth. We did make two filings with the BPU to new programs that are aimed at stimulating the economy creating jobs and moving forward with the state’s environmental goals.
NJR Energy Services this year is estimated to account for 30% to 35% of our net financial earnings, and in doing that, achieved the third highest level of earnings in their history. And finally, we’ve been able to maintain a very high customer satisfaction rate.
Going to the first quarter results, our net financial earnings for the quarter were $32.5 million or $0.77 per share compared to with $36.3 million or $0.87 per share last year. As I said, New Jersey Natural Gas had a very strong quarter.
Earnings were $23.1 million compared with $16.7 million during the same period last year. That increase, which I said was about 38%, reflected primarily the impact of new base rates and higher incentive margins.
NJRES for the quarter net financial earnings were $9.4 million compared to with $19.1 million during the same period last year. That difference is attributed primarily to narrow summer/winter spreads entering the winter and less contracted transportation capacity in the Northeast.
As we know, NJRES earnings are seasonal in nature. And as I said earlier, our expectation is that for the full year that NJRES will contribute between 30% and 35% of our consolidated net financial earnings.
On slide five, we did update our earnings guidance increasing it to the range of $2.32 to $2.42 per basic share in fiscal 2009. If we are able to achieve that, that would be 18 consecutive years of improved financial performance for the company.
I just wanted to touch on some of the reasons why we are able to do that in the challenging environment, macro environment that we find ourselves in now. First of all is the impact of new base rates at New Jersey Natural Gas.
Also gross margin from our incentive programs increased by 62% over last year, and we expect those levels to be above last year for the entirety of fiscal 2009. Our customer growth rate, we see that continuing in excess of 1% this year.
We will see some increase in pension and OPEB about $1.8 million in 2009. That reflects increases in discount rate, which has primarily offset losses in the plan asset value.
And our expectation as far as that higher pension expense is included in the guidance, the updated guidance that we are giving here today. From a financing point of view, we have no current plans to access the long-term markets and certainly the relatively low interest rates that we are seeing are helping our bottom line.
What we will see when we factor in NJRES net financial earnings this year is a mix of earnings that is returning to more historical levels. Now let me get into some of the specifics.
On slide six, we talk about our customer growth. During the quarter we added 1,763 new customers.
That was just a slight increase over 2008. About 50% of that growth is coming from conversion markets, and that is a trend that we expect to continue throughout the year.
In fact, margin from conversions is about 45% of the total. Growth has remained strong in the conversion market despite recession and despite the decline in oil prices.
Most of the conversions are coming from oil, but we are also getting some from electric and propane. And in addition to that, activity in the commercial market remains steady.
Moving to slide seven, just to give you an update on the regulatory front. We did file a new program with the Board of Public Utilities on January 20th.
We refer to as our Accelerated Infrastructure Program or AIP. Basically the proposed rate recovery, the capital spending would be at our weighted average plus the capital.
And what the program actually does in its simplest terms is to accelerate system reliability spending that we had originally planned for 2010 and 2011. We believe that that will create up to 100 new jobs, which will hopefully help the state’s economy.
We will have AFUDC treatment. Those accruals will eliminate the income statement effects associated with that spending.
And the way the proposal is structured, the cash recovery would occur on an annual basis. Moving to slide eight, we continued to invest heavily in our core business.
In fiscal 2009. We currently expect capital spending of about $77.5 million.
You can see on the pie chart there the various components. But you can see that the major focus remains on our customer growth, system integrity and replacement.
And I’ll just make a comment that our automated meter reading project does remain on track. You can see the spending that’s expected in fiscal 2009 with the AMR program.
Now obviously with that level of spending, our strong financial profile remains very important. I would point out that demand for commercial paper at New Jersey Natural Gas remains strong.
Yesterday, for example, we issued a $7 million piece of paper for 35 days at 0.28%, 28 basis points. So you can see the impact of lower interest rates.
Earlier in 2008, actually in May, we did issue $125 million of Medium Term Notes. You can see very favorable rates there that 5.6% with a spread of about 180 basis points off of the ten-year treasury.
And as I noted, at the current time, we do not have any plans to issue any long-term debt for New Jersey Natural Gas Company. Our committed bank facilities remain in place.
So our access to capital is occurring as needed because of the strength of our financial profile. Now I want to – moving to slide ten and talking about NJRES, we continue our efforts to manage a diverse portfolio of storage assets.
You can see from the map where those assets, both the storage and transportation are located primarily in the Southeast, the Gulf Coast, the Mid-Atlantic and the Mid-Continent. As I noted, this year’s results were affected by lower storage spreads and smaller levels of contracted transportation capacity.
However, on balance we expect that NJRES will turn in an overall strong performance for the year. That – in that 30% to 35% range with a total contribution for net financial earnings and our efforts right now remain focused on building the portfolio in a disciplined way as we have done very successfully over the years.
Going to slide 11, just a brief update on the Steckman Ridge storage project. The project remains on plan for an in-service date of spring of this year.
We expect that additional wells will be added throughout this summer. Now with regard to marketing, we are in the process of finalizing contracts with customers for the first year’s available capacity, and we will make those customers known – we will make them public when the field is placed into service.
But as we evaluate the supply additions in the region, we believe that they continue to support storage values. With regard to spending, we are in line with the $132.5 million budget, and it remains our expectation that Steckman will contribute to earnings in fiscal 2010.
Moving to slide 11, I want to talk about another regulatory filing related to energy efficiency that was also filed with the Board of Public Utilities on January 20th of this year. Its objective was not only to stimulate the economy, but also to support New Jersey’s environmental goal.
We believe from a job’s perspective, that program will also add an additional 100 jobs and that’s on top of what I discussed with the AIP. The recovery includes the overall weighted cost of capital.
The program itself establishes a number of new office for the installation of energy efficient equipment and includes and helps us [ph] to current rebates that are available to customers through the Clean Energy Program. There was a total of $15.3 million of potential customer rebates and incentive, and that would be over a four-year period with the expectation of earning our full rate of return at the existing weighted average cost of capital.
Moving to slide 13, as I mentioned, the dividend increase that we announced in November was effective on January 2 of this year. It was 10.7%.
That was the second year in a row of greater than 10% increases in the dividend. And when we look at that from a longer term perspective, it represents the 16th time in the past 14 years that we’ve been able to increase the dividend.
But I think with all of the discussion that’s been out there with regard to the dividends, it’s important to look at our dividend rate a little more closely. So if you move to slide 14, you will see that our one year dividend growth rate was 10.5%.
That compared with our peer average of about 4.4%. And if we look at that over a slightly longer term, we can see that the dividend growth rate for New Jersey Resources was 6.3% compared with the peer average of 3.7%.However, as we know, increasing dividend is one thing, but making sure that an appropriate financial profile is there to support it is something else.
So if you go to slide 15, you can see that our one year dividend payout ratio is about 50%. So we are reinvesting a good amount of our earnings back into the company to support future earnings per share growth.
That compared with our peer average of 58.8%. And at the same time, if we look at a five-year average, our payout ratio is just below 50%.
The peer average is above 60%. I think what that tells us is not only that underscores the financial strength of our company but also the safety of the dividend.
And then on slide 16, we give you an update on our total return for calendar 2008. As we all know, it was a difficult market environment, but we were able to turn a very strong performance of a total return, including dividends, of more than 21%.
Our peers were just about 2% and the S&P 500, of course, was down by almost 36%. So we’ve had a – we’ve been able to continue to perform well in this market environment.
So in summary, we continue to be a company that is built upon on performance. Our financial profile remains strong.
We continue to experience steady core market growth. Our regulatory relations are constructive.
We are executing a very disciplined strategy with regard to our wholesale energy services business. And again, we are demonstrating, as we have, by increasing our guidance for fiscal 2009, demonstrating again our record of providing consistent financial performance.
So with that, I will open the lines to questions.
Operator
Thank you. (Operator instructions) All right.
Our first question comes from the line of Jim Lykins. Your line is open.
Jim Lykins – Hilliard Lyons
Good morning, everyone.
Larry Downes
Hi, Jim.
Jim Lykins – Hilliard Lyons
First of all, you commented on the lower gas volatility in the quarter. I was just wondering if you could give us a feel for what you are seeing so far into Q1 as well.
Larry Downes
Let me ask Rick Gardner to take that question. Rick?
Rick Gardner
We’ve seen volatility at – January did show us some good volatility in the market area in relation to Appalachia pricing. And right now it’s really going to take a look at the weather and see how that really shapes out.
Jim Lykins – Hilliard Lyons
Okay. And I was also wondering if you might be able to tell us what your assumption is and guidance for gas volatilities were?
Larry Downes
That’s I think – that’s embedded in the 30% to 35% of the total and how we expect that volatility will affect the results of NJRES.
Jim Lykins – Hilliard Lyons
Having said that, can you at least say whether you are assuming something similar to Q4 or if there is an improvement there?
Rick Gardner
Again, seasonality will always be an issue, and it’s part of the business based on when certain positions are put on and when certain assets are hedged. I can tell you that as usual we will look at the current market for storage spread, for example, when valuing any unhedged position, and we do not assume unusual weather or other events that would cause tremendous upside on margin.
Jim Lykins – Hilliard Lyons
Okay. And the $77.5 million in CapEx, does that include the AIP or will there be some additional CapEx spend there?
Larry Downes
That would be – that would be incremental to the $77.5 million, the AIP.
Jim Lykins – Hilliard Lyons
And can you give us a feel for maybe what your interest rate in there? Or is it too early to tell?
Larry Downes
The total over the likes of the program would be an additional $70.8 million.
Jim Lykins – Hilliard Lyons
Okay. And –
Larry Downes
Jim, that would unfold over. That’s not all in one year.
Jim Lykins – Hilliard Lyons
Okay. And lastly, there was about a 22% drop in depreciation this quarter.
Maybe if you could comment on that and if that’s maybe – or what we should expect over the next few quarters in depreciation?
Larry Downes
The depreciation rate was lowered as part of our rate case, which is why you’re seeing that number go down.
Jim Lykins – Hilliard Lyons
Okay. So, should we assume depreciation more in line with Q1 for the next couple of quarters then?
Larry Downes
I think it’s important to look at it over the course of the year. So there is no skewing because of timing differences in the capital expenditures.
But generally because of the lower rate, you will see that trend continue.
Jim Lykins – Hilliard Lyons
Okay.
Glenn Lockwood
No, it is indicative of the trend that we would expect obviously with our (inaudible) being depreciated on an average of 2.34% instead of 3.0%. You can come up with your own estimates of how much that would equate on an annual basis.
Jim Lykins – Hilliard Lyons
Okay, great Thank you, gentlemen.
Larry Downes
Thanks, Jim.
Rick Gardner
Thanks, Jim.
Operator
Our next question comes from the line of Dan Fidell with Brean Murray. Your line is open.
Dan Fidell – Brean Murray
Good morning, guys. Thanks for the call.
Larry Downes
Hi, Dan.
Dan Fidell – Brean Murray
Just following on one of Jim’s questions on the Accelerated Infrastructure Program and energy efficiency projects. Can you give us a little more color on sort of what those energy efficiency projects might be, and any kind of additional detail you could give us in terms of how we ought to be thinking about the CapEx?
That would be helpful too.
Larry Downes
Basically, as we said, the program is structured around the use of incentives. And what we’re trying to do is to build upon existing incentives that the state offers for the use of more efficient equipment.
So if you have a customer, for example, whose equipment breaks, which he has a choice between higher energy efficient equipment or the lower efficiency equipment. The lower obviously costs less.
So what we are trying to do through the program is to provide additional incentives on top of those which are already available through the state to make the purchase decision make that economically feasible for the higher energy equipment. And what we would do then is in providing those incentives, we would actually recover those and earn on those at our weighted average cost of capital.
Equipment is one element of it. We expect that as part of the program that we will offer.
We will have audits done of the different houses and identify other opportunities for increasing the efficiency of the homes and then use rebates to help the customer make the purchase decision to make that investment to reduce their use of energy. But the bottom line is that I think from your perspective is we would be – those incentives that we would be offering, we would effectively recover those and earn on those.
That’s on the energy efficiency side. Do you want to add something, Glenn?
Glenn Lockwood
I would say that the way we would recover that is similar to our current writers in that account-wise. We would earn that return real-time.
And in fact, as we spend the money in as any assets going to service, for example, on the AIP program, or as we spend the money on the environmental programs, and then from a cost recovery perspective, you have your slight lag as too many customers actually then pay us for whatever regulatory asset has been created through that real-time recovery.
Larry Downes
Now on the – the second part of your question, Dan, is with regard to the AIP. As you know, we’ve maintained healthy capital budgets.
The two main drivers of those budgets are customer growth and, what I would call in general terms, system integrity, system replacement. What we are doing – and our budgets have been, as we’ve disclosed, in north of $70 million.
Roughly $25 million to $30 million of that customer growth related. The rest is in a variety of pipeline and system integrity/replacement projects.
What we are talking about here is accelerating some of those system replacement/integrity projects, which enhance the reliability of the entire system to accelerate those dollars in order to create jobs and obviously simulate the economy through the purchase of materials, reinvestment of dollars. As Glenn noted with regard to the regulatory treatment of the costs associated with those investments, it would be similar at our weighted average cost of capital.
Dan Fidell – Brean Murray
Okay, thank you.
Larry Downes
Probably what – 9 or 10 discreet projects that were –?
Glenn Lockwood
Yes, there’s actually 14 projects occurring over 2.5 years approximately. And I would just say that just based on the timing of getting approvals for the program and then permitting and et cetera, it’s fair to say the majority of this actual spending and related to recovery would start in fiscal 2010 for us, not in next January [ph] month.
Dan Fidell – Brean Murray
I see. Okay.
Thanks. Maybe one other question on Steckman Ridge, can you maybe just comment on your overall level of satisfaction of that project, how it’s progressed and maybe your appetite for additional (inaudible) projects going forward.
You’re certainly going to be busy with some of these other projects. Just wondering how you feel about Steckman and the future in that area?
Larry Downes
I’m going to ask Rick Gardner to comment on that, Dan.
Rick Gardner
We are satisfied with the progress at Steckman. We are on plan, both timing and expense-wise.
So we are very excited about it. As you mentioned, NJR will continue to look at other projects.
As opportunities become available, we’ll bring those to management. And there are some opportunities out in the marketplace right now.
So as always, we’re going to keep an eye on those and review them as they become available.
Dan Fidell – Brean Murray
Could you give us any more specifics on that side? Just to press the case a little bit, should we be looking for any specific announcement in the next couple of quarters on that regard?
Larry Downes
No, Dan, you shouldn’t be looking for any.
Dan Fidell – Brean Murray
Okay. Thanks very much for your conference today again.
Larry Downes
Okay. Thanks, Dan.
Operator
(Operator instructions) Our next question comes from the line of Ryan Rosenthal with Sidoti & Company. Your line is open.
Ryan Rosenthal – Sidoti & Company
Good morning, everyone.
Larry Downes
Hi, Ryan.
Ryan Rosenthal – Sidoti & Company
Just a couple of questions for you. Going back to the Accelerated Infrastructure Program, when you suggest that you will be earning your weighted average cost of capital, in terms of the equity component of that, is that based on your regulated ROE?
Is that what you are expecting?
Larry Downes
That’s correct, the 10.3%.
Ryan Rosenthal – Sidoti & Company
Okay. And I think you mentioned – to reconfirm – that that would most likely begin in fiscal 2010.
I think you said the three-year – in terms of a three-year basis that you’d earn on those projects. Is that kind of the timeline in terms of estimating them?
Larry Downes
Let me ask Mark Sperduto to comment on that line.
Mark Sperduto
Ryan, the way it will work is spending that occurs between – at fiscal year closes will be reflected in October first rate change. So as Glenn mentioned, because of permitting and material acquisition, not much other than design work and some construction, minimal amount would occur in fiscal ’09.
And then it accelerates in fiscal ’10 and fiscal ’11.
Ryan Rosenthal – Sidoti & Company
Okay. And I know you guys are generally hesitant to discuss (inaudible) by margins going forward, but you guys really commented on the recent – looks like there has been a nice widening of spreads for fiscal 2010.
Is that something you’re witnessing and are you considering hedging more of your storage capacity now because of that?
Steve Westhoven
Yes, we’re certainly –
Larry Downes
Hold on a second. Ryan, this is Steve Westhoven speaking.
Steve Westhoven
We’re certainly keeping an eye on that looking forward. And obviously we have a lot of storage that we manage, and we are looking at spreads for not only this coming year, but the next years that follow and looking to put some hedges in our book accordingly.
Ryan Rosenthal – Sidoti & Company
Okay. And then in terms of this quarter, you mentioned that there was less contracted transportation capacity in the Northeast.
Is that a one-time event or is there some kind of fundamental change in the business there?
Larry Downes
No, there isn’t any fundamental change in the business. It’s just a matter of having contracts that come into our book.
And as they rollout and we look to renew, we look for the right assets for the right future period. And it’s been a continuous change for us.
So it’s not something unusual in our business. It really hasn’t changed at all and we saw the same focus.
Ryan Rosenthal – Sidoti & Company
Okay. And then one final question regarding the Home Services business, another set that was particularly [ph] weaker year-over-year, was there any particular item that caused the weakness this quarter?
Larry Downes
Their team [ph] appeared in the Northeast, we had a very cold winter so far. So some of their labor costs are a little bit higher than planned because of overtime dealing with serving some customers, and we are seeing some impact from the economy on the level of service contracts being either renewed or new sales.
So that of course is factored into our overall guidance.
Ryan Rosenthal – Sidoti & Company
Okay. Thanks for your time, everybody.
Larry Downes
Thank you.
Operator
At this time, I have no further questions in queue.
Larry Downes
Okay.
Dennis Puma
Okay. Thank you very much.
We’ll see next quarter.
Operator
Thank you for using the conferencing services. At this time, your conference has concluded.
You may disconnect you line.