Newjersey Resources Corporation · NYSE:NJR
Newjersey Resources — Investor Presentation (January 2008)
81 slides from Newjersey Resources's investor presentation, Jan 7, 2008
Slide 1: Strategies for a Changing Business Environment
Strategies for a Changing Business Environment January 8, 2008
Slide 2: Regarding Forward-Looking Statements
Regarding Forward-Looking Statements Certain statements contained in this presentation are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “may,”
Slide 3: Disclaimer Regarding Non-GAAP Financial Measures
Disclaimer Regarding Non-GAAP Financial Measures Included in this presentation are the non-GAAP financial measures, Financial Margin and Net Financial Earnings. Financial margin represents operating revenues from the sale of natural gas sales less gas purchases, and excludes the accounting impacts o
Slide 4: Today's Agenda
Today’s Agenda Introduction - Laurence M. Downes NJRES Overview - Richard R. Gardner NJNG Overview - Kathleen T. Ellis Regulatory Overview - Mark R. Sperduto Utility Marketing Plan - Thomas J. Massaro, Jr. Financial Overview - Glenn C. Lockwood Closing Remarks - Laurence M. Downes
Slide 5: NJR at a Glance
NJR at a Glance Ticker Symbol (NYSE): NJR Price Range (52 Weeks) $56.45-$45.50 Common Shares Outstanding: 27.8 million Market Capitalization: $1.4 billion Annual Dividend Rate: $1.60 Dividend Yield: 3.2 percent Total Assets: $2.4 billion December 31, 2007
Slide 6: NJR Today
Distribution Wholesale Energy Services Midstream Growing service area; close to NYC and Phila. Constructive regulatory environment Rate base and margin growth opportunities Growing transportation and storage portfolio Disciplined risk management Asset optimization Ancillary services Iroquois Pipelin
Slide 7: 2007 - Another Solid Performance
2007 - Another Solid Performance • NFE growth of 12.4 percent • Implemented Conservation Incentive Program • Increased dividend 5.3 percent • Announced Steckman Ridge Storage project • Refunded customers over $100 million as a result of declining natural gas prices • Recipient of the prestigious J.D
Slide 8: Financial Goals
Financial Goals • Achieve long-term NFE growth of 5 percent or better • Grow dividend a minimum of 5 percent annually • Use Share Repurchase Plan opportunistically • Achieve a total return in top 25 percent of peer group • Maintain a strong financial profile with a minimum average equity ratio of 50
Slide 9: 2008-2010 NFE Drivers
2008-2010 NFE Drivers • Margin Growth from New Customers • Residential and Commercial Balance • Incentive Programs • Wholesale Energy Services • Midstream Equity Investments • Home Services • Base Rate Case
Slide 10: NJRES Overview
Strategies for a Changing Business Environment NJRES Overview - Richard R. Gardner, Vice President-Energy Services
Slide 11: How NJRES Makes Money
How NJRES Makes Money • Optimize transportation and storage capacity • Manage other companies’ assets • Manage hedged positions • Monetize volatility • Contract with wholesale customers to deliver natural gas, together with reliable products and services
Slide 12: NJRES Key Initiatives
NJRES Key Initiatives • Continuing to replace existing assets as they expire • Evaluating midstream opportunities • Continuing to bid for asset management opportunities • Expanding into new regions
Slide 13: The NJRES Portfolio
The NJRES Portfolio • The portfolio consists of two types of physical assets: – Storage capacity • 26.9 bcf – Transportation capacity • 741,790 dth/d • The above portfolio was contracted by NJRES as of December 2007, with additional assets periodically being managed for other entities
Slide 14: Storage Capacity
Storage Capacity • Storage transactions allow for the injection of natural gas, which is immediately hedged for future sale • Storage capacity is leased for various periods of time • Storage capacity provides opportunity to realize time spreads – Having storage allows the time spreads to be reset mu
Slide 15: Storage spread example
1. On May 15, 2006 buy spot $5.92 sell Jan ’07 at $11.03 for a $5.11 spread 2. On Aug 1, 2006 sell spot for $8.67 and buy Sep ’06 at $8.20 for a $.47 spread. 3. On Jan 2, 2007 buy spot for $5.41 and sell May ’07 at $6.68 for a $1.27 spread 4. On Feb 5, 2007 sell spot for $9.13 and buy May ’07 at $7.
Slide 16: Pipeline Transportation
Pipeline Transportation • Pipeline transportation allows for natural gas to be purchased in one location and sold in another • Pipeline transportation is leased for various periods of time • Provides opportunity to capture locational spreads – Having transportation allows the locational spreads to b
Slide 17: Examples of Options from Transportation
Examples of Options from Transportation Supply Transportation Delivered Sales Margin Area Costs Costs Price Supply Market Sale Replacement 2. $6.90 ------ ------- $7.53 $.07 3. $9.00 ------ -------- $9.60 $.10 $6.90 - $7.00 = -$.10 $7.70 - $7.53 = $.17 -$.10 +$.17 = $.07 $9.00 - $7.00 = $2.00 $7.70
Slide 18: How the Portfolio is Valued
How the Portfolio is Valued • “Basis book value” – Indicates intrinsic value of transportation, both hedged and unhedged, no trading and calculation of optionality • Hedged value is the delivery point sales price minus (cost of supply + variable transportation expense + fixed transportation costs) •
Slide 19: NJRES 2008 Plan Financial Margin
NJRES 2008 Plan Financial Margin • 2008 Plan Financial Margin – Approximately 59 percent of plan financial margin was “value” existing in the portfolio at the beginning of the fiscal year. • Intrinsic value – Optimization and trading margin, is the extrinsic value expected to be generated from: • St
Slide 20: October 1, 2007 - Fiscal 2008 Plan Financial Margin
October 1, 2007 - Fiscal 2008 Plan Financial Margin
Slide 21: December 31, 2007 - Fiscal 2008 Forecast Financial Margin
December 31, 2007 - Fiscal 2008 Forecast Financial Margin
Slide 22: NJRES Portfolio
NJRES Portfolio
Slide 23: NJRES Firm Portfolio as of December 2007
NJRES Firm Portfolio as of December 2007
Slide 24: Counterparty Credit Ratings
97 percent of net sales with investment grade companies Counterparty Credit Ratings * Credit exposure to non-investment grade companies is mitigated through the use of prepayments or Letters of Credit. months ended December 31, 2007
Slide 25: Strategy
Strategy • Continue to use discipline in contracting for assets – Use market experience and customer relationships when contracting for assets • Enter new pipeline/storage markets that “connect” to our existing asset base – Use market knowledge to leverage pipeline and storage tariffs at facilities
Slide 26: Midstream Asset Update
Midstream Asset Update
Slide 27: Steckman Ridge, L.P.
Steckman Ridge, L.P. • Acquired Steckman Ridge natural gas field from Pennsylvania General Energy • 17.7 Bcf Reservoir with up to 12 Bcf storage working capacity • Owned equally by: – New Jersey Resources Steckman Ridge Storage Company ― Spectra Energy Transmission (SET)
Slide 28: Project Summary
Project Summary • Anticipated 2 to 3 turn service (45-60 day withdrawal cycle) • Pipeline interconnect options – Texas Eastern Transmission (“TETLP”) • Approximately 3 miles • Line jointly owned with Dominion Transmission • Project cost estimated at $250 million
Slide 29: Market Position
Market Position • Eastern most storage on Texas Eastern • Potential to enable the most economical pipeline expansion to NY/NJ citygates • Positioned to leverage Cove Point LNG and Rockies Express deliveries • Texas Eastern completing 150,000 Dth/d expansion along path of Steckman Ridge • Three propo
Slide 30: Project Overview
Project Overview Rockies Supply
Slide 31: Steckman Ridge Status
Steckman Ridge Status • Open Season was successful – Visiting potential customers • FERC filing on November 1, 2007 • Expectations moving forward – FERC certificate April 2008 – Begin construction June 2008 – Begin customer injections May 2009 – Commercial operations winter 2009/2010
Slide 32: Iroquois Pipeline
Iroquois Pipeline • 411-mile pipeline system running from the Canadian border at Waddington, NY to Long Island and New York City, NY • 78,100 HP of compression • 1.2 Bcf/d of peak deliverability • Commenced operations in 1991
Slide 33: Iroquois Pipeline Ownership
Iroquois Pipeline • NJR - 5.53% ownership, up from original 2.8% • Currently 5 owners from original 13
Slide 34: NJR's Iroquois Ownership Earnings
NJR’s Iroquois Ownership Earnings
Slide 35: Iroquois Opportunities
Iroquois Opportunities • Market Access – Agreement with Con Edison • Began service November 2007 • 08/09 Expansion – Agreement with Keyspan Energy (National Grid) • Planned for November 2008 • Broadwater LNG – Off-shore LNG terminal in Long Island sound – Project owners - Shell and TransCanada
Slide 36: NJNG Overview
Strategies for a Changing Business Environment NJNG Overview - Kathleen T. Ellis, Senior Vice President-Corporate Affairs
Slide 37: Our Core Business
Our Core Business • Provide safe and reliable natural gas services to 478,000 customers in Monmouth, Ocean and Morris counties • $947 million of Rate Base • $224 million in gross margin in 2007 • Steady Rate Base growth opportunities • Approximately 4 million customer interactions per year • 16 cons
Slide 38: NJNG Operational Excellence
NJNG Operational Excellence • Customer Response – Emergency calls: 99 percent responded to in less than 60 minutes – Meter work: 98 percent completed on scheduled date • Leaks per mile – 1 st quartile among peers – Continuous reduction over last eight years • Pipeline Integrity compliance – Ahead of
Slide 39: Regulatory Relationships
Regulatory Research Associates rates NJ regulation as “Average 2” Regulatory Relationships • NJ regulatory process is reasonable and balanced – Responsive to economic impact – Considers interests of company and customers • NJNG maintains a positive relationship with regulators – Through continuous a
Slide 40: Marketing Opportunities
Marketing Opportunities • Customer growth rate exceeds industry average – Maintain a profitable balance in the new construction market – Maintain a healthy mix of new construction and conversions • Profitable, disciplined growth – Targeted marketing and advertising – Manage new customer construction
Slide 41: New Jersey Energy Master Plan
New Jersey Energy Master Plan • Statewide goals for 2020 – 20 percent reduction in energy usage – 20 percent of energy served by renewable resources – 20 percent reduction in greenhouse gas emissions • Utilities as partners – Direct connection to customers – Trusted resource for energy information –
Slide 42: Rate Case and Regulatory Overview
Strategies for a Changing Business Environment Rate Case and Regulatory Overview - Mark R. Sperduto, Vice President-Regulatory Affairs
Slide 43: Base Rate Case
Base Rate Case • November 20 th petition filed • Requested an increase of $58.4 million • Includes equity capital of approximately $500 million • Return on equity requested - 11.375 percent • Proposed rate base of $946.7 million
Slide 44: Base Rate Case - Review Process
Base Rate Case - Review Process • Once filed with the BPU base rate cases undergo a formal review process • A quasi-judicial proceeding heard at the Office of Administrative Law (OAL) • Statutory time for a case is nine months – One month notice – Two four-month suspension periods granted – After ni
Slide 45: Revenue Requirement
Revenue Requirement ( $ in millions) Rate base $946.7 Rate of return - overall x 8.45 % Income required 80.0 Pro-forma operating income 45.8 Income deficiency 34.2 Revenue conversion x 1.71 Increase in revenue required $58.4 * * Represents a 7.5 percent increase for an average residential customer T
Slide 46: Rate Base Components
Rate Base Components ( $ in millions) Plant in service $1,274 Less: Accumulated depreciation (423) Net plant 851 Gas inventory Working capital Less deferred taxes & other (122) Total rate base $947
Slide 47: Rate Base
Rate Base • Since our last base rate case filing in 1993: – Total rate base has increased $455 million, CAGR 4.6 percent • Net plant has increased $373 million, CAGR 4.0 percent • Plant in service has increased $650 million, CAGR 5.0 percent – Likely review of plant additions since the last base rat
Slide 48: Base Rate Case - Overall Rate of Return
Base Rate Case Overall rate of return-WACC Weighted Ratio Cost rate cost rate Total debt 47.09% 5.22% 2.46% Customer deposits 0.45% 4.58% 0.02% Common equity 52.47% 11.375% 5.97% Total 8.45%
Slide 49: Base Rate Case - Rate of Return Comparison
Base Rate Case - Rate of Return Comparison • Capital structure ratios similar • Cost of debt • 1993 - 8.43% • 2007 - 5.22% • Cost of equity • 1993 - 11.50% • 2007 - 11.375% • Overall rate of return • 1993 - 10.00% • 2007 - 8.45%
Slide 50: Base Rate Case - Pro-Forma Operating Income
Base Rate Case - Pro-Forma Operating Income (in millions) Unadjusted operating income $68.5 Less adjustments - major – Wages 3.3 – Pension & benefits 1.1 – Weather & CIP 4.4 – BGSS incentive margins 4.0 – Depreciation 5.9 – Lost revenues 0.8 – Post test year plant 0.7 – Other 2.5 Pro-forma operating
Slide 51: Base Rate Case - Rate & Tariff Design
Base Rate Case - Rate & Tariff Design • Proposed clear and simple organization of tariff, where possible • Implement C&I Rate Schedule restructuring – Size-based classifications: 0-5,000 and above 5,000 annual therms – Improved price-to-compare through consistent rate design for BGSS and transportat
Slide 52: BGSS Incentive Objectives
BGSS Incentive Objectives • Encourage different types of purchasing / asset optimization strategies • Devote appropriate resources and gain necessary experience • Maximize customer benefits • Evolving and reflective of market dynamics • Provide company financial incentive
Slide 53: Existing Incentives
Existing Incentives • Off-system sales and capacity release – In place since 1992 – Optimization of capacity assets – Sharing formula of 85 percent customer, 15 percent NJNG • Storage Incentive (SI) – In place since 2004 – Promote long-term price stability – Promote cost efficiencies – Sharing formu
Slide 54: Incentive Programs
Incentive Programs $29 $30 $24 $34 $37 $43 $45 • Current programs – Capacity release – Storage incentive – Off-system sales • Programs in place through October 2008 • Customer bills reduced by over $338 million, or 4 percent annually, since program inception
Slide 55: Proposed Incentive Structure
Proposed Incentive Structure • Part of 2007 base rate case • Remain in effect until next base rate case • No change to off-system/capacity release programs • FRM – Eliminate transaction cost limits/or double the amount – Tie volume to BGSS purchase requirement • SI program – Expand the volume from 1
Slide 56: New Incentive Program
New Incentive Program • Winter incentive program – Similar to SI program – Set volume annually after considering SI and FRM volumes – Set benchmark at initial hedges on a ratable basis for November - March – Based on these established spreads trading can occur to improve the positions – Sharing form
Slide 57: Conservation Incentive Program
Conservation Incentive Program • Approved by the BPU on October 12, 2006 – Outside of traditional rate proceeding • Stabilizes NJNG gross margin from: – Declining usage – Weather • 3-year pilot - effective October 1, 2006 – NJNG protected for all variations in customer usage – New customer programs
Slide 58: CIP - Basic Mechanics and Rate Case Modifications
Group 1993 Rate Case Use per Customer CIP Benchmark Proposed Benchmark in Rate Case CIP - Basic Mechanics and Rate Case Modifications Residential non-heat 225.1 231.9 Residential heat 1,199 1,113.0 1,068.9 Commercial 6,115 5,292.8 (small) 2,544.8 (large) 14,701.2 CIP Basic Mechanics • Actual custome
Slide 59: Customer Growth
Strategies for a Changing Business Environment Customer Growth - Thomas J. Massaro, Jr., Vice President-Marketing and Business Intelligence
Slide 60: Our Service Area Demographics
Our Service Area Demographics Source: US Census Bureau
Slide 61: Fiscal 2007 Customer Additions
Fiscal 2007 Customer ions Commercial 13% Residential 87% Commercial 37% Reddential 63%
Slide 62: Residential Growth Potential
Residential Growth Potential 2013-2023 New Customers = 106,296 Non-heat customers Non-gas off main Non-gas on main Conversions = 140,254 Sources: Arthur D. Little and Harte Hanks 2007-2012 Near main
Slide 63: Commercial Growth Potential
Commercial Growth Potential Source: Arthur D. Little
Slide 64: Competitive Advantage
Equivalent Base on Heat Load in CIP Tariff Competitive Advantage Electric Equivalent Propane Equivalent Fuel Oil Equivalent $3,956 $2,988 $1,923 As of November 2007 NJNG $1,288
Slide 65: Marketing Strategy
Marketing Strategy • New Construction – Future market potential for residential and commercial markets remain healthy – NJNG expects to get 95 percent of new construction • Conversions – Targeted incentives to spur conversion markets – Deploying marketing resources toward commercial conversions • Ne
Slide 66: NJR Home Services
Strategies for a Changing Business Environment NJR Home Services - Glenn Lockwood, President
Slide 67: NJR Home Services
NJR Home Services • Created in 2000 • Spinout of NJNG Appliance Service – Flexibility of Pricing • Not capital intensive • Principally a service business (i.e., labor intensive) • Organic growth • High quality and service levels • High productivity
Slide 68: NJR Home Services - 2007 Revenue by Type
Appliance Contracts Provide the Majority of Revenue NJR Home Services - 2007 Revenue by Type
Slide 69: Net Income
Net Income $3.0 $2.0 8 = $10 $08 $0.0 2004 2005 2006 2007 2003
Slide 70: Financial Update
Strategies for a Changing Business Environment Financial Update - Glenn Lockwood, Senior Vice President and CFO
Slide 71: Restatement of Earnings
Restatement of Earnings • Changes in fair value of derivatives – If it qualifies for hedge accounting - balance sheet – If it doesn’t - income statement • Impacts NJRES and NJREC only, no impact to NJNG • No change in NJR fundamentals – Financial strength – Cash flows – Liquidity • NJRES business mo
Slide 72: Impact of Restatement on Equity
Result: No change in overall financial profile Impact of Restatement on Equity “2006 As Reported” Common stock $72.7 Premium on common stock 253.2 Accumulated OCI, net 93.6 Treasury stock & other (65.2) Retained earnings 267.3 Total $621.6 Restated Common stock $72.7 Premium on common stock 253.2 Ac
Slide 73: Impact of Restatement on Income Statement and Cash Flow
Result: No change in cash flow Impact of Restatement on Income Statement and Cash Flow “2006 As Reported” Net income $78.5 Cash flow Net income $78.5 Unrealized gain (loss) on derivatives (4.9) Sub total $73.6 Restated Net income $221.9 Cash flow Net income $221.9 Unrealized gain (loss) on derivativ
Slide 74: Reconciliation of GAAP to Net Financial Earnings
Result: 2006 NFE same as “2006 as reported” earnings Reconciliation of GAAP to Net Financial Earnings Earnings per GAAP $221.9 Add/Subtract Unrealized gain (loss) on derivatives (143.4) Net Financial Earnings $78.5 ($ millions)
Slide 75: Net Financial Earnings per Share
NJR estimates Net Financial Earnings of $3.20 to $3.30 per basic share in fiscal 2008 Net Financial Earnings per Share * Net of certain items * September
Slide 76: NJNG Capital Expenditure Forecast
NJNG Capital Expenditure Forecast
Slide 77: Share Repurchase Program
Plan expanded to 4.5 million shares in November 2007 Share Repurchase Program Shares authorized (millions): 4.5 Shares repurchased (millions): 3.5 Split-adjusted average cost: $34.72 September 30, 2007
Slide 78: Capital Structure
Capital Structure NJNG corporate ratings: S&P: A+; Moody’s: Aa3 • Equity through Dividend Reinvestment Plan • NJNG long-term debt – $125 million in FY08 • NJR/NJNG bank facilities total $605 million – NJR facility renewed in December – $325 million, 5-year tenor September 30, 2007
Slide 79: Dividend Growth and Payout Ratio
Dividend Growth and Payout Ratio 1-year dividend growth rate of 5.3 percent * Effective January 2, 2008 ** Based on Net Financial Earnings * Dividends per share Payout ratio **
Slide 80: NJR: Quality Performance
NJR: Quality Performance December 31, 2007 Returns assume dividends reinvested • Sustained core market growth • Constructive regulatory relations • Disciplined wholesale energy services strategy • Strong financial profile • Demonstrated record of consistent financial performance
Slide 81: Strategies for a Changing Business Environment
Strategies for a Changing Business Environment January 8, 2008
New Jersey Resources — Investor Presentation (January 2008) on 6ix