Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: NJR is an energy services holding company. Its primary regulated subsidiary, New Jersey Natural Gas (NJNG), provides retail natural gas service in central and northern New Jersey. Its unregulated subsidiary, NJR Energy Services (NJRES), provides wholesale energy services. The company also operates a Retail and Other segment including appliance services and real estate.
Key Financial Metrics (Nine Months Ended June 30, 2006)
| Metric | 2006 (9 Months) | 2005 (9 Months) |
|---|---|---|
| Operating Revenues | $2,765.1 million | $2,463.3 million |
| Net Income | $90.5 million | $83.7 million |
| Diluted Earnings Per Share | $3.22 | $2.97 |
| Operating Cash Flow | $44.7 million | $141.3 million |
| Total Assets | $2,138.1 million | $1,859.0 million |
| Long-Term Debt | $333.8 million | $318.1 million |
| Short-Term Debt | $153.7 million | $193.7 million |
| Cash and Temporary Investments | $4.7 million | $3.2 million |
Note: For the three months ended June 30, 2006, the company reported a net loss of $4.0 million compared to net income of $1.8 million in the prior year quarter.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12.2% year-over-year for the nine-month period, driven primarily by higher wholesale commodity costs passed through to customers and increased activity in the Energy Services segment.
- Profitability: Net income increased 8.1% to $90.5 million. This growth was driven by a 90% increase in net income from the Energy Services segment ($35.5 million vs. $18.7 million), which offset a 5.4% decline in the Natural Gas Distribution segment.
- Cash Flow Decline: Operating cash flow decreased significantly by $96.6 million to $44.7 million. This was primarily due to a $115.4 million swing in working capital, driven by increased gas in storage and higher wholesale gas costs, partially offset by higher net income.
- Segment Performance:
- Natural Gas Distribution: Revenues increased due to higher prices, but utility gross margin remained relatively flat due to warmer weather and reduced customer usage per degree day.
- Energy Services: Gross margin increased 84.2% due to favorable time spreads on storage assets and positive locational spreads.
- Retail and Other: Net income decreased $6.9 million, largely due to the absence of a $10.1 million pre-tax gain on the sale of a commercial office building recorded in the prior year.
Guidance, Outlook, and Risks
- Customer Growth: NJNG expects to add approximately 10,628 new customers in fiscal 2006, representing an estimated annual growth rate of 2.3%.
- Regulatory Actions: NJNG filed for a 6.6% reduction in Basic Gas Supply Service (BGSS) rates effective October 2006 and intends to grant a refund of at least $20 million to customers in September 2006 due to lower wholesale costs. Discussions are ongoing regarding a Conservation and Usage Adjustment (CUA) to replace the weather-normalization clause.
- Capital Expenditures: NJNG estimates capital expenditures of $28.2 million for the remainder of fiscal 2006 and $71.4 million for fiscal 2007, primarily for system integrity and pipeline safety rulemaking.
- Key Risks:
- Commodity Price Volatility: Fluctuations in natural gas prices significantly impact the Energy Services segment and customer bills.
- Regulatory Recovery: Significant costs, including Manufactured Gas Plant (MGP) remediation (estimated future liability of $93.9 million), are deferred as regulatory assets pending Board of Public Utilities (BPU) approval for recovery.
- Weather and Usage: Warmer weather and reduced customer usage per degree day (attributed to conservation due to high prices) negatively impact utility gross margins.
- Litigation: Ongoing mass tort litigation regarding the Long Branch MGP site and disputes with insurance carriers (Kemper Insurance) regarding coverage.
Investor Verification Checklist
- Regulatory Asset Recovery: Verify the BPU's stance on the recovery of MGP remediation costs and the proposed Conservation and Usage Adjustment (CUA).
- Energy Services Volatility: Assess the sustainability of the Energy Services segment's margin growth, which is heavily dependent on volatile wholesale market spreads.
- Liquidity Position: Review the significant decrease in operating cash flow and the company's reliance on short-term debt and credit facilities to fund working capital needs.
- Legal Contingencies: Monitor the status of the Long Branch MGP mass tort litigation and the outcome of the dispute with Kemper Insurance Company.
- Customer Usage Trends: Evaluate the long-term impact of reduced customer usage per degree day on the regulated utility's revenue base.