Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2007
Business Overview: NJR is an energy services holding company operating through three primary segments: Natural Gas Distribution (regulated utility NJNG), Energy Services (unregulated wholesale trading NJRES), and Retail and Other (HVAC services, real estate, and energy investments). The company serves approximately 478,000 customers in central and northern New Jersey.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 (Restated) |
|---|---|---|
| Operating Revenues | $3,021.8 million | $3,271.2 million |
| Operating Income | $127.3 million | $388.4 million |
| Net Income | $65.3 million | $221.9 million |
| Earnings Per Share (Basic) | $2.34 | $7.96 |
| Total Assets | $2,230.7 million | $2,398.9 million |
| Long-Term Debt | $383.2 million | $332.3 million |
| Short-Term Debt | $256.5 million | $280.7 million |
| Cash Flow from Operations | $122.4 million | ($23.0 million) used |
Material Changes vs. Prior Period
- Significant Decline in Net Income: Net income decreased 70.6% to $65.3 million. This was primarily driven by a reversal of unrealized gains on derivative instruments in the Energy Services segment. In 2006, the company recorded $143.4 million in unrealized gains; in 2007, it recorded $23.1 million in unrealized losses.
- Restatement of Financials: The company restated prior year financial statements (2005-2007) due to an incorrect application of "critical-terms-match" criteria for cash flow hedge accounting under SFAS 133. Unrealized gains/losses previously recorded in Other Comprehensive Income were reclassified to the Income Statement.
- Revenue Decline: Operating revenues fell 7.6% to $3.02 billion. This was due to lower wholesale natural gas prices, customer refunds totaling $76.4 million, and a decrease in off-system sales revenue.
- Segment Performance:
- Natural Gas Distribution: Net income was relatively stable at $44.5 million (down 5.1% from 2006), supported by the Conservation Incentive Program (CIP) which mitigated weather impacts.
- Energy Services: Net income plummeted to $21.3 million from $188.4 million due to the accounting restatement and market volatility.
Guidance, Outlook, Risks, and Unusual Items
- Internal Control Material Weakness: Management and auditors identified a material weakness in internal controls over financial reporting regarding the accounting for derivative instruments. The auditors issued an adverse opinion on the effectiveness of internal controls.
- Regulatory Filings: NJNG petitioned the New Jersey Board of Public Utilities (BPU) for a base rate increase of approximately $58.4 million to cover rising costs. Implementation is unlikely in fiscal 2008 due to regulatory lag.
- Environmental Liabilities: NJNG is responsible for remediating three Manufactured Gas Plant (MGP) sites. Future expenditures are estimated between $105.3 million and $164.8 million. A liability of $105.3 million has been accrued.
- Legal Proceedings: A $4.0 million pre-tax charge was recognized in Q4 2007 related to the Long Branch Mass Tort Litigation settlement costs that were deemed non-recoverable by the BPU.
- Investment Activity: NJR invested $55 million in the Steckman Ridge natural gas storage facility (50% interest), with a total project cost estimated at $250 million.
Investor Verification Checklist
- Derivative Accounting: Verify the remediation plan for the material weakness in internal controls regarding SFAS 133 compliance and the impact of unrealized derivative gains/losses on future earnings volatility.
- Regulatory Recovery: Monitor the BPU's decision on the $58.4 million base rate increase and the recovery status of the $105.3 million MGP remediation liability.
- Energy Services Volatility: Assess the stability of the Energy Services segment's "financial margin" (non-GAAP) versus reported GAAP net income, given the high sensitivity to natural gas price fluctuations.
- Liquidity Position: Review the company's reliance on short-term debt ($256.5 million) and credit facilities to fund working capital and the Steckman Ridge investment.
- Customer Growth: Validate the projected 1.8% annual customer growth rate for NJNG and the success of the Conservation Incentive Program in decoupling usage from revenue.