Business Context and Reporting Period
Company: New Jersey Resources Corp (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: NJR is an energy services holding company. Its primary subsidiary, New Jersey Natural Gas (NJNG), is a regulated utility providing 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 (Six Months Ended March 31, 2006)
| Metric | 2006 (Thousands) | 2005 (Thousands) |
|---|---|---|
| Operating Revenues | $2,228,998 | $1,919,045 |
| Net Income | $94,465 | $81,867 |
| Earnings Per Share (Diluted) | $3.37 | $2.90 |
| Operating Cash Flow | $102,368 | $212,943 |
| Long-Term Debt | $334,459 | $318,678 |
| Short-Term Debt | $88,500 | $97,300 |
| Total Assets | $2,137,057 | $1,912,218 |
Segment Performance (Six Months Net Income):
- Natural Gas Distribution: $52.2 million (Decrease of 1.7% vs. prior year)
- Energy Services: $41.9 million (Increase of 90% vs. prior year)
- Retail and Other: $0.4 million (Decrease of 94% vs. prior year)
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 16% year-over-year, driven primarily by higher wholesale commodity costs passed through to customers in the Natural Gas Distribution segment and increased pricing in the Energy Services segment.
- Profitability: Net income increased 15% to $94.5 million. This growth was driven by a 90% surge in earnings from the Energy Services segment (NJRES), which offset a slight decline in the regulated Natural Gas Distribution segment.
- Cash Flow Decline: Operating cash flow decreased significantly by $110.6 million (to $102.4 million). This was primarily due to changes in working capital, specifically increased gas in storage and decreased gas purchases payable, driven by higher wholesale gas costs.
- Unusual Items in Prior Year: The prior year's six-month results included a $6.0 million after-tax gain on the sale of a commercial office building and a $1.5 million charge for an early retirement program. Adjusted for these items, prior year earnings were lower than reported.
Outlook, Risks, and Management Commentary
- Regulatory Strategy: NJNG filed a Conservation and Usage Adjustment (CUA) proposal with the New Jersey Board of Public Utilities (BPU) to replace the Weather-Normalization Clause (WNC). The goal is to decouple gross margin from customer usage, which has declined due to higher prices and conservation efforts. If the CUA is not approved, NJNG may file a base rate case.
- Energy Services Volatility: Management notes that NJRES performance is highly seasonal and dependent on wholesale price volatility. First-half results are not indicative of full-year performance due to the timing of fixed costs versus winter margin generation.
- Environmental Liabilities: NJNG is responsible for remediation at three former Manufactured Gas Plant (MGP) sites. A liability of $93.9 million is recorded, with a corresponding regulatory asset. Management believes costs are recoverable through the remediation rider, subject to BPU approval.
- Legal Proceedings: NJNG settled mass tort litigation regarding the Long Branch MGP site in December 2005. Litigation continues against Kemper Insurance Company regarding coverage for these costs. Management believes costs are recoverable via insurance or regulatory riders.
- Capital Requirements: NJNG expects capital expenditures of $32 million for the remainder of fiscal 2006 and $64 million in fiscal 2007, primarily for system integrity and pipeline safety rulemaking.
Key Facts for Investor Verification
- Regulatory Approval of CUA: Verify the status of the Conservation and Usage Adjustment proposal with the BPU, as its approval is critical to stabilizing NJNG's earnings against usage declines.
- MGP Remediation Recovery: Confirm the BPU's stance on the recovery of the $93.9 million accrued remediation liability and the $79.1 million of previously incurred costs.
- Kemper Insurance Litigation: Monitor the outcome of the lawsuit against Kemper Insurance Company, as a failure to recover costs could impact the balance sheet if regulatory recovery is also denied.
- Energy Services Margins: Assess the sustainability of NJRES margins, which are heavily influenced by short-term wholesale price spreads and may not be repeatable in the second half of the fiscal year.
- Working Capital Trends: Review the impact of rising wholesale gas prices on working capital requirements and operating cash flow in subsequent quarters.