Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: NJR is an energy services holding company operating through three primary segments: Natural Gas Distribution (regulated utility NJNG), Energy Services (unregulated wholesale NJRES), and Retail and Other (including investments in mid-stream assets like Iroquois and Steckman Ridge).
Key Financial Metrics (Nine Months Ended June 30, 2009)
| Metric | 2009 (Thousands) | 2008 (Thousands) |
|---|---|---|
| Operating Revenues | $2,179,872 | $2,989,122 |
| Net Income | $32,958 | $35,123 |
| Earnings Per Share (Diluted) | $0.77 | $0.84 |
| Cash Flow from Operating Activities | $350,684 | $144,295 |
| Total Assets | $2,304,088 | $2,625,392 |
| Long-Term Debt | $457,671 | $455,117 |
| Short-Term Debt | $48,600 | $178,200 |
| Cash and Temporary Investments | $77,022 | $42,626 |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 27.1% year-over-year, primarily driven by a 70% drop in NYMEX natural gas prices, which reduced both sales volumes and prices in the Energy Services segment.
- Net Income: Consolidated net income decreased 6.2% to $33.0 million. This was due to unrealized losses on derivatives in the Retail and Other segment, partially offset by improved margins in the Natural Gas Distribution segment following a base rate increase.
- Operating Cash Flow Surge: Cash flow from operations increased significantly to $350.7 million (from $144.3 million) due to lower natural gas inventory costs and reduced receivable balances resulting from lower commodity prices.
- Debt Reduction: Short-term debt decreased by approximately $130 million as the company utilized strong operating cash flows to reduce borrowings.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Regulatory Approvals: The New Jersey Board of Public Utilities (BPU) approved an Accelerated Infrastructure Program (AIP) and an Energy Efficiency (EE) Program, allowing for cost recovery on infrastructure investments.
- Steckman Ridge: The company's 50% interest in the Steckman Ridge storage facility became partially operational in Q3 2009. Total project costs are estimated at $265 million, with NJR obligated to fund approximately $132.5 million.
- Dividends: Dividends per common share increased to $0.93 for the nine-month period compared to $0.83 in the prior year.
Risks and Contingencies
- Derivative Volatility: The company reports significant volatility in GAAP earnings due to the fair value accounting of derivative instruments used to hedge physical gas transactions. Unrealized losses in the Energy Services and Retail segments impacted reported net income.
- Auction Rate Securities (ARS): NJNG holds approximately $97 million in variable-rate debt backed by ARS. All auctions for these securities failed during the period, causing interest rates to reset to maximum rates (though currently low due to low LIBOR). There is no assurance future auctions will succeed.
- Internal Control Weakness: Management identified a material weakness in internal controls regarding the fair value recording of physical natural gas transactions. While remediation is underway, disclosure controls were deemed not effective as of June 30, 2009.
- Environmental Liabilities: NJNG has a recorded liability of $120.2 million for Manufactured Gas Plant (MGP) remediation, with total future costs estimated between $120.2 million and $177.2 million.
Investor Verification Checklist
- Derivative Accounting Impact: Verify the reconciliation between GAAP Net Income and "Net Financial Earnings" to understand the true economic performance versus accounting volatility caused by derivative mark-to-market adjustments.
- ARS Liquidity Risk: Monitor the status of the $97 million in Auction Rate Securities to assess potential liquidity constraints or interest rate spikes if auctions continue to fail.
- Internal Control Remediation: Review subsequent filings to confirm the remediation of the material weakness in internal controls over financial reporting related to commodity pricing.
- Steckman Ridge Funding: Track capital expenditure commitments for the Steckman Ridge project to ensure the $132.5 million obligation is met and assess the timeline for non-recourse financing.
- Regulatory Rate Recovery: Confirm the implementation and customer impact of the new AIP and EE Program rate riders approved by the BPU.