Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: NJR is an energy services holding company operating through two principal subsidiaries: New Jersey Natural Gas (NJNG), a regulated utility providing retail natural gas service in central and northern New Jersey, and NJR Energy Services (NJRES), an unregulated wholesale energy marketer. Effective October 1, 2009, the company established a new reportable segment, "Midstream Assets," to reflect investments in natural gas transportation (Iroquois) and storage (Steckman Ridge) facilities.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Dec 31, 2009 | Three Months Ended Dec 31, 2008 |
|---|---|---|
| Total Operating Revenues | $609,546 | $801,304 |
| Net Income | $51,902 | $28,272 |
| Earnings Per Share (Diluted) | $1.24 | $0.67 |
| Operating Cash Flow | $(52,199) (Used) | $(36,960) (Used) |
| Short-Term Debt | $200,800 | $143,400 |
| Long-Term Debt | $438,412 | $455,492 |
| Total Assets | $2,431,629 | $2,321,030 |
Margins: The filing does not explicitly state a consolidated gross margin percentage. However, NJNG reported a utility gross margin of $74,957 thousand, and NJRES reported a gross margin of $50,020 thousand for the period.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 23.9% to $609.5 million, primarily driven by a 40% drop in NYMEX natural gas prices, which reduced NJRES revenues by $115.6 million and NJNG revenues by $82.4 million (partially due to customer refunds).
- Profit Surge: Despite lower revenues, Net Income increased 83.6% to $51.9 million. This was driven by favorable unrealized gains on derivative contracts at NJRES due to declining gas prices and lower interest expenses.
- Segment Performance:
- Natural Gas Distribution (NJNG): Net income remained relatively flat ($23.5 million vs. $23.1 million) due to lower interest expenses offsetting a slight decrease in operating income.
- Energy Services (NJRES): Net income more than doubled to $27.6 million from $10.9 million, fueled by higher realized margins on physical sales and unrealized gains on derivatives.
- Midstream Assets: Net income increased to $1.9 million from $0.5 million, largely due to the commercial operation of the Steckman Ridge storage facility.
- Cash Flow: Cash used in operating activities increased to $52.2 million (from $37.0 million) due to higher natural gas inventory costs at NJRES and a $37.4 million refund to NJNG customers.
Guidance, Outlook, and Risks
Management Commentary:
- Customer Growth: NJNG expects to add approximately 12,000 to 14,000 new customers in fiscal 2010 and 2011, though growth is currently slowed by weak economic conditions and a slower new construction market.
- Capital Expenditures: Total capital expenditures for fiscal 2010 are estimated at $106.6 million, including $44.2 million for the Accelerated Infrastructure Program (AIP).
- Regulatory: The New Jersey Board of Public Utilities (BPU) approved an extension of the Conservation Incentive Program (CIP) through September 30, 2013. NJNG also received approval for the AIP and Energy Efficiency (EE) Program.
Risks and Contingencies:
- Commodity Price Volatility: NJRES results are subject to significant volatility due to the timing differences between the settlement of financial derivatives and the physical sale of natural gas inventory.
- Auction Rate Securities (ARS): NJNG holds approximately $97 million in variable-rate debt backed by ARS. All auctions for these securities failed during the quarter, causing interest rates to default to maximum rates (175% of 30-day LIBOR or 10-12%). While current rates remain low, future liquidity issues could increase borrowing costs.
- Manufactured Gas Plant (MGP) Remediation: NJNG faces estimated future remediation costs ranging from $146.7 million to $244.3 million. While costs are expected to be recoverable through regulatory riders, there is no assurance of ultimate recovery.
- Credit Risk: The company maintains significant gross credit exposure ($242.1 million) to wholesale counterparties, though net exposure is mitigated by collateral and netting agreements.
Investor Verification Checklist
- Derivative Accounting Impact: Verify the reconciliation between GAAP Net Income and "Net Financial Earnings" to understand the extent of unrealized gains/losses driving the reported profit surge.
- ARS Liquidity Risk: Monitor the status of the $97 million in Auction Rate Securities held by NJNG and the potential for increased interest costs if LIBOR rises or liquidity does not improve.
- Regulatory Recovery: Confirm the BPU's continued approval of the Conservation Incentive Program (CIP) and the recovery of MGP remediation costs, as these are critical to NJNG's margin stability.
- Steckman Ridge Financing: Track the progress of non-recourse project financing for the Steckman Ridge storage facility, which could reduce NJR's $132.5 million funding obligation.
- Working Capital Seasonality: Assess the impact of seasonal gas inventory build-up on operating cash flows, which resulted in significant cash usage despite high net income.