NJR

New Jersey Resources Corporation (NJR) - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended December 31, 2007. 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 (appliance services, real estate, and energy investments). The financial statements for the prior year period (ended Dec 31, 2006) have been restated due to a change in accounting for derivative instruments.

Key Financial Metrics

Note: Operating cash flow turned negative primarily due to seasonal working capital requirements (increased receivables and inventory) associated with colder weather.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 10.0% ($73.7 million), driven by a 13.4% colder weather period increasing NJNG firm sales and higher volumes/prices at NJRES.
• Segment Performance:
  • Natural Gas Distribution: Net income decreased 16.3% to $16.7 million due to lower incentive program margins and higher O&M expenses, despite higher firm sales.
  • Energy Services: Net income increased 14.1% to $13.2 million. GAAP earnings were impacted by a $10.1 million derivative loss (vs. $6.8 million gain prior year), but non-GAAP "Financial Margin" increased significantly to $35.8 million due to better capacity utilization.
  • Retail and Other: Turned profitable with $0.4 million net income, up from a $2.0 million loss, largely due to reduced unrealized derivative losses.
• Accounting Changes: Effective Oct 1, 2007, NJRES ceased using the "normal purchase normal sale" exception for new physical commodity contracts, recording them at fair value. This increased volatility in reported earnings.

Guidance, Outlook, and Risks

• Regulatory Filings: NJNG filed a base rate case on Nov 20, 2007, seeking a $58.4 million increase. Management does not expect rate changes to be effective in fiscal 2008 due to regulatory lag.
• Capital Projects: NJR is developing the Steckman Ridge natural gas storage facility (50% interest). Total project cost is estimated at $250 million; NJR has invested $58 million as of Dec 31, 2007, with a maximum obligation of $125 million.
• Dividends and Buybacks: Dividends per share increased to $0.40. The company has a 4.5 million share repurchase plan, with 960,747 shares remaining available as of Dec 31, 2007. A 3-for-2 stock split was announced for March 2008.
• Risks: Key risks include volatility in natural gas commodity prices, credit risk from wholesale counterparties, regulatory outcomes (specifically the base rate case and MGP remediation recovery), and the ability to secure non-recourse financing for Steckman Ridge.
• Internal Controls: The company identified a material weakness regarding the accounting of derivative instruments (SFAS 133) and is implementing remediation steps, including enhanced training and review processes.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the reconciliation between GAAP Net Income and non-GAAP "Financial Margin" for the Energy Services segment to understand true operational performance vs. accounting volatility.
• Working Capital Seasonality: Confirm that the negative operating cash flow is strictly seasonal and driven by receivables/inventory build-up for winter heating, rather than operational distress.
• Regulatory Rate Case: Monitor the status of the $58.4 million base rate increase filing with the New Jersey Board of Public Utilities (BPU).
• Steckman Ridge Financing: Assess the progress of securing non-recourse project financing to limit NJR's equity exposure to the $125 million cap.
• Stock Split Adjustment: Ensure financial models account for the 3-for-2 stock split effective March 3, 2008, which will adjust share count and EPS.