NJR

Business Context and Reporting Period

New Jersey Resources Corporation (NJR) is an energy services holding company operating through two primary subsidiaries: New Jersey Natural Gas (NJNG), a regulated utility, and NJR Energy Services (NJRES), an unregulated wholesale energy provider. This Form 10-Q covers the quarterly period ended June 30, 2007, and the nine-month period ended on the same date. The company operates in three segments: Natural Gas Distribution, Energy Services, and Retail and Other.

Key Financial Metrics

Note: Operating margins are heavily influenced by the pass-through nature of gas purchase costs. Utility Gross Margin for NJNG was $40.0 million for the quarter and $197.5 million for the nine months.

Material Changes vs. Prior Period

• Quarterly Results: Net loss increased to $5.0 million from $4.0 million in the prior year quarter. This was primarily driven by lower gross margins at NJRES due to fewer arbitrage opportunities in the wholesale market, partially offset by increased utility gross margin at NJNG due to customer growth and the Customer Incentive Program (CIP).
• Nine-Month Results: Net income increased 14.6% to $103.7 million from $90.5 million. This improvement was driven by higher gross margins at NJRES (due to strategic storage withdrawals and favorable pricing) and increased earnings at NJNG (due to the CIP and customer growth), despite a 12.1% decrease in total operating revenues.
• Revenue Drivers: The nine-month revenue decline was largely due to refunds issued to NJNG customers ($51.5 million in Dec 2006 and $20 million in Mar 2007) resulting from lower wholesale gas costs, as well as reduced off-system sales volumes.
• Segment Performance:
  • Natural Gas Distribution: Net income rose to $55.7 million (9 months) due to the CIP mitigating weather/usage impacts and customer growth.
  • Energy Services: Net income rose to $46.1 million (9 months) driven by favorable market pricing and storage optimization.

Guidance, Outlook, and Risks

• Regulatory Outlook: NJNG expects to petition the New Jersey Board of Public Utilities (BPU) for a base rate increase during fiscal 2008 to cover rising operating and capital costs. However, due to regulatory lag, rate modifications are unlikely to be effective in fiscal 2008.
• Capital Projects: NJR invested $52.5 million in the Steckman Ridge natural gas storage facility partnership in Q2 2007. Total capital expenditures for NJNG are estimated at $33.4 million for the remainder of fiscal 2007.
• Key Risks:
  • Market Volatility: NJRES results are sensitive to natural gas price spreads and weather conditions. Moderate weather in Q2 2007 narrowed pricing spreads, reducing margins.
  • Regulatory Recovery: Significant costs related to Manufactured Gas Plant (MGP) remediation (estimated future liability of $105.4 million) are deferred as regulatory assets pending BPU approval for recovery.
  • Legal Proceedings: Ongoing litigation regarding MGP sites and insurance recoveries (Kemper Insurance settlement of $12.8 million received in Jan 2007) remains a contingency.

Investor Verification Checklist

• Regulatory Asset Recovery: Verify the status of BPU approval for the recovery of $87.1 million in net MGP remediation costs and the $105.4 million future liability.
• Rate Case Timing: Monitor the filing and approval timeline for NJNG's proposed base rate increase, as delays could impact future earnings.
• Wholesale Margin Sustainability: Assess the sustainability of NJRES margins given the volatility of natural gas spreads and the impact of weather on trading opportunities.
• Steckman Ridge Financing: Confirm the project's ability to secure non-recourse financing for the remaining $72.5 million of development costs.
• Working Capital Seasonality: Review the impact of seasonal gas inventory build-up on short-term debt levels and interest expense.