Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 30, 2008
Business Overview: NJR is an energy services holding company operating through two primary reportable segments: Natural Gas Distribution (via subsidiary New Jersey Natural Gas, NJNG), a regulated utility serving ~484,000 customers in New Jersey; and Energy Services (via subsidiary NJR Energy Services, NJRES), an unregulated wholesale energy marketer. The company also maintains Retail and Other operations, including investments in mid-stream assets (Steckman Ridge storage facility, Iroquois pipeline), HVAC services, and commercial real estate.
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Operating Revenues | $3,816,210 | $3,021,765 |
| Operating Income | $201,450 | $127,250 |
| Net Income | $113,910 | $65,281 |
| Earnings Per Share (Diluted) | $2.70 | $1.55 |
| Total Assets | $2,625,392 | $2,230,745 |
| Long-Term Debt | $455,117 | $383,184 |
| Short-Term Debt | $178,200 | $256,479 |
| Cash Flow from Operating Activities | $132,368 | $122,406 |
| Dividends Declared Per Share | $1.11 | $1.01 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 26.3% to $3.82 billion, driven primarily by a 36% increase in NJRES transaction volumes and a 21% increase in average natural gas prices. NJNG revenues rose 7.3% due to off-system sales and customer growth, partially offset by reduced usage.
- Profitability Surge: Net income increased 74.5% to $113.9 million. This was largely driven by the Energy Services segment, which reported net income of $71.9 million (up from $21.3 million), benefiting from favorable market spreads and unrealized gains on derivative instruments.
- Regulatory Milestone: The New Jersey Board of Public Utilities (BPU) approved a $32.5 million base rate increase for NJNG effective October 3, 2008, along with an extension of the Conservation Incentive Program (CIP) through 2011.
- Stock Split: A 3-for-2 stock split was executed in March 2008, increasing outstanding shares from ~28 million to ~42 million. All prior period per-share data has been retroactively adjusted.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Customer Growth: NJNG expects to add 14,000 to 16,000 new customers over the next two years, with approximately 50% coming from fuel conversions.
- Capital Expenditures: Projected capital expenditures for NJNG are estimated at $77.3 million for fiscal 2009 and $70.9 million for fiscal 2010, focused on customer growth and pipeline safety.
- Steckman Ridge: The company is developing a 17.7 Bcf natural gas storage facility in Pennsylvania, with service expected in summer 2009. NJR has invested $78.7 million and is obligated to fund up to $132.5 million.
Risks and Contingencies
- Internal Control Material Weakness: Management and auditors identified a material weakness in internal controls over financial reporting. An immaterial error occurred in the recording of fair values for certain physical natural gas transactions in Q2 and Q3 2008. While corrected in Q4, the weakness resulted in an adverse opinion on internal controls.
- Auction Rate Securities (ARS): NJNG holds ~$97 million in ARS. Due to market failures, these securities are currently paying maximum interest rates (10-12%), increasing borrowing costs. There is no assurance of liquidity to refinance these at lower rates.
- Environmental Liabilities: NJNG is responsible for remediating three Manufactured Gas Plant (MGP) sites. Future expenditures are estimated between $120.7 million and $177.2 million. A liability of $120.7 million has been accrued.
- Market Volatility: NJRES earnings are highly sensitive to natural gas price volatility and the fair value of derivative instruments. A significant portion of 2008 net income included unrealized gains/losses on derivatives.
Investor Verification Checklist
- Internal Control Remediation: Verify the progress of the remediation plan for the material weakness in derivative accounting controls to ensure future financial statement reliability.
- ARS Liquidity: Monitor the status of the $97 million in Auction Rate Securities and the company's ability to refinance or manage the elevated interest rates.
- Derivative Exposure: Review the composition of NJRES's derivative portfolio and the sensitivity of earnings to future natural gas price movements, given the volatility in reported net income.
- MGP Cost Recovery: Confirm the BPU's continued approval of the Remediation Adjustment Clause (RAC) to ensure the $120.7 million accrued liability can be recovered from customers.
- Steckman Ridge Financing: Track the progress of securing non-recourse project financing for the Steckman Ridge storage facility to mitigate NJR's recourse obligation.