Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
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 ~487,000 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 pipeline and storage infrastructure (e.g., Steckman Ridge) and commercial real estate.
Key Financial Metrics
| Metric ($ in thousands) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Operating Revenues | $2,592,460 | $3,816,210 |
| Net Income | $27,242 | $109,168 |
| Earnings Per Share (Diluted) | $0.64 | $2.59 |
| Operating Cash Flow | $267,241 | $132,368 |
| Total Assets | $2,321,030 | $2,635,297 |
| Long-Term Debt | $455,492 | $455,117 |
| Short-Term Debt | $143,400 | $178,200 |
| Common Stock Equity | $689,726 | $728,068 |
Note: The filing includes an immaterial restatement of prior year financials related to accounting errors in "park and loan" transactions, which reduced 2008 Net Income by $4.7 million.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenues decreased by approximately $1.2 billion (32%) compared to 2008. This was primarily driven by a $1.2 billion decrease in NJRES revenues due to lower average natural gas prices on the NYMEX and reduced transaction volumes.
- Profitability Drop: Net income fell 75% to $27.2 million. The decline was largely attributed to unrealized losses of $39.3 million and realized losses of $34.5 million (after tax) in the Energy Services segment resulting from the decline in natural gas commodity prices and the settlement of derivative hedges.
- Segment Performance:
- Natural Gas Distribution: Net income increased 54% to $65.4 million, driven by a $32.5 million base rate increase approved by the BPU and lower depreciation expenses.
- Energy Services: Reported a net loss of $32.6 million, compared to net income of $67.2 million in 2008.
- Cash Flow Improvement: Operating cash flow increased significantly to $267.2 million (up from $132.4 million) due to lower natural gas inventory costs and reduced receivable balances at NJRES, despite the drop in net income.
Guidance, Outlook, and Risks
- Customer Growth: NJNG expects to add 12,000 to 14,000 new customers over the next two years (fiscal 2010-2011), with approximately 50% expected to be conversions from other fuels. This growth is projected to increase utility gross margin by approximately $3.4 million annually.
- Regulatory Outlook: The Conservation Incentive Program (CIP) remains in effect for an additional year pending a final BPU order. NJNG has filed for rate adjustments to reflect lower wholesale gas costs, resulting in provisional rate decreases for customers.
- Capital Projects: NJNG is proceeding with the Accelerated Infrastructure Program (AIP), investing approximately $44.2 million in fiscal 2010. The Steckman Ridge storage facility is partially operational, with NJR having invested $122.5 million to date against a total obligation of $132.5 million.
- Key Risks:
- Commodity Price Volatility: Continued fluctuations in natural gas prices significantly impact NJRES earnings and unrealized derivative values.
- Credit Market Access: The company relies on credit facilities for liquidity; continued tightening in credit markets could increase borrowing costs or limit access.
- Auction Rate Securities (ARS): NJNG holds ~$97 million in ARS. All auctions have failed, causing interest rates to reset to maximum levels (though currently low due to low LIBOR). Future failures could materially increase borrowing costs if LIBOR rises.
- Environmental Liabilities: Estimated future expenditures for Manufactured Gas Plant (MGP) remediation range from $146.7 million to $244.3 million. A liability of $146.7 million has been accrued.
Investor Verification Checklist
- Derivative Accounting: Verify the reconciliation between GAAP Net Income and "Net Financial Earnings" (a non-GAAP measure) to understand the impact of unrealized gains/losses on reported volatility.
- ARS Exposure: Monitor the status of the $97 million in Auction Rate Securities and the company's progress in refinancing these obligations to avoid potential interest rate spikes.
- MGP Remediation Costs: Track the actual costs incurred for the five Manufactured Gas Plant sites against the $146.7 million accrued liability and the regulatory approval for cost recovery.
- Steckman Ridge Financing: Confirm whether the Steckman Ridge project secures non-recourse financing as planned, which would reduce NJR's recourse obligation.
- Restatement Impact: Review the specific adjustments made to the 2008 and 2007 financial statements regarding "park and loan" transactions to ensure full understanding of the accounting correction.