SEC Filing Summary: New Jersey Resources Corp (10-Q)
Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: NJR is an energy services holding company operating through two primary subsidiaries: New Jersey Natural Gas Company (NJNG), a regulated utility providing retail natural gas service in New Jersey, and NJR Energy Services Company (NJRES), an unregulated wholesale energy marketer. The company also holds investments in energy infrastructure, including a 5.53% interest in Iroquois Gas Transmission System and a 50% interest in the Steckman Ridge natural gas storage facility.
Key Financial Metrics
Performance (Six Months Ended March 31, 2009 vs. 2008):
- Operating Revenues: $1,738.8 million (2009) vs. $1,988.7 million (2008); a decrease of 12.6%.
- Net Income: $47.3 million (2009) vs. $42.7 million (2008); an increase of 10.7%.
- Earnings Per Share (Diluted): $1.11 (2009) vs. $1.02 (2008).
- Operating Cash Flow: $345.9 million (2009) vs. $167.7 million (2008); a significant increase of 106%.
- Dividends Per Share: $0.62 (2009) vs. $0.55 (2008).
Balance Sheet Highlights (March 31, 2009):
- Total Assets: $2,416.6 million (down from $2,625.4 million at Sept 30, 2008).
- Long-Term Debt: $459.0 million.
- Short-Term Debt: $10.0 million (down significantly from $178.2 million).
- Cash and Temporary Investments: $83.3 million.
- Capitalization: Common stock equity represents 62% of total capitalization.
Material Changes vs. Prior Period
Revenue and Profit Drivers:
- Commodity Prices: The decline in natural gas commodity prices drove a 26.6% decrease in gas purchases for the quarter, contributing to higher net income despite lower revenues. Lower prices reduced unrealized and realized losses on derivative instruments compared to the prior year.
- Regulatory Changes: NJNG benefited from a base rate increase approved in October 2008, which improved utility gross margins. Depreciation expense decreased due to a rate reduction from 3.0% to 2.34% and amortization of previously recovered asset retirement obligations.
- Weather Impact: Colder weather in the first half of fiscal 2009 (9.9% colder than the prior year) increased firm sales volumes for NJNG, partially offsetting revenue declines from lower prices.
- Energy Services Segment: NJRES reported a net loss of $6.6 million for the six-month period, compared to a loss of $12.8 million in the prior year. While GAAP net loss improved, "Financial Margin" (a non-GAAP measure) decreased by $33.9 million due to the expiration of a favorable transportation contract and lower storage spreads.
Debt and Liquidity:
- NJR repaid $25 million in senior notes and NJNG repaid $30 million in mortgage bonds during the period.
- Short-term borrowings were reduced significantly as operating cash flows improved.
- Auction Rate Securities (ARS) auctions for NJNG's variable-rate debt continued to fail, resulting in interest rates resetting to maximums (approx. 0.9% weighted average), though this remains lower than the prior year's 4.6%.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook:
- Capital Expenditures: Estimated at $87.4 million for fiscal 2009, including $6 million for the Accelerated Infrastructure Program (AIP) approved by the BPU.
- Steckman Ridge: Construction continues on the natural gas storage facility. NJR has invested $107 million and is obligated to fund up to $132.5 million. Non-recourse financing is anticipated upon completion.
- Customer Growth: NJNG expects to add 12,000 to 14,000 new customers in fiscal 2009 and 2010.
Risks and Contingencies:
- Internal Control Material Weakness: The company disclosed a material weakness in internal controls related to the accounting of physical natural gas transactions (pricing errors). While remediation efforts are underway (hiring new controller, expanding training), the weakness was not fully remediated as of March 31, 2009, rendering disclosure controls ineffective.
- Market Risk: Significant exposure to natural gas price volatility. NJRES uses derivatives to hedge, but accounting rules (SFAS 133) cause volatility in reported earnings due to unrealized gains/losses.
- Regulatory Risk: Recovery of Manufactured Gas Plant (MGP) remediation costs ($120.2 million liability) is subject to BPU approval. Future regulatory decisions could impact the recoverability of these costs.
- Credit Risk: Gross credit exposure to counterparties totaled $197.5 million. Failure of counterparties to perform could result in material losses.
Key Facts for Investor Verification
- Internal Control Status: Verify the progress of remediation for the material weakness in internal controls over financial reporting regarding commodity transaction pricing.
- Derivative Accounting Impact: Assess the volatility in NJRES earnings caused by unrealized gains/losses on derivatives versus the underlying economic "Financial Margin."
- Auction Rate Securities (ARS): Monitor the liquidity of the ARS market for NJNG's $97 million variable-rate debt; continued auction failures could impact borrowing costs if LIBOR rises significantly.
- Steckman Ridge Financing: Confirm the ability of the Steckman Ridge project to secure non-recourse financing to reduce NJR's recourse obligation.
- MGP Remediation Recovery: Track BPU proceedings regarding the recovery of the $120.2 million MGP remediation liability.