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 (Unaudited)
Period Ended: March 31, 2010
Business Overview: NJR is an energy services holding company operating primarily through two subsidiaries: New Jersey Natural Gas (NJNG), a regulated utility serving central and northern New Jersey, and NJR Energy Services (NJRES), an unregulated wholesale energy marketer. Effective October 1, 2009, the company established a new "Midstream Assets" segment to report investments in natural gas transportation (Iroquois) and storage (Steckman Ridge) facilities.
Key Financial Metrics (Six Months Ended March 31, 2010)
| Metric | 2010 (6 Months) | 2009 (6 Months) |
|---|---|---|
| Total Operating Revenues | $1,527.9 million | $1,738.8 million |
| Net Income | $126.1 million | $60.3 million |
| Earnings Per Share (Diluted) | $3.02 | $1.41 |
| Operating Cash Flow | $245.0 million | $345.9 million |
| Long-Term Debt | $436.5 million | $455.5 million |
| Short-Term Debt | $98.7 million | $143.4 million |
| Cash and Temporary Investments | $156.1 million | $83.3 million |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 109% year-over-year to $126.1 million. This was primarily driven by favorable unrealized and realized gains on derivative instruments at NJRES due to declining natural gas prices and effective hedging strategies.
- Revenue Decline: Total operating revenues decreased 12.1% to $1.53 billion. This was caused by lower average natural gas prices (NYMEX averaged $4.46 in 2010 vs. $6.27 in 2009) and reduced customer usage due to warmer weather and conservation efforts.
- Segment Performance:
- NJNG (Utility): Net income remained relatively flat ($64.0M vs $64.7M). Revenues declined due to lower Basic Gas Supply Service (BGSS) rates and customer refunds totaling $72.7 million.
- NJRES (Energy Services): Net income surged to $63.1 million from $6.3 million, driven by a $91.2 million increase in gross margin from derivative gains.
- Midstream Assets: Net income increased to $3.4 million, largely due to earnings from the Steckman Ridge storage facility which became commercially operational in late 2009.
- Cash Flow: Operating cash flow decreased by $100.9 million compared to the prior year, primarily due to higher natural gas inventory costs at NJRES and changes in working capital related to gas cost recovery and margin requirements.
Guidance, Outlook, and Risks
- Regulatory Developments: The New Jersey Board of Public Utilities (BPU) approved an extension of the Conservation Incentive Program (CIP) through September 2013. NJNG also received approval for an Accelerated Infrastructure Program (AIP) to expedite $70.8 million in infrastructure projects.
- Capital Expenditures: Estimated at $106.6 million for fiscal 2010, including $44.2 million for AIP projects. Fiscal 2011 is estimated at $79.0 million.
- Key Risks:
- Commodity Price Volatility: Significant exposure to natural gas price fluctuations, managed through derivatives which create earnings volatility due to mark-to-market accounting.
- Auction Rate Securities (ARS): NJNG holds approximately $97 million in variable-rate debt backed by ARS. Continued failure of ARS auctions forces these bonds to bear interest at maximum rates (10-12%), though current LIBOR rates keep the effective cost low (0.43%).
- Environmental Liabilities: NJNG faces remediation costs for five Manufactured Gas Plant (MGP) sites, with estimated future expenditures ranging from $146.7 million to $244.3 million. A liability of $146.7 million is currently recorded.
- Legislative Impact: The Patient Protection and Affordable Care Act enacted in March 2010 will reduce tax deductions for retiree drug subsidies starting in fiscal 2014, resulting in a one-time non-cash charge of $2.6 million.
Investor Verification Checklist
- Derivative Valuation: Verify the sustainability of NJRES earnings, which are heavily influenced by unrealized gains on derivatives that may reverse in future periods.
- ARS Liquidity: Monitor the status of Auction Rate Securities auctions; a prolonged failure combined with rising LIBOR rates could significantly increase NJNG's borrowing costs.
- MGP Remediation: Track the BPU's approval of cost recovery for Manufactured Gas Plant remediation, as failure to recover these costs would materially impact earnings.
- Weather Normalization: Assess the impact of the CIP mechanism on NJNG's utility gross margin, particularly regarding weather variances and customer usage benchmarks.
- Steckman Ridge Financing: Confirm whether the Steckman Ridge storage facility secures non-recourse project financing to reduce NJR's $132.5 million recourse obligation.