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 March 31, 2007, and the six-month period ended March 31, 2007. The company is a large accelerated filer with 27,993,844 shares of common stock outstanding as of May 1, 2007.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2007 | Six Months Ended Mar 31, 2007 |
|---|---|---|
| Operating Revenues | $1,024.6 million | $1,766.1 million |
| Net Income | $80.5 million | $108.7 million |
| Diluted EPS | $2.87 | $3.89 |
| Operating Cash Flow | N/A | $241.6 million |
| Long-Term Debt | $335.5 million | $335.5 million |
| Short-Term Debt | $127.0 million | $127.0 million |
| Total Assets | $2,228.0 million | $2,228.0 million |
Segment Performance (Six Months Ended Mar 31, 2007):
- Natural Gas Distribution: Net Income of $53.1 million (49% of total).
- Energy Services: Net Income of $55.0 million (50% of total).
- Retail and Other: Net Income of $0.5 million (1% of total).
Material Changes vs. Prior Period
Revenue and Profit: Net income for the quarter increased 33.8% to $80.5 million from $60.2 million in the prior year quarter. For the six-month period, net income rose 15% to $108.7 million from $94.5 million. Operating revenues decreased 3.7% for the quarter and 20.8% for the six-month period compared to the prior year.
Drivers of Change:
- Energy Services (NJRES): Significant earnings growth was driven by strategic natural gas storage withdrawals that captured favorable market pricing due to colder weather in delivery areas. Gross margin increased $34.3 million for the quarter.
- Natural Gas Distribution (NJNG): Revenues were reduced by approximately $71.5 million in bill credits/refunds to residential and small commercial customers due to lower wholesale gas costs. However, the implementation of the Conservation Incentive Program (CIP) helped stabilize utility gross margins despite warmer weather and lower usage.
- Expenses: Gas purchases decreased significantly (9.9% for the quarter, 25.9% for six months) reflecting lower commodity prices and customer refunds. Interest charges increased due to higher short-term borrowings and rates.
Guidance, Outlook, and Risks
Management Commentary: Management notes that results for the interim periods are not indicative of full-year results due to the seasonal nature of utility operations. NJNG expects customer growth of approximately 2.0% annually. The company is evaluating a potential rate review with the Board of Public Utilities (BPU) by October 1, 2008, to maintain its return on equity target.
Capital Projects: NJR invested $52.5 million in the Steckman Ridge natural gas storage facility partnership in the first half of fiscal 2007, with a total commitment of up to $125 million. Operational start-up is expected in fiscal 2009.
Risks and Contingencies:
- Regulatory Risk: Recovery of Manufactured Gas Plant (MGP) remediation costs and other regulatory assets is subject to BPU approval. A $105.4 million liability for future MGP expenditures is recorded, with recovery sought through the Remediation Adjustment Clause (RAC).
- Legal Proceedings: NJNG settled litigation with Kemper Insurance Company for $12.8 million regarding MGP site claims. Mass Tort Litigation related to the Long Branch site was settled in December 2005, with indemnification obligations assumed by NJNG.
- Market Risk: The company faces volatility in natural gas commodity prices and wholesale credit risk. Value-at-Risk (VaR) for the trading portfolio was $2.4 million (1-day, 95% confidence) as of March 31, 2007.
Investor Verification Checklist
- Regulatory Asset Recovery: Verify the status of BPU approvals for the recovery of $82.2 million in net MGP remediation costs and the $105.4 million future liability.
- Customer Refunds: Confirm the impact of the $71.5 million in customer bill credits on future revenue recognition and cash flow.
- Steckman Ridge Investment: Monitor the $52.5 million equity investment and the remaining $72.5 million funding obligation for the new storage facility.
- Interest Rate Exposure: Review the impact of rising short-term interest rates on NJNG's working capital financing, given the $127 million in short-term debt.
- Conservation Incentive Program (CIP): Assess the long-term impact of the CIP on utility gross margins and the potential reduction in return on equity if a rate review is not filed by October 2008.