Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: NJR is an energy services holding company operating through three primary segments: Natural Gas Distribution (regulated utility NJNG), Energy Services (unregulated wholesale NJRES), and Retail and Other (investments and services). The company serves customers in New Jersey and wholesale markets across the Northeast, Mid-Continent, and Gulf Coast regions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Nine Months Ended June 30, 2008 |
|---|---|---|
| Operating Revenues | $1,000.4 million | $2,989.1 million |
| Net (Loss) Income | $(7.6) million | $35.1 million |
| Earnings Per Share (Basic) | $(0.18) | $0.84 |
| Operating Cash Flow | N/A | $144.3 million |
| Long-Term Debt | $481.6 million | $481.6 million |
| Short-Term Debt | $109.9 million | $109.9 million |
| Total Assets | $2,668.0 million | $2,668.0 million |
| Common Stock Equity | $657.7 million | $657.7 million |
Note: Prior period data for 2007 has been restated to correct accounting for derivative instruments.
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $7.6 million for the quarter ended June 30, 2008, compared to net income of $25.4 million in the same period of 2007. For the nine-month period, net income decreased 44% to $35.1 million from $62.8 million.
- Revenue Growth: Operating revenues increased 51.1% for the quarter and 23.1% for the nine months, driven primarily by higher transaction volumes and wholesale natural gas prices in the Energy Services segment.
- Gas Purchase Costs: Gas purchases increased 70.4% for the quarter and 28.4% for the nine months, reflecting higher commodity costs and the impact of unrealized losses on derivative instruments.
- Segment Performance:
- Natural Gas Distribution: Operating income remained relatively flat ($7.6 million) for the quarter, though net income dropped significantly due to regulatory charges.
- Energy Services: Reported an operating loss of $26.0 million for the quarter (vs. $40.2 million income in 2007) due to unrealized losses on financial derivatives caused by rising natural gas prices.
- Retail and Other: Net income increased to $7.8 million for the quarter, driven by unrealized gains on derivative hedges in the NJR Energy subsidiary.
Guidance, Outlook, and Risks
- Regulatory Settlement: NJNG signed a stipulation on July 30, 2008, regarding its base rate case. Pending BPU approval, this will result in a revenue increase of approximately $32.5 million and an allowed return on equity of 10.3%, effective October 1, 2008. This settlement resulted in a one-time after-tax charge of $1.5 million in the current quarter.
- Derivative Accounting Volatility: Management highlights that GAAP results are significantly impacted by unrealized gains and losses on derivative instruments used to hedge natural gas inventory. The company utilizes non-GAAP measures ("financial margin" and "net financial earnings") to assess operational performance without this volatility.
- Interest Rate Risk: NJNG holds approximately $97.0 million in variable-rate debt backed by Auction Rate Securities (ARS). Due to failed auctions, these bonds are currently bearing interest at maximum rates (10-12%), increasing borrowing costs.
- Capital Projects: The company is developing the Steckman Ridge natural gas storage facility. Total project costs were revised to $265 million, with NJR obligated to fund up to $132.5 million. Construction is expected to complete in Q1 fiscal 2010.
- Internal Controls: The company disclosed a material weakness in internal controls related to the accounting of derivative instruments, which led to the restatement of prior period financials. Remediation efforts are ongoing.
Investor Verification Checklist
- Derivative Exposure: Verify the extent of unrealized losses in the Energy Services segment and the company's ability to manage margin requirements given the net short position in natural gas futures.
- Regulatory Approval: Confirm the final approval of the NJNG base rate case stipulation by the New Jersey Board of Public Utilities (BPU) to ensure the projected $32.5 million revenue increase is realized.
- Auction Rate Securities: Assess the liquidity risk and potential long-term interest cost impact of the $97 million in NJNG variable-rate debt tied to failed ARS auctions.
- Steckman Ridge Financing: Monitor the progress of securing non-recourse project financing for the Steckman Ridge storage facility to mitigate NJR's $132.5 million recourse obligation.
- Restatement Impact: Review the specific adjustments made to the 2007 financial statements regarding derivative accounting to ensure full understanding of the material weakness remediation.