NJR

Business Context and Reporting Period

Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2005
Business Overview: NJR is an energy services holding company. Its primary subsidiary, New Jersey Natural Gas (NJNG), is a regulated utility providing retail natural gas service in central and northern New Jersey. Unregulated subsidiaries include NJR Energy Services (NJRES), which provides wholesale energy services, and the Retail and Other segment, which includes appliance services and real estate development.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 36% to $1.16 billion, driven primarily by higher wholesale natural gas commodity prices.
• Profitability: Net income rose 13.5% to $34.3 million. Diluted EPS increased 16% to $1.23.
• Segment Performance:
  • Energy Services (NJRES): Net income surged 127% to $14.9 million, attributed to increased market volatility and pricing differentials following Hurricanes Katrina and Rita.
  • Natural Gas Distribution (NJNG): Net income increased 4.8% to $18.7 million, aided by incentive programs despite lower usage per degree day.
  • Retail and Other: Net income dropped significantly to $0.7 million from $5.8 million, largely due to the absence of a $10.1 million pre-tax gain on the sale of a commercial office building recorded in the prior year.
• Cash Flow: Operating cash flow turned negative at ($168.3) million, compared to ($22.5) million in the prior year. This was caused by a $207.6 million increase in working capital requirements (higher receivables and gas in storage) due to elevated commodity costs.

Guidance, Outlook, and Risks

• Regulatory Actions: NJNG filed a Conservation and Usage Adjustment (CUA) proposal to decouple customer usage from gross margin. A 23.2% provisional price increase for Basic Gas Supply Service (BGSS) became effective in December 2005 due to higher wholesale costs.
• Capital Expenditures: NJNG estimates capital expenditures of $54 million for the remainder of fiscal 2006 and $64 million for fiscal 2007, focused on customer growth and pipeline safety.
• Environmental Liabilities: NJNG has identified 11 former Manufactured Gas Plant (MGP) sites. Future remediation expenditures are estimated between $93.9 million and $162.3 million. A liability of $93.9 million is currently accrued, with a corresponding regulatory asset.
• Legal Proceedings:
  • Long Branch MGP Litigation: A confidential settlement was reached in October 2005 and approved in December 2005. Management believes costs are recoverable via insurance or the remediation rider.
  • Kemper Insurance Litigation: NJR sued Kemper Insurance for fraud regarding coverage policies. The court denied a request to deposit policy limits, finding Kemper currently able to pay.
• Market Risk: The company utilizes futures, options, and swaps to hedge natural gas price volatility. The Value-at-Risk (VAR) for net positions was $1.3 million (95% confidence, 1-day) as of December 31, 2005.

Investor Verification Checklist

• Working Capital Sensitivity: Verify the impact of continued high natural gas commodity prices on the company's negative operating cash flow and short-term debt levels ($348.2 million).
• Regulatory Recovery: Confirm the New Jersey Board of Public Utilities (BPU) approval of the CUA proposal and the finalization of the BGSS price increase to ensure cost recovery mechanisms remain intact.
• MGP Remediation Costs: Monitor the actual remediation expenditures against the $93.9 million accrued liability and the status of insurance recoveries from Kemper and other carriers.
• Energy Services Volatility: Assess the sustainability of NJRES's earnings growth, which was heavily influenced by temporary market volatility following hurricanes.
• Debt Maturities: Review the schedule of contractual cash obligations, particularly the $348.2 million in short-term debt due within one year.