Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2004
Business Overview: NJR is an energy services holding company. Its primary regulated subsidiary, New Jersey Natural Gas (NJNG), provides 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 commercial real estate.
Key Financial Metrics
| Metric | Q4 2004 | Q4 2003 |
|---|---|---|
| Operating Revenues | $853,988,000 | $643,046,000 |
| Operating Income | $53,628,000 | $42,247,000 |
| Net Income | $30,202,000 | $24,378,000 |
| Earnings Per Share (Basic) | $1.09 | $0.89 |
| Earnings Per Share (Diluted) | $1.06 | $0.87 |
| Cash Flow from Operating Activities | ($22,470,000) | ($80,914,000) |
| Cash Flow from Investing Activities | $21,496,000 | ($25,086,000) |
| Cash Flow from Financing Activities | $6,377,000 | $109,277,000 |
| Total Assets | $2,076,657,000 | $1,832,330,000 |
| Long-Term Debt | $319,871,000 | $233,094,000 |
| Short-Term Debt | $290,000,000 | $299,100,000 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 33% to $854.0 million, driven primarily by higher wholesale natural gas commodity prices affecting both the Natural Gas Distribution and Energy Services segments.
- Profitability: Net income increased 24% to $30.2 million. Basic EPS rose 22% to $1.09.
- Unusual Items: Reported earnings included a $10.1 million gain on the sale of a commercial office building (Retail and Other segment) and a $1.5 million charge for an early retirement program for officers. Adjusted basic EPS was $0.93.
- Segment Performance:
- Natural Gas Distribution: Operating income decreased 3.9% to $31.8 million due to lower customer usage and the early retirement charge, despite higher revenues.
- Energy Services: Operating income increased 32% to $12.2 million, driven by favorable hedging opportunities in volatile markets.
- Retail and Other: Net income surged to $5.8 million from $40,000, primarily due to the office building sale.
- Cash Flow: Operating cash outflow improved significantly (from $80.9M to $22.5M) due to higher net income and reduced broker margin requirements. Investing cash flow turned positive ($21.5M) due to proceeds from the office building sale.
Guidance, Outlook, and Risks
- Customer Growth: NJNG expects to add approximately 10,800 new customers and convert 950 existing customers in fiscal 2005, representing a 2.4% annual growth rate.
- Capital Expenditures: Remaining fiscal 2005 capital expenditures for NJNG are estimated at $48.6 million. NJRES and Retail and Other do not anticipate significant capital expenditures in 2005.
- Regulatory Environment: NJNG operates under a Basic Gas Supply Service (BGSS) agreement. A 5% self-implementing price increase took effect December 1, 2004, to recover higher wholesale costs. The company is subject to BPU audits and rate reviews.
- Environmental Liabilities: NJNG has identified 11 former Manufactured Gas Plant (MGP) sites. As of December 31, 2004, a liability of $92.9 million was recorded for future remediation costs, with a corresponding regulatory asset. Actual costs may vary based on technology and regulations.
- Legal Proceedings:
- Long Branch MGP Litigation: 303 active mass tort cases alleging personal injury and property damage. NJNG believes it is not liable for most claims and expects recovery through insurance or the remediation rider, though punitive damages may not be recoverable.
- Stagecoach Marketing Dispute: Ongoing litigation with eCORP Marketing regarding a storage marketing agreement. The agreement remains in place, but resolution is uncertain.
- Kemper Insurance: NJNG is suing its insurer, Kemper, for coverage of Long Branch claims. Kemper is in runoff, creating uncertainty regarding its ability to meet obligations.
- Market Risk: The company uses futures, options, and swaps to hedge natural gas price volatility. Value-at-Risk (VAR) for commodity derivatives was $548,000 (95% confidence, 1-day) as of December 31, 2004.
Investor Verification Checklist
- Adjusted Earnings: Verify the impact of the $10.1 million office building sale on the Retail and Other segment's profitability to assess core operational performance.
- MGP Remediation Costs: Monitor the $92.9 million accrued liability for MGP sites and the status of insurance recoveries, particularly regarding the Kemper Insurance litigation.
- Regulatory Recovery: Confirm the New Jersey Board of Public Utilities (BPU) approval of the remediation rider and BGSS price adjustments to ensure cost recovery assumptions hold.
- Stagecoach Agreement: Track the resolution of the dispute with eCORP Marketing, as the agreement involves significant future purchase obligations ($22 million annually).
- Working Capital: Review the seasonal nature of cash flows, specifically the reliance on short-term debt and commercial paper to fund natural gas purchases during peak winter months.