Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 1998
Business Overview: NJR operates primarily through its regulated utility subsidiary, New Jersey Natural Gas Company (NJNG), and unregulated subsidiaries including NJR Energy Holdings (fuel marketing and capacity management) and NJR Development (real estate). The company is subject to seasonal weather fluctuations and ongoing energy deregulation in New Jersey.
Key Financial Metrics
| Metric (in thousands, except per share) | Q4 1998 | Q4 1997 |
|---|---|---|
| Operating Revenues | $244,590 | $220,395 |
| Operating Income | $19,971 | $18,762 |
| Net Income | $15,152 | $14,216 |
| Earnings Per Share (Basic) | $0.85 | $0.80 |
| Earnings Per Share (Diluted) | $0.84 | $0.79 |
| Net Cash from Operating Activities | $2,931 | $(16,277) |
| Net Cash from Financing Activities | $13,984 | $13,892 |
| Net Cash Used in Investing Activities | $(12,113) | $4,952 |
| Total Assets | $1,008,804 | $939,701 |
| Long-Term Debt | $333,541 | $284,407 |
| Short-Term Debt | $93,000 | $77,340 |
| Cash and Temporary Investments | $7,278 | $8,034 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 11% to $244.6 million, driven by customer growth and improved unregulated operating results.
- Profitability: Net income rose 7% to $15.2 million. Basic EPS increased 6% to $0.85.
- Operating Income: NJNG operating income before taxes decreased slightly (1%) to $24.8 million due to higher operation and maintenance costs, partially offset by customer growth.
- Cash Flow: Net cash from operating activities improved significantly to a positive $2.9 million from a negative $16.3 million in the prior year, largely due to changes in working capital (specifically receivables and purchased gas).
- Debt Structure: Long-term debt increased by approximately $49 million. The company redeemed $20 million of preferred stock in October 1998, reducing preferred dividends and boosting net income.
- Weather Impact: Weather was 11% warmer than normal, reducing firm sales volume by 13%. However, the Weather Normalization Clause (WNC) accrued $3.8 million in gross margin for future recovery.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Deregulation: The "Electric Discount and Energy Restructuring Act" signed in February 1999 allows customers to choose natural gas suppliers by December 31, 1999. NJNG expects to retain its role as a transporter and supplier until at least 2002.
- Capital Expenditures: Remaining fiscal 1999 construction expenditures for NJNG are estimated at $43 million, funded by internal generation and debt issuance to maintain a 50% common equity ratio.
- Year 2000 Compliance: The company is on track to be Year 2000 ready. Capitalized costs through December 1998 were $18 million, with an additional $6.2 million expected in 1999. Management does not expect material adverse financial impact.
Risks and Contingencies
- Legal Proceedings:
- Gas Remediation: NJNG is involved in proceedings regarding 11 former manufactured gas plant (MGP) sites. Costs are being recovered via a BPU-approved rider, but litigation against insurance carriers and former owners continues.
- South Brunswick Asphalt: Named as a defendant regarding alleged environmental contamination; management does not expect a material adverse effect.
- Combe Fill South Landfill: Named as a third-party defendant in Superfund actions; liability extent is currently unpredictable.
- BPU Inquiry: An informal review of gas purchases from 1989-1995 is ongoing; management does not anticipate a material adverse outcome.
- Market Risk: The company uses futures, options, and swaps to hedge natural gas price fluctuations. As of December 31, 1998, there were deferred unrealized losses of approximately $1.8 million (NJNG) and $2.7 million (Energy Services) on futures contracts.
- Interest Rate Risk: NJNG has $97 million in variable rate debt. Sensitivity analysis indicates a 100 basis point rate increase would change net interest expense by approximately $242,000 to $301,000 depending on the specific debt tranche.
Investor Verification Checklist
- Weather Normalization: Verify the timing and mechanism for the recovery of the $3.8 million WNC accrual resulting from the warm winter.
- Debt Maturity Profile: Review the specific maturity dates of the increased long-term debt ($333.5 million) and short-term debt ($93 million) to assess refinancing risks.
- Year 2000 Costs: Monitor the $6.2 million projected spend for 1999 to ensure it remains within budget and does not impact liquidity.
- Regulatory Outcomes: Track the resolution of the BPU inquiry regarding historical gas purchases and the status of the MGP remediation litigation.
- Deregulation Impact: Assess the rate of customer migration to alternative suppliers following the December 1999 deregulation deadline and its effect on NJNG's gross margin.