Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: NJR operates primarily through its regulated subsidiary, New Jersey Natural Gas Company (NJNG), providing natural gas distribution in central and northern New Jersey. It also operates unregulated segments including Energy Services (wholesale marketing) and Retail and Other (home services, real estate, and investments).
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Mar 31, 2003 | Six Months Ended Mar 31, 2003 |
|---|---|---|
| Operating Revenues | $1,152,101 | $1,820,880 |
| Net Income | $41,244 | $64,567 |
| Earnings Per Share (Basic) | $1.52 | $2.39 |
| Earnings Per Share (Diluted) | $1.50 | $2.35 |
| Operating Cash Flow | N/A | $164,069 |
| Long-Term Debt | $269,118 | $269,118 |
| Short-Term Debt | $68,300 | $68,300 |
| Cash and Temporary Investments | $15,676 | $15,676 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased significantly, rising 119% for the three months and 98% for the six months ended March 31, 2003, compared to the prior year. This was driven by higher wholesale gas prices and increased volumes in the Energy Services segment, as well as colder weather in the Natural Gas Distribution segment.
- Profitability: Net income increased 18% for both the three-month and six-month periods compared to the prior year. Basic EPS rose 17% to $1.52 (quarter) and $2.39 (six months).
- Segment Performance:
- Natural Gas Distribution: Operating income increased 10% (quarter) and 12% (six months) due to 33-35% colder weather and customer growth.
- Energy Services: Operating income more than doubled, increasing 139% for the quarter and 122% for the six months, driven by higher margins from capacity management and storage assets.
- Retail and Other: Reported a net loss of $200,000 for the quarter and $271,000 for the six months, compared to net income in the prior year, primarily due to a $341,000 after-tax loss on the sale of equity investments.
- Debt Reduction: Long-term debt decreased from $370.6 million (Sept 30, 2002) to $269.1 million (Mar 31, 2003), reflecting significant debt payments of $131.4 million during the six-month period.
Guidance, Outlook, and Risks
- Regulatory Proceedings: NJNG received a provisional 6% price increase for Basic Gas Supply Service (BGSS) effective February 1, 2003. A new annual filing seeking an 8.8% increase effective July 1, 2003, was submitted in May 2003. The Board of Public Utilities (BPU) is reviewing filings regarding the recovery of Manufactured Gas Plant (MGP) remediation costs.
- Environmental Liabilities: NJNG estimates future MGP remediation expenditures between $65.8 million and $83.3 million. While costs are expected to be recoverable through a regulatory rider, no assurance is given regarding ultimate resolution.
- Capital Expenditures: Remaining fiscal 2003 construction expenditures for NJNG are estimated at $31 million. The Retail segment is undertaking a $22.5 million build-to-suit project expected to complete in Q3 2004.
- Liquidity: The company maintains $380 million in committed credit facilities. Management anticipates making $13 million in tax-deductible contributions to pension plans in mid-2003 to mitigate liability increases caused by declining market values and discount rates.
- Market Risks: The company faces commodity price risk managed through futures, options, and swaps. The Value-at-Risk (VAR) for net positions was $870,000 (95% confidence, 1-day) as of March 31, 2003.
Investor Verification Checklist
- Weather Sensitivity: Verify the impact of the Weather Normalization Clause (WNC) on future earnings, as $7.4 million of margin was deferred due to colder-than-normal weather in the first half of fiscal 2003.
- Regulatory Recovery: Confirm the BPU's approval status for the recovery of MGP remediation costs and the 8.8% BGSS rate increase filed in May 2003.
- Debt Structure: Review the maturity schedule of the $269 million long-term debt and the $68 million short-term debt to assess refinancing risks.
- Energy Services Volatility: Assess the sustainability of the Energy Services segment's margin growth, which is heavily influenced by natural gas commodity price volatility and storage asset utilization.
- Pension Funding: Monitor the company's ability to meet the anticipated $13 million pension funding requirement in 2003 and the impact of future market performance on postretirement benefit liabilities.