Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2002
Business Overview: NJR operates through three primary segments: Natural Gas Distribution (regulated utility subsidiary NJNG), Energy Services (unregulated fuel and capacity management), and Retail and Other (appliance services, real estate, and investments). The company is subject to significant regulatory oversight by the New Jersey Board of Public Utilities (BPU) and faces market risks related to natural gas commodity prices.
Key Financial Metrics
| Financial Metric (in thousands) | Three Months Ended June 30, 2002 |
Three Months Ended June 30, 2001 |
Nine Months Ended June 30, 2002 |
Nine Months Ended June 30, 2001 |
|---|---|---|---|---|
| Operating Revenues | $442,309 | $260,644 | $1,363,920 | $1,818,166 |
| Operating Income | $9,581 | $8,785 | $103,651 | $100,864 |
| Net Income | $4,764 | $4,312 | $59,375 | $55,051 |
| Diluted EPS | $0.17 | $0.16 | $2.19 | $2.06 |
| Cash Flow from Operations | N/A | N/A | $30,207 | $(9,124) |
| Long-Term Debt | $418,215 | N/A | $418,215 | $325,185 |
| Short-Term Debt | $14,200 | N/A | $14,200 | $74,300 |
| Cash & Temporary Investments | $3,939 | N/A | $3,939 | $2,823 |
Note: Operating margins are thin due to the pass-through nature of gas costs in the regulated segment. The "Gas purchases" expense line item is significantly higher than operating income.
Material Changes vs. Prior Period
- Revenue Volatility: Consolidated operating revenues increased 69.7% for the quarter but decreased 25.0% for the nine-month period compared to the prior year. The nine-month decline was driven by significantly lower wholesale natural gas prices affecting the Energy Services segment.
- Profitability Growth: Net income increased 11.6% for the quarter and 7.8% for the nine-month period. This growth was driven by profitable customer growth in the NJNG segment, improved results in Energy Services, and lower net interest charges.
- Weather Impact: The nine-month period experienced record warm weather (17% warmer than normal), resulting in lower customer usage. While a Weather Normalization Clause (WNC) accrued $16.4 million for future recovery, management estimates $6.2 million in lost margin beyond the WNC protection.
- Debt Structure: Long-term debt increased by approximately $93 million year-over-year (nine-month comparison), while short-term debt decreased significantly from $74.3 million to $14.2 million, reflecting a shift in financing mix.
- Accounting Changes: The prior year's nine-month results included a $1.3 million charge for the cumulative effect of a change in accounting for derivatives (SFAS 133). No comparable charge occurred in the current period.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Remaining fiscal 2002 construction expenditures for NJNG are estimated at $14 million. Additional MGP remediation expenditures are estimated at $8.5 million for the remainder of the fiscal year.
- Regulatory Proceedings: NJNG is negotiating with the BPU regarding the extension of margin-sharing mechanisms for off-system sales and capacity management, currently scheduled to expire December 31, 2002. Management believes these will be extended on acceptable terms.
- Energy Deregulation: The BPU has determined that Basic Gas Supply Service (BGSS) should continue to be provided by state natural gas utilities, though the long-term competitive landscape remains under review.
Risks and Contingencies
- Manufactured Gas Plant (MGP) Remediation: NJNG is responsible for remediating 11 former MGP sites. While a significant insurance settlement was reached in September 2001, the company is pursuing claims against other parties (e.g., Kaiser-Nelson Steel) with no assurance of outcome. Total accrued remediation costs included in regulatory assets are $91.2 million.
- Stagecoach Storage Obligation: Energy Services has a 10-year agreement to market the Stagecoach storage facility, with potential purchase obligations totaling approximately $14 million for the first period and $22 million annually thereafter. Management does not currently believe this will result in future losses given current market prices and contracted volumes.
- Market Risk: The company faces commodity price risk and interest rate risk. As of June 30, 2002, the Value-at-Risk (VAR) for commodity derivatives was $209,000 (95% confidence, one-day holding). Interest rate sensitivity analysis indicates a 1% rate change would impact annual interest expense by approximately $810,000 for the parent company and $295,000 for NJNG's unhedged variable debt.
Investor Verification Checklist
- Weather Normalization Accuracy: Verify the $16.4 million WNC accrual and the $6.2 million estimated lost margin due to warm weather to assess the true impact on future earnings.
- MGP Remediation Recovery: Confirm the status of BPU approvals for the recovery of MGP remediation costs and the timeline for insurance settlement payments.
- Regulatory Incentive Extensions: Monitor the outcome of negotiations with the BPU regarding the extension of margin-sharing mechanisms for off-system sales and capacity management beyond December 31, 2002.
- Stagecoach Contract Viability: Review the progress of Energy Services in securing third-party contracts to cover the Stagecoach storage purchase obligations to ensure no future losses materialize.
- Debt Maturity Profile: Analyze the $167.8 million in long-term debt due after 5 years and the $35 million due within one year to assess refinancing risks and liquidity requirements.