Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended December 31, 2000
Business Overview: NJR operates through four primary segments: Natural Gas Distribution (regulated utility NJNG), Energy Services (unregulated wholesale marketing), Retail Holdings (appliance services and retail marketing), and NJR Capital & Other (real estate and investments). The company serves over 411,000 residential and commercial customers in New Jersey.
Key Financial Metrics
| Metric (in thousands, except per share) | Q4 2000 | Q4 1999 |
|---|---|---|
| Operating Revenues | $667,487 | $263,438 |
| Operating Income | $36,265 | $30,825 |
| Net Income | $17,709 | $16,171 |
| Diluted EPS (Net Income) | $1.00 | $0.90 |
| Operating Cash Flow | $(79,761) | $(16,190) |
| Long-Term Debt | $414,328 | $313,023 |
| Short-Term Debt | $18,000 | $97,000 |
| Cash & Temporary Investments | $5,360 | $2,809 |
Note: Operating cash flow was negative due to significant seasonal increases in working capital requirements (gas purchases and receivables) typical for the fourth quarter.
Material Changes vs. Prior Period
- Revenue Surge: Operating revenues increased 153% to $667.5 million, driven primarily by a significant rise in wholesale natural gas prices and increased volume in the Energy Services segment.
- Profitability: Net income rose 9.5% to $17.7 million. Income before the cumulative effect of accounting changes increased 17.9% to $19.1 million.
- Accounting Change: The company adopted SFAS 133 (Accounting for Derivative Investments) effective October 1, 2000. This resulted in a one-time charge of $1.3 million (net of tax) to net income.
- Debt Structure: Long-term debt increased by $101.3 million, while short-term debt decreased by $79 million, reflecting a shift in financing strategies and the classification of commercial paper.
- Segment Performance:
- Natural Gas Distribution: Operating income increased 7.8% due to customer growth and colder weather (15.6% below normal), despite higher O&M expenses.
- Energy Services: Operating income jumped from $0.9 million to $4.1 million due to a three-fold increase in wholesale gas prices and doubled volume.
- Retail Holdings: Reported an operating loss of $0.3 million, widening from a $0.1 million loss in the prior year, due to lower margins in retail sales.
Guidance, Outlook, and Risks
- Regulatory Outlook: The New Jersey Board of Public Utilities (BPU) approved a 16% increase in the Gas Cost Recovery (GCR) factor and expanded the Flexible Pricing Mechanism (FPM). Further rate increases of up to 2% are pending for March and April 2001.
- Capital Expenditures: Remaining fiscal 2001 construction expenditures for NJNG are estimated at $38.5 million. Additional remediation costs for former manufactured gas plants are estimated at $19.2 million for the remainder of the year.
- Liquidity: The company maintains $135 million in committed credit facilities for unregulated subsidiaries and $125 million for NJNG to support commercial paper. Cash requirements for margin accounts on derivative hedges remain a factor.
- Legal and Environmental Risks:
- Gas Remediation: NJNG is responsible for remediation at two former manufactured gas plant (MGP) sites, with ongoing litigation regarding insurance coverage and liability for other sites.
- Combe Fill South Landfill: NJNG is a third-party defendant in Superfund actions; the extent of liability is currently unpredictable.
- South Brunswick Asphalt: Litigation regarding alleged environmental contamination from tar emulsion removed from MGP sites is pending.
- Market Risks: The company is exposed to natural gas price fluctuations and interest rate changes, though it utilizes futures, swaps, and options to hedge these risks. A 10% change in market value of derivatives could impact earnings by approximately $21 million (pre-tax sensitivity).
Investor Verification Checklist
- Working Capital Seasonality: Verify the impact of the $108.9 million increase in working capital on cash flow sustainability in Q1 2001.
- Derivative Accounting Impact: Confirm the ongoing effect of SFAS 133 adoption on future earnings and the $9.8 million expected reduction in gas costs in 2001.
- Regulatory Approvals: Monitor the BPU's ruling on additional LGA increases expected in Q1 2001 and the extension of the Flexible Pricing Mechanism.
- Environmental Liabilities: Review updates on the MGP remediation costs and the status of the Combe Fill South Landfill litigation to assess potential future charges.
- Debt Maturities: Assess the refinancing needs for the $115.9 million in variable rate debt and the $50 million commercial paper classified as long-term.