Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended June 30, 2001
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 and Other (real estate and investments). The company is subject to New Jersey Board of Public Utilities (BPU) regulation regarding rates and cost recovery.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2001 |
3 Months Ended June 30, 2000 |
9 Months Ended June 30, 2001 |
9 Months Ended June 30, 2000 |
|---|---|---|---|---|
| Operating Revenues | $260,644 | $247,961 | $1,818,166 | $880,387 |
| Operating Income | $8,785 | $8,942 | $100,864 | $95,252 |
| Net Income | $4,312 | $3,116 | $55,051 | $51,956 |
| Diluted EPS (Continuing Ops) | $0.24 | $0.18 | $3.09 | $2.87 |
| Operating Cash Flow (9 Months) | $(9,124) vs $115,172 | |||
| Long-Term Debt | $325,185 (as of June 30, 2001) | |||
| Short-Term Debt | $74,300 (as of June 30, 2001) | |||
| Cash & Temp Investments | $2,823 (as of June 30, 2001) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 5.1% for the quarter and 106.5% for the nine-month period. The nine-month surge is largely attributed to the Energy Services segment, where revenues jumped from $259.8 million to $920.1 million due to increased storage management activity and natural gas price volatility.
- Profitability: Net income from continuing operations rose 39% for the quarter and 7.8% for the nine-month period. Earnings per share (diluted) increased 33% for the quarter and 7.7% for the nine-month period.
- Cash Flow Deterioration: Net cash flows from operating activities turned negative to $(9.1) million for the nine months ended June 30, 2001, compared to a positive $115.2 million in the prior year. This was driven by a $96.5 million use of cash for working capital, primarily due to changes in purchased gas costs and deferred gas costs.
- Accounting Change: The adoption of SFAS 133 (Accounting for Derivatives) resulted in a cumulative effect charge of $1.3 million (net of tax) against net income for the nine months ended June 30, 2001.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: NJNG estimates remaining fiscal 2001 construction expenditures at $16 million. Additional MGP remediation expenditures are estimated at $9 million for the remainder of the fiscal year.
- Financing Strategy: The company intends to maintain a common equity ratio of at least 50% to support credit ratings. Financing for remaining expenditures is expected via short-term debt and a potential sale-leaseback transaction in the fourth quarter.
- Regulatory Environment: The BPU has approved a stipulation to fully open NJNG's residential markets to competition and restructure rates. The BPU must determine the utility's ongoing role in Basic Gas Supply Service by January 1, 2002.
Risks and Contingencies
- Legal Proceedings: NJNG is involved in litigation regarding environmental contamination at former Manufactured Gas Plant (MGP) sites and the Combe Fill South Landfill (Superfund site). While the company seeks cost recovery through ratemaking, there is no assurance of the timing or extent of recovery.
- Market Risk: The company faces commodity price risk and interest rate risk. NJNG has $147 million in variable rate debt, partially hedged. Sensitivity analysis indicates a 100 basis point rate increase would impact net interest expense by approximately $537,000 on unhedged NJNG debt.
- Investment Volatility: The company holds an investment in Capstone Turbine Corporation. Other comprehensive income included a $10.1 million after-tax unrealized loss associated with this investment for the nine-month period.
Investor Verification Checklist
- Working Capital Usage: Verify the sustainability of the $96.5 million cash outflow for working capital and the company's ability to fund operations without significant new equity issuance.
- Derivative Accounting Impact: Confirm the long-term impact of the SFAS 133 adoption on earnings volatility and the specific amounts expected to be charged to gas costs in future periods ($9.8 million expected in 2001).
- Regulatory Cost Recovery: Monitor the BPU's decision on the recovery of underrecovered gas costs and MGP remediation expenses, as these are critical to NJNG's margin stability.
- Energy Services Volatility: Assess the sustainability of the Energy Services segment's revenue growth, which is heavily dependent on natural gas price volatility and storage management volumes.
- Environmental Liabilities: Review the status of the MGP remediation litigation and the Combe Fill South Landfill proceedings for potential unrecorded liabilities.