NJR

Business Context and Reporting Period

Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended December 31, 2001
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

Note: Q4 2000 Net Income included a $1.3 million charge for the cumulative effect of a change in accounting for derivatives (SFAS 133).

Material Changes vs. Prior Period

• Revenue Decline: Consolidated operating revenues decreased 41% to $395.8 million, driven primarily by significantly lower wholesale natural gas prices affecting the Energy Services segment and reduced gas sales volumes due to warmer weather.
• Profitability Increase: Despite lower revenues, Net Income increased 11% to $19.7 million. This was driven by reduced operating and maintenance expenses, lower net interest charges, and improved results in the Retail and Other segment, which offset the impact of warm weather on the utility segment.
• Weather Impact: The quarter was 32% warmer than the prior year, reducing average customer usage. However, customer growth (11,461 additions) and the Weather Normalization Clause (WNC) helped stabilize gross margins for firm customers.
• Segment Performance:
  • NJNG: Operating income decreased 4% due to lower firm gross margins, partially offset by O&M reductions.
  • Energy Services: Revenues dropped 49% due to lower gas prices, though delivery volumes increased.
  • Retail and Other: Turned profitable ($0.4 million) compared to a loss of $0.7 million in the prior year, aided by improved Home Services results.

Outlook, Risks, and Contingencies

Management Commentary and Guidance

• Capital Expenditures: NJNG estimates remaining fiscal 2002 construction expenditures at $38 million for system growth and renewals. Additional MGP remediation costs are estimated at $16.8 million for the remainder of the year.
• Regulatory Actions: The BPU approved a 3% price decrease effective February 2002 due to lower projected gas costs. NJNG is seeking to extend margin-sharing incentives for off-system sales and capacity management through 2004.
• Liquidity: The company maintains $135 million in committed credit facilities for unregulated subsidiaries and $180 million for NJNG to support commercial paper issuances. Management aims to maintain a common equity ratio of at least 50%.

Risks and Contingencies

• Legal Proceedings:
  • Manufactured Gas Plant (MGP) Remediation: NJNG is involved in proceedings regarding 11 former MGP sites. A favorable settlement was reached in September 2001 with a major insurance carrier, with payments to be made in four annual installments. One carrier remains unresolved.
  • South Brunswick Asphalt: NJNG is a defendant in a civil action regarding alleged environmental contamination. The company does not believe the outcome will have a material adverse effect.
  • Combe Fill South Landfill: NJNG is a third-party defendant in Superfund actions. The extent of liability is currently unpredictable.
• Market Risk: The company uses futures, swaps, and options to hedge natural gas price volatility. As of December 31, 2001, the Value-at-Risk (VAR) for commodity positions was $293,700 (95% confidence, one-day holding period).
• Interest Rate Risk: NJR has $98.9 million in variable-rate debt; a 100 basis point rate increase would change annual interest expense by $583,000. NJNG has $147 million in variable-rate debt, with $56 million hedged via an interest rate cap.

Investor Verification Checklist

• Weather Normalization: Verify the timing and amount of the $6.6 million WNC accrual for recovery in future periods.
• Regulatory Approvals: Monitor the status of the BPU review regarding the extension of margin-sharing incentives and the BGSS competitive proposal.
• Insurance Settlements: Track the progress of the remaining insurance carrier settlement regarding MGP remediation liabilities.
• Gas Cost Recovery: Confirm the implementation of the Gas Cost Underrecovery Adjustment (GCUA) surcharge to collect $29.9 million in underrecovered costs.
• Derivative Exposure: Review the impact of the $3.2 million expected to be recorded as an increase to gas costs in 2002 from accumulated other comprehensive income.