Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended March 31, 1999
Business Overview: NJR operates primarily through its regulated utility subsidiary, New Jersey Natural Gas Company (NJNG), and unregulated subsidiaries including NJR Energy Holdings (fuel marketing and capacity management) and NJR Development (real estate). The company is navigating energy market deregulation in New Jersey and managing significant Year 2000 compliance initiatives.
Key Financial Metrics
| Metric (in thousands, except per share) | 3 Months Ended Mar 31, 1999 |
3 Months Ended Mar 31, 1998 |
6 Months Ended Mar 31, 1999 |
6 Months Ended Mar 31, 1998 |
|---|---|---|---|---|
| Operating Revenues | $327,315 | $266,586 | $571,905 | $486,981 |
| Operating Income | $35,042 | $33,085 | $55,013 | $51,847 |
| Net Income | $30,337 | $28,511 | $45,489 | $42,727 |
| Diluted EPS | $1.69 | $1.60 | $2.53 | $2.39 |
| Operating Cash Flow (6 mo) | $82,118 | $23,651 | ||
| Long-Term Debt | $319,364 (as of Mar 31, 1999) | |||
| Short-Term Debt | $54,100 (as of Mar 31, 1999) | |||
| Cash & Temp Investments | $11,833 (as of Mar 31, 1999) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 22.8% for the quarter and 17.4% for the six-month period compared to the prior year, driven by higher gas purchase costs passed through to customers and increased volumes.
- Profitability: Net income rose 6.4% for the quarter and 6.5% for the six-month period. This growth was attributed to customer growth at NJNG, benefits from refinancing, and improved unregulated operating results.
- Margin Drivers: NJNG's firm transportation gross margin increased significantly (79% for the quarter) due to a residential pilot program allowing customers to switch suppliers while using NJNG's infrastructure. Conversely, gross margin from sales to firm customers decreased slightly due to warmer weather and customer switching.
- Cash Flow: Net cash flows from operating activities surged to $82.1 million for the six months ended March 31, 1999, compared to $23.7 million in the prior year, largely due to a favorable change in working capital ($20.4 million inflow vs. $30.5 million outflow previously).
- Dividends: Preferred stock dividends decreased significantly due to the redemption of $20 million of preferred stock in October 1998.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Construction: Remaining fiscal 1999 construction expenditures are estimated at $29 million, primarily for customer growth support and system renewals.
- Capital Structure: NJNG aims to maintain a common equity ratio of approximately 50% to support current credit ratings.
- Year 2000 Compliance: The company is on track to be "Year 2000 ready" by September 1999. Capitalized costs to date are $18.6 million, with an additional $6.2 million expected in 1999. Management believes the worst-case scenario is a temporary service disruption.
Risks and Contingencies
- Regulatory Proceedings: NJNG is awaiting a decision from the New Jersey Board of Public Utilities (BPU) regarding a 15-month Levelized Gas Adjustment (LGA) proposal and the collection of $15.8 million in Weather Normalization Clause (WNC) margins.
- Environmental Litigation: The company is involved in proceedings regarding eleven former manufactured gas plant (MGP) sites and a Superfund site (Combe Fill South Landfill). While costs are expected to be recovered through ratemaking, there is no assurance of timing or extent.
- Market Risk: The company utilizes futures, options, and swaps to hedge natural gas price fluctuations. A hypothetical 10% change in gas prices could alter the value of contracts by approximately $5.0 million.
- Interest Rate Risk: NJNG has $97 million in variable rate debt, partially hedged. A 100 basis point increase in rates on unhedged debt would increase interest expense by approximately $242,000 (net of tax).
Investor Verification Checklist
- Regulatory Approval: Verify the BPU's decision on the LGA extension and the $15.8 million WNC margin collection, as these impact future cash flows.
- Environmental Liabilities: Monitor the status of the MGP site remediation and the Combe Fill South Landfill litigation to assess potential cost recovery delays.
- Year 2000 Costs: Confirm that the projected $6.2 million in remaining Year 2000 expenditures aligns with actual spending and that no material service disruptions occur.
- Debt Maturity: Review the schedule for the $54.1 million in short-term debt and the $319.4 million in long-term debt to assess refinancing needs.
- Customer Migration: Track the rate of customer migration from sales service to firm transportation service under the deregulation pilot program to evaluate long-term margin stability.