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, 2001
Business Overview: NJR operates primarily through its regulated utility subsidiary, New Jersey Natural Gas (NJNG), and unregulated subsidiaries including Energy Services (wholesale marketing), Retail Holdings (appliance services and retail marketing), and NJR Capital (real estate and investments). The company is subject to New Jersey energy deregulation legislation and utilizes derivative instruments to manage commodity price risks.
Key Financial Metrics
| Metric (in thousands, except per share) | 3 Months Ended Mar 31, 2001 | 3 Months Ended Mar 31, 2000 | 6 Months Ended Mar 31, 2001 | 6 Months Ended Mar 31, 2000 |
|---|---|---|---|---|
| Operating Revenues | $890,035 | $368,988 | $1,557,522 | $632,426 |
| Operating Income | $55,814 | $55,485 | $92,079 | $86,310 |
| Net Income | $33,030 | $32,669 | $50,739 | $48,840 |
| Diluted EPS (Net Income) | $1.85 | $1.84 | $2.85 | $2.74 |
| Operating Cash Flow (6 Months) | $50,130 (2001) vs $90,008 (2000) | |||
| Long-Term Debt | $298,185 (as of Mar 31, 2001) | |||
| Short-Term Debt | $33,000 (as of Mar 31, 2001) | |||
| Cash & Temporary Investments | $17,084 (as of Mar 31, 2001) |
Material Changes vs. Prior Period
- Revenue Surge: Operating revenues increased 141% for the quarter and 146% for the six months compared to the prior year. This was driven primarily by a significant increase in wholesale natural gas prices and higher volumes managed by the Energy Services segment.
- Earnings Growth: Net income increased 3.8% for the quarter and 5.6% for the six months. Growth was attributed to customer additions, higher usage at NJNG due to colder weather, and improved wholesale marketing results.
- Accounting Change Impact: The six-month results include a $1.3 million charge (net of tax) due to the cumulative effect of adopting SFAS 133 (Accounting for Derivative Investments and Hedging Activities) effective October 1, 2000.
- Cash Flow Decline: Net cash flows from operating activities decreased significantly to $50.1 million for the six months ended March 31, 2001, compared to $90.0 million in the prior year. This was largely due to a $24.8 million use of cash for changes in working capital, specifically increased receivables and gas inventory costs.
- Debt Management: The company closed a $285 million revolving credit agreement in January 2001. Short-term debt increased to $33 million to support working capital needs.
Guidance, Outlook, and Risks
- Regulatory Environment: The New Jersey Board of Public Utilities (BPU) 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.
- Rate Adjustments: The BPU approved a 16% increase in the Gas Cost Recovery (GCR) factor and authorized Flexible Pricing Mechanism (FPM) increases of approximately 2% per month through July 2001 to reflect market changes.
- Capital Expenditures: Remaining fiscal 2001 construction expenditures for NJNG are estimated at $27.1 million. Additional MGP remediation expenditures are estimated at $14 million for the remainder of the fiscal year.
- Legal Contingencies:
- Environmental Remediation: NJNG is involved in proceedings regarding 11 former manufactured gas plant (MGP) sites. Costs are generally recoverable through a Remediation Rider, though insurance recovery litigation is ongoing.
- Third-Party Litigation: NJNG is a defendant in actions regarding alleged environmental contamination at sites owned by South Brunswick Asphalt, L.P., and the Combe Fill South Landfill (Superfund site). Management does not believe these will have a material adverse effect, but outcomes are uncertain.
- Market Risks: The company faces commodity price risk and interest rate risk. A sensitivity analysis indicates that a 100 basis point change in interest rates on variable debt would change interest expense by approximately $537,000 (net of tax).
Investor Verification Checklist
- Derivative Accounting: Verify the impact of the SFAS 133 adoption on future earnings, specifically the $9.8 million expected reduction in gas costs in 2001 recorded in Other Comprehensive Income.
- Working Capital Trends: Monitor the significant increase in customer accounts receivable ($285.5 million) and gas in storage, which drove the decline in operating cash flow.
- Regulatory Decisions: Track the BPU's determination of NJNG's role in Basic Gas Supply Service by January 1, 2002, and the status of the Flexible Pricing Mechanism approvals.
- Environmental Liabilities: Review the status of the MGP remediation cost recovery filings and the outcome of the insurance litigation regarding environmental claims.
- Debt Structure: Confirm the utilization of the new $285 million credit facility and the company's ability to maintain its target 50% common equity ratio.