Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended March 31, 2002
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 serves residential and commercial customers in New Jersey.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 2002 | 3 Months Ended Mar 31, 2001 | 6 Months Ended Mar 31, 2002 | 6 Months Ended Mar 31, 2001 |
|---|---|---|---|---|
| Operating Revenues | $525,780 | $890,035 | $921,611 | $1,557,522 |
| Operating Income | $59,300 | $55,814 | $94,070 | $92,079 |
| Net Income | $34,930 | $33,030 | $54,611 | $50,739 |
| Diluted EPS | $1.29 | $1.24 | $2.01 | $1.90 |
| Operating Cash Flow (6 mo) | $26,765 (2002) vs $50,130 (2001) | |||
| Long-Term Debt | $415,822 (as of Mar 31, 2002) | |||
| Cash & Temp Investments | $6,195 (as of Mar 31, 2002) |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased significantly year-over-year (down 41% for the quarter and 41% for the six months). This was primarily driven by record warm weather reducing natural gas consumption and lower wholesale gas prices affecting Energy Services revenues.
- Profitability Increase: Despite lower revenues, Net Income increased 5.8% for the quarter and 7.7% for the six months. This was achieved through reduced operation and maintenance expenses, lower net interest charges, and profitable customer growth in the regulated utility segment.
- Segment Performance:
- Natural Gas Distribution: Operating income remained relatively flat ($53.0M vs $53.1M for the quarter) despite a 31% revenue drop, due to cost controls and customer additions offsetting weather impacts.
- Energy Services: Operating income surged 264% for the quarter ($5.2M vs $1.4M) due to higher margins on pipeline and storage transactions, despite lower overall revenues.
- Cash Flow: Net cash provided by operating activities for the six months ended March 31, 2002, was $26.8 million, a decrease of $23.4 million compared to the prior year, largely due to changes in working capital.
Guidance, Outlook, and Risks
- Weather Impact: The six months ended March 31, 2002, were the warmest in NJNG's history (18% warmer than normal). While a Weather Normalization Clause (WNC) allows for the recovery of $14.8 million in lost margin in future periods, management estimates $6 million in margin was lost beyond the WNC protection.
- Regulatory Environment: NJNG is navigating energy deregulation. The New Jersey Board of Public Utilities (BPU) approved a 3% price decrease effective February 2002 due to lower projected gas costs. Discussions are ongoing regarding the Basic Gas Supply Service (BGSS) proposal.
- Environmental Liabilities:
- Manufactured Gas Plants (MGP): NJNG is remediating 11 former MGP sites. Estimated remaining expenditures for fiscal 2002 are $13.4 million (net of insurance). A favorable insurance settlement was reached in September 2001.
- Legal Settlements: NJNG settled a liability verdict with South Brunswick Asphalt, L.P. (SBA) regarding environmental contamination. Costs are expected to be recoverable through ratemaking. A settlement regarding the Combe Fill South Landfill was confirmed in May 2002, releasing NJNG from claims.
- Capital Resources: NJNG maintains a $200 million credit facility to support commercial paper. The company aims to maintain a common equity ratio of at least 50% to preserve credit ratings. Remaining fiscal 2002 construction expenditures are estimated at $29 million.
- Market Risk: The company uses futures, swaps, and options to hedge commodity price risks. The Value-at-Risk (VAR) for net positions at March 31, 2002, was $324,000 (95% confidence, one-day holding period).
Investor Verification Checklist
- Weather Normalization Recovery: Verify the timing and mechanism for the recovery of the $14.8 million in accrued WNC margins and the $8.3 million in prior-year accrued margins.
- Environmental Cost Recovery: Confirm the BPU's approval status for the recovery of MGP remediation costs and the South Brunswick Asphalt settlement costs through the ratemaking process.
- Energy Services Margins: Assess the sustainability of the increased margins in the Energy Services segment given the volatility of wholesale gas prices.
- Debt Structure: Review the maturity profile of the $415.8 million in long-term debt and the $124.5 million in variable-rate debt to understand interest rate exposure.
- Customer Growth vs. Usage: Analyze whether continued customer additions can offset the revenue impact of declining per-customer usage due to weather or conservation.