Business Context and Reporting Period
Company: New Jersey Resources Corporation (NJR)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2000
Business Overview: NJR operates through three primary segments: New Jersey Natural Gas (NJNG), a regulated utility; Energy Holdings, an unregulated energy marketing and trading subsidiary; and NJR Development, focused on real estate. The company is navigating energy deregulation in New Jersey, transitioning residential markets to competition while maintaining delivery services.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2000 |
3 Months Ended June 30, 1999 |
9 Months Ended June 30, 2000 |
9 Months Ended June 30, 1999 |
|---|---|---|---|---|
| Operating Revenues | $247,949 | $159,486 | $880,387 | $731,391 |
| Operating Income | $8,942 | $8,135 | $95,252 | $90,703 |
| Net Income | $3,116 | $3,060 | $51,956 | $48,549 |
| Diluted EPS (Net Income) | $0.18 | $0.17 | $2.91 | $2.70 |
| Cash Flow from Operations | N/A | N/A | $115,172 | $118,326 |
| Long-Term Debt | $283,980 | N/A | $283,980 | $286,264 |
| Short-Term Debt | $17,600 | N/A | $17,600 | $33,400 |
| Cash & Temporary Investments | $2,564 | N/A | $2,564 | $2,479 |
Note: Operating margins for the nine months ended June 30, 2000, were approximately 10.8% ($95.3M / $880.4M).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 55.5% for the quarter and 20.4% for the nine-month period compared to the prior year. This surge is primarily driven by higher wholesale gas costs passed through to customers and increased volumes in the Energy Holdings segment.
- Earnings Increase: Net income rose 1.8% for the quarter and 7.0% for the nine-month period. The nine-month increase includes $828,000 in income from discontinued operations (final reconciliation of the exit from oil and gas production).
- Segment Performance:
- NJNG: Operating income increased 25.6% (quarter) and 5.1% (nine months) due to customer growth (12,318 additions) and higher usage, despite warmer weather.
- Energy Holdings: Operating income decreased significantly for the quarter ($24k vs $1.3M) due to a shift in operations toward storage transactions, though nine-month net income improved due to investment returns.
- Debt Reduction: Short-term debt decreased from $33.4 million (June 1999) to $17.6 million (June 2000). Long-term debt remained relatively stable.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Weather Normalization: Warmer weather in the nine-month period resulted in $7.9 million of gross margin being accrued for future recovery. NJNG has $18 million in accrued Weather Normalization Clause (WNC) margin to be collected in fiscal 2001 and 2002.
- Capital Expenditures: Remaining fiscal 2000 construction expenditures for NJNG are estimated at $14.6 million. Additional remediation costs for former manufactured gas plants are estimated at $7 million for the remainder of the fiscal year.
- Deregulation: The company is implementing rate restructuring to segregate Basic Gas Supply and Delivery services. NJNG expects to retain its role as a gas supplier until at least December 31, 2002.
Risks and Contingencies
- Environmental Remediation: NJNG is remediating 11 former manufactured gas plant (MGP) sites. Costs are recovered through a regulatory rider, but the company is litigating with insurance carriers and former owners (Kaiser-Nelson) to recover costs. Outcomes are uncertain.
- Legal Proceedings:
- South Brunswick Asphalt: Named as a defendant regarding alleged contamination from tar emulsion. NJNG believes the ultimate resolution will not have a material adverse effect.
- Combe Fill South Landfill: Named as a third-party defendant in Superfund actions. NJNG is unable to predict liability extent but expects to seek recovery through ratemaking.
- Market Risk: The company uses futures, swaps, and options to hedge natural gas price fluctuations. A theoretical 10% change in market value could impact futures, swaps, and options by approximately $8.4M, $6.4M, and $1.2M, respectively, though these are largely offset by underlying contracts.
- Accounting Standards: The company is evaluating the impact of SFAS No. 133 (Derivatives and Hedging), required by December 31, 2000.
Investor Verification Checklist
- Weather Accruals: Verify the collectability of the $18 million in accrued Weather Normalization Clause (WNC) margins scheduled for future recovery.
- Environmental Litigation: Monitor the status of insurance recovery claims regarding MGP remediation and the South Brunswick Asphalt lawsuit.
- Regulatory Decisions: Track BPU decisions on the role of utilities in gas supply services (due by Jan 1, 2002) and customer account services (due by Dec 31, 2000).
- Derivative Exposure: Review the effectiveness of hedging strategies given the volatility in natural gas prices and the upcoming adoption of SFAS No. 133.
- Discontinued Operations: Confirm that the $828,000 income from discontinued operations represents the final reconciliation of the 1995 exit plan.