New Jersey Resources Corporation — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended March 31, 2014; fiscal year ends September 30. The unaudited interim results are seasonal and management cautions they are not indicative of full-year results. NJR operates regulated New Jersey gas distribution alongside wholesale energy services, clean energy, midstream, and retail businesses.
Financial results
| Metric | Three months ended March 31, 2014 | Year-over-year change | Six months ended March 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $1,579.6 million | +64.4% | $2,458.0 million | +44.9% |
| Operating income | $247.0 million | Compared with $57.0 million | $259.2 million | Compared with $144.2 million |
| Net income | $173.0 million | Compared with $45.5 million | $180.7 million | Compared with $105.7 million |
| Diluted EPS | $4.07 | Compared with $1.08 | $4.26 | Compared with $2.52 |
| Dividends per share | $0.42 | Compared with $0.40 | $0.84 | Compared with $0.80 |
Revenue growth largely reflected sharply higher natural gas sales volumes and prices at NJRES during extreme cold weather, plus increased NJNG sales and off-system activity. Higher commodity costs also drove revenue and gas-purchase growth; revenue growth should not be read as equivalent margin growth.
Management’s non-GAAP net financial earnings (NFE) were $151.9 million for the quarter, versus $68.7 million, and $191.8 million for six months, versus $104.2 million. NJRES’s six-month NFE rose to $98.8 million from $19.4 million. GAAP results are affected by derivative fair-value and hedge timing differences; NFE adjusts for these items and is not a substitute for GAAP earnings. NJNG net income was $47.0 million for the quarter and $74.7 million for six months; six-month utility gross margin was $199.4 million, up from $189.0 million.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $383.4 million, versus $108.4 million; working-capital changes and unusually cold weather materially influenced cash generation.
- Investing cash outflow was $110.2 million, including $60.0 million of utility-plant expenditure and $45.4 million for solar and wind equipment. Financing cash outflow was $266.6 million, principally reflecting repayments of short-term debt. Ending cash was $9.6 million.
- At March 31, total debt was approximately $713.2 million, comprising $628.5 million long-term debt, $21.5 million current maturities, and $63.2 million short-term debt. This compares with approximately $947.1 million at September 30, 2013. The company reported a capital structure of 59% common equity, 36% long-term debt, and 5% short-term debt.
- Available borrowing capacity was $384.5 million under NJR’s revolving facility and $201.3 million under NJNG’s facility. Management said existing borrowing capacity and operating cash flow should cover working capital, capital spending, and dividends for the next 12 months; it reported compliance with debt covenants.
- NJNG issued $125 million of senior notes in March, using proceeds to reduce short-term debt and redeem $60 million of debt. Its revolving credit facility was due to expire in August 2014; the BPU approved renewal and related financing authority on April 23, after quarter-end.
Changes, outlook, and notable matters
- The earnings increase was concentrated in NJRES, benefiting from extreme cold, elevated gas prices, and market volatility. NJNG also benefited from customer growth and infrastructure investment. NJR reported weather 15.2% colder than the prior-year quarter and 17.5% colder than the 20-year average for the quarter.
- Management expected NJNG customer growth of approximately 1.5% annually over the next two years and 14,000–16,000 additions in fiscal 2014 and 2015 combined. No consolidated earnings or EPS guidance is stated in the supplied filing text.
- Estimated NJNG capital expenditures were $157.7 million for fiscal 2014 and $161.8 million for fiscal 2015. NJRCEV estimated fiscal 2014 solar capital expenditures of $75–$85 million and was developing two wind projects, with expected investments of approximately $22 million and $42 million.
- Solar and wind returns depend partly on tax incentives and renewable-energy certificate values. Delayed construction, permitting, grid interconnection, or failure to qualify for incentives could affect earnings. The filing’s fiscal-year tax estimate incorporates forecast project completions and is subject to revision.
- NJNG recorded a $183.6 million liability and matching regulatory asset for manufactured-gas-plant remediation. Its estimated total future remediation range was $159.8–$261.2 million; customer recovery is subject to regulatory approval and is not assured. It also had $15.2 million of deferred Superstorm Sandy operating costs, with recovery timing and amount uncertain; approximately 75% of affected customers had service restored.
- Commodity and derivative volatility can produce earnings timing effects, margin calls, and counterparty credit losses. Wholesale gross credit exposure was $376.6 million before collateral and netting. Other cited risks include regulation, access to capital, environmental obligations, and renewable-project execution.
- Moody’s upgraded NJNG’s senior secured rating from Aa3 to Aa2 in January 2014 and maintained a stable outlook. The company said there were no material changes to its previously disclosed risk factors and no material developments in reportable legal proceedings during the quarter.
Investor verification points
- Assess how much of the exceptional NJRES performance reflected durable underlying margins versus weather, commodity volatility, and derivative timing; compare GAAP earnings with NFE and its reconciliation.
- Review liquidity and seasonal working-capital needs, facility expirations and renewals, debt maturities, and the ability to fund planned utility and clean-energy investment.
- Track BPU decisions affecting NJNG cost recovery, including the CIP, infrastructure programs, Sandy costs, and MGP remediation; verify whether recorded regulatory assets remain recoverable.
- Check the timing and completion of solar and wind projects, associated tax-credit eligibility, and SREC market conditions against management’s estimates.
- Consider whether cold-weather-driven gas demand and earnings are representative of future periods; the filing specifically cautions that interim results are seasonal.