NEW JERSEY RESOURCES CORP quarterly report, Q2 FY2013

New Jersey Resources Corporation — Form 10-Q Summary

Business context and reporting period. NJR is an energy holding company with regulated natural-gas distribution, wholesale energy services, renewable energy, energy infrastructure investments, and retail operations. This unaudited report covers the quarter and six months ended March 31, 2013 (the second quarter and first half of fiscal 2013). Dollar amounts below are in millions unless stated otherwise. Interim results are seasonal and are not necessarily indicative of full-year performance.

Financial results and position

Metric	Three months ended March 31	Six months ended March 31
Operating revenue	$960.9 vs. $612.9 in 2012	$1,696.9 vs. $1,255.3
Operating income	$57.0 vs. $67.7	$144.2 vs. $142.9
Net income	$45.5 vs. $54.5	$105.7 vs. $111.9
Diluted EPS	$1.08 vs. $1.31	$2.52 vs. $2.68
Dividends per share	$0.40 vs. $0.38	$0.80 vs. $0.76

• Revenue increased 56.8% for the quarter and 35.2% for the half-year, largely reflecting higher natural-gas prices and volumes at NJRES and the absence of NJNG customer bill credits issued in the prior-year period. Gas purchases rose faster than revenue; much of the revenue and gas-cost movement reflects commodity pass-through.
• Quarterly net income fell 16.6%; first-half net income fell 5.6%. Management attributed the declines primarily to lower solar investment tax credits and changes in NJRES derivative results. Operating income declined for the quarter but edged higher for the half-year.
• For the quarter, NJNG net income was $45.9 versus $44.9; Clean Energy Ventures was $5.2 versus $11.9; and Energy Services reported a $7.2 loss versus a $3.6 loss. For the half-year, NJNG earned $71.4 versus $70.9, Clean Energy Ventures $10.5 versus $22.0, and Energy Services $20.6 versus $16.1.
• NJRES’ GAAP results were affected by derivative and physical-gas accounting timing differences. Its non-GAAP net financial earnings were $16.4 for the quarter versus $15.9, and $19.4 for the half-year versus $23.5. Consolidated net financial earnings, also non-GAAP, were $68.7 for the quarter versus $74.1 and $104.2 for the half-year versus $119.4.
• Cash from operations was $108.4 for the half-year versus $104.6; investing used $90.2 versus $111.3; financing used $16.7 versus generating $7.0. Ending cash was $6.0. Working capital changes included a $245.2 increase in receivables, partly offset by inventory reductions and higher gas-purchases payable.
• At March 31, total assets were $2,941.7, common equity $897.8, long-term debt $527.7, current maturities of long-term debt $8.6, and short-term debt $288.1. Cash was $6.0 and current liabilities were $736.5. Capital structure was 52% equity, 31% long-term debt and 17% short-term debt.
• Cash-flow investment included $51.4 in utility plant and $24.9 in solar equipment. The company paid $33.9 in common dividends during the half-year. NJR and NJNG reported compliance with debt covenants. NJR had $125.5 available under its credit facility and NJNG $142.5 under its facility at period-end.

Changes, outlook, and material matters

• Compared with the prior year, colder weather boosted NJNG firm sales, while Superstorm Sandy disrupted service to about 30,100 customers and reduced margin in affected areas. NJNG added 3,697 customers in the half-year and expected to add approximately 13,000–15,000 over fiscal 2013 and 2014.
• Management estimated fiscal 2013 NJNG capital expenditures of $145.8 and fiscal 2014 expenditures of $119.9. NJNG estimated Sandy-related restoration capital costs of $30–$40, with $26–$30 expected in fiscal 2013; fiscal 2013 incremental storm operating costs were estimated at $15–$17. Recovery of deferred storm costs remains subject to regulatory review and approval.
• NJR estimated solar capital expenditures of $60–$90 in fiscal 2013 and $70–$90 in fiscal 2014. Project timing, permitting, grid interconnection, eligibility for federal investment tax credits (ITCs), and solar renewable energy certificate (SREC) prices could affect returns. The company reported $12.8 of solar ITC benefits for the first half, compared with $24.9 in 2012.
• NJNG’s BPU-approved SAFE program allows up to $130 of infrastructure investment over four years. NJNG also sought a $6.9 annual base-rate increase for prior accelerated infrastructure investments; settlement discussions were ongoing. Its request to continue and modify the Conservation Incentive Program was pending.
• NJRES’ financial margin, a non-GAAP measure, was $29.2 for the quarter versus $29.4 and $38.0 for the half-year versus $45.4. Management said reduced market volatility and narrower transportation spreads—associated in part with expanded shale-gas supply—continue to challenge storage and transportation optimization opportunities.
• On April 15, 2013, after quarter-end, NJNG issued $50 of 3.15% senior secured notes due 2028 to refinance short-term debt and fund capital spending.
• NJNG had an estimated $159.6–$266.4 range of future costs for five manufactured-gas-plant sites and recorded a $182 liability with a matching regulatory asset. Recovery depends on BPU approval; the filing cautions that nonrecovery could materially affect results, financial position, or cash flows. The filing reported no newly reportable legal proceedings or material developments in existing proceedings during the quarter.
• Other key risks include commodity-price and derivative volatility, counterparty credit and collateral exposure, liquidity and interest-rate changes, weather, regulatory cost recovery, renewable-energy incentives and project execution, and cyberattacks or information-system failures. Management stated that disclosure controls were effective and there was no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether NJNG will recover Sandy-related restoration costs and what the BPU’s storm-cost prudency review will determine.
• Progress and economics of SAFE, accelerated infrastructure, customer growth, and pending rate or program filings.
• Solar project completion and ITC eligibility, along with SREC pricing and NJRCEV’s planned capital spending.
• NJRES’ underlying performance apart from GAAP derivative timing effects, and the persistence of weak market spreads and volatility.
• Liquidity and seasonal borrowing needs, including the use of available credit facilities and the effect of commodity prices and working-capital swings.
• The eventual cost and regulatory recovery of manufactured-gas-plant remediation, compared with the recorded $182 liability and disclosed estimated range.