NEW JERSEY RESOURCES CORP quarterly report, Q2 FY2011

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New Jersey Resources Corporation — Q2 FY2011 Form 10-Q

Reporting period: Quarter and six months ended March 31, 2011; fiscal year ends September 30. Unaudited results are seasonal and management cautions that interim results are not necessarily indicative of full-year performance. NJR operates regulated New Jersey gas distribution, wholesale energy services, midstream investments and a newly established clean-energy segment.

Financial performance and position

  • Quarter revenue: $977.0 million, up 6.4% from $918.3 million. Operating income was $93.2 million, down 23.6% from $122.0 million; net income was $63.9 million, down 13.9% from $74.2 million. Diluted EPS was $1.54 versus $1.78.
  • Six-month revenue and earnings: Revenue was $1.690 billion, up 10.6%; operating income was $133.5 million versus $207.4 million. Net income was $88.4 million, down 29.9% from $126.1 million. Diluted EPS was $2.13 versus $3.02.
  • Quarterly dividend: $0.36 per share, compared with $0.34 in the prior-year quarter. Six-month dividends were $0.72 versus $0.68.
  • Cash flow: Six-month operating cash flow was $181.0 million, down from $245.0 million. Investing used $59.0 million, including $43.6 million for utility plant and $11.5 million for solar equipment. Financing used $46.5 million. Ending cash was $76.4 million versus $156.1 million a year earlier.
  • Balance sheet at March 31: Total assets were $2.502 billion; common equity was $785.1 million. Current assets of $709.6 million exceeded current liabilities of $585.2 million. Short-term debt was $147.6 million; the balance sheet reported long-term debt of $430.0 million and current maturities of $12.2 million.
  • Liquidity and debt: NJR had a $325 million committed credit facility, with $147.6 million outstanding; NJNG had a $200 million facility with no period-end borrowing. The facilities expire in December 2012. Management said the companies were in compliance with debt covenants and expected operating cash flow and borrowing availability to meet foreseeable needs.

Material changes and operating drivers

  • Lower reported earnings largely reflected derivative mark-to-market and inventory-hedging timing effects at NJRES. Six-month consolidated net financial earnings, a company-defined non-GAAP measure, were $96.2 million versus $91.4 million; GAAP net income was affected by $36.7 million of after-tax unrealized derivative losses, partly offset by $29.0 million of after-tax realized gains associated with gas still in inventory.
  • NJNG performed better: quarterly net income rose to $44.0 million from $40.5 million, and six-month net income rose to $68.4 million from $64.0 million. Utility gross margin, a non-GAAP measure, increased to $108.7 million for the quarter from $104.0 million, and to $186.5 million for six months from $179.0 million. Colder weather, customer growth, higher transportation margin and approved rate recovery contributed.
  • NJRES quarterly net income declined to $12.9 million from $35.4 million; six-month net income fell to $11.5 million from $63.1 million. Management cited lower market volatility and weaker storage and transportation optimization opportunities, as well as derivative timing volatility. Its non-GAAP financial margin was $29.3 million for the quarter versus $41.1 million and $38.0 million for six months versus $50.3 million.
  • Clean Energy Ventures, established in FY2011, reported $5.2 million of net income for the quarter and $5.2 million for six months, substantially reflecting federal investment tax credits (ITCs), including estimated credits on projects expected to be completed by fiscal year-end.

Outlook, risks and contingencies

  • Management expected NJRES to contribute 5%–10% of consolidated net financial earnings in FY2011, down from a larger share in FY2010, citing shale-gas-driven market changes and reduced volatility. This is a segment outlook, not consolidated earnings guidance.
  • NJR expected fiscal 2011 solar capital expenditures of $50–$70 million, of which $49.8 million was committed or spent; it warned that construction, permitting and grid-interconnection delays could jeopardize ITCs and Solar Renewable Energy Credits and materially affect earnings. NJNG estimated capital spending of $104.2 million in FY2011 and $123 million in FY2012.
  • NJNG customer additions were expected to total approximately 12,000–14,000 in FY2011 and FY2012. The BPU approved the $60.2 million AIP II infrastructure investment program; future base-rate recovery filings were planned for June 2011 and October 2012.
  • NJNG recorded a $201.6 million MGP remediation liability and matching regulatory asset for estimated future costs. Recovery depends on BPU approval; denial or changes in the estimate could affect results, cash flows or financial position. Previously incurred remediation costs, net of recoveries, included a further $70.1 million regulatory asset.
  • All auctions for NJNG’s $97 million of auction-rate securities had failed. The debt was not in default and the reported weighted average rate was 0.45%, but failed auctions and rising LIBOR could increase borrowing costs; refinancing alternatives were under review.
  • NJR had $208.6 million of gross wholesale credit exposure before collateral and netting. Derivative-related collateral calls, counterparty defaults, commodity-price movements and access to credit markets remain risks. NJR also guaranteed approximately $389.5 million of specified gas purchase and demand-fee commitments.
  • NJR sought $10.7 million in New Jersey tax refunds for amended returns but had recognized no benefit because the outcome was uncertain. It also disclosed up to $5.7 million of potential additional funding for Steckman Ridge construction.
  • The company reported no new reportable legal proceedings or material changes to previously disclosed risk factors other than the added risk that delayed or failed solar projects could affect ITC qualification and the effective tax rate. Disclosure controls were concluded effective; no material internal-control change was reported.

Key facts for investors to verify

  • How much of the earnings decline reflects temporary derivative/inventory timing versus changes in NJRES’s underlying margins and market opportunity.
  • Whether solar projects reach service by September 30, 2011, and whether the assumed ITCs and SRECs are realized.
  • Progress on NJNG’s rate-recovery filings, AIP II investment and MGP remediation recovery approvals.
  • Liquidity under seasonal working-capital needs, available credit capacity, and the effect of failed auction-rate-security markets if interest rates rise.
  • Changes in wholesale counterparty exposure, collateral requirements and the $201.6 million remediation estimate.