New Jersey Resources Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing is an annual report, not a quarterly report; it also includes unaudited quarterly data. NJR operates a regulated New Jersey gas utility and unregulated energy, renewable-energy, and related businesses.
Business context and financial results
NJR’s four reportable segments are Natural Gas Distribution (NJNG), Clean Energy Ventures, Energy Services (NJRES), and Energy Holdings. NJNG serves approximately 500,100 customers. Gas commodity costs are largely passed through to customers, so reported revenue can move substantially with gas prices and volumes; management also uses non-GAAP utility gross margin and net financial earnings (NFE) to assess performance.
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Operating revenue | $2.249 billion | $3.009 billion | Down 25.3% |
| Operating income | $108.7 million | $143.0 million | Down 24.0% |
| Net income | $92.9 million | $101.3 million | Down 8.3% |
| Diluted EPS | $2.23 | $2.44 | Down 8.6% |
| Net financial earnings (non-GAAP) | $112.4 million; $2.70 diluted per share | $106.5 million; $2.56 diluted per share | Up 5.5% |
| Cash from operating activities | $51.1 million | $250.1 million | Down $199.0 million |
| Cash used in investing activities | $217.1 million | $175.1 million | Outflow increased |
Revenue and gas purchases fell mainly because of lower natural-gas prices, reduced off-system sales, lower NJNG usage, and $85.9 million of NJNG customer bill credits. Net income also reflected weaker NJRES GAAP results, partly offset by solar investment tax credits (ITCs) and higher NJNG earnings. NJR’s effective tax rate fell to 7.7% from 27.1%, principally due to solar ITCs. NFE excludes timing effects from certain derivatives and economic hedges; it is not a GAAP measure.
Segments, margins, and cash flow
- NJNG: Net income was $73.2 million, up 2.7%. Utility gross margin, a non-GAAP measure, rose to $275.8 million from $269.0 million. Warmer weather reduced firm throughput, while customer growth, transportation margins, and infrastructure-related rate recovery supported results. The utility added 6,704 customers.
- Clean Energy Ventures: Net income was $19.5 million versus $6.8 million. The increase was driven principally by ITCs from solar projects placed in service; $34.1 million of ITCs were recognized in FY2012. NJR had 35.9 MW of solar assets in service at year-end.
- NJRES: GAAP net loss was $8.6 million versus $13.5 million of income. Financial margin, a non-GAAP measure, fell to $37.0 million from $43.7 million, and NFE fell to $10.8 million from $18.6 million. Management attributed the decline mainly to lower gas-price volatility and reduced optimization opportunities, including effects of shale-gas supply growth.
- Energy Holdings: Net income was $6.7 million, essentially unchanged. Retail and Other: Net income was $2.4 million, down from $3.1 million.
- Operating cash flow declined sharply, with working-capital movements, NJNG customer credits and lower gas-cost recovery, NJRES payable changes, and higher margin deposits among the cited factors. Cash used in investing increased primarily with solar and utility investment. Cash and equivalents were $4.5 million at year-end.
Debt, liquidity, and capital
At September 30, 2012, long-term debt was $525.2 million and short-term debt was $279.8 million, versus $426.8 million and $159.4 million, respectively, a year earlier. Total capitalization was $1.339 billion, including $813.9 million of common equity. NJR reported $144.8 million outstanding under its $325 million revolving facility, with $166.3 million available; NJNG had $135 million outstanding under its $200 million facility, with $65 million available. These facilities are subject to covenants, and management stated that NJR and NJNG were in compliance. The filing says existing borrowing availability and operating cash flow were expected to cover working capital, capital expenditures, and dividends for the foreseeable future, while noting restoration spending after the storm could require additional financing.
FY2012 dividends declared were $1.52 per share, compared with $1.44 in FY2011. Fiscal 2013 and 2014 NJNG capital expenditures were estimated at $119.3 million and $119.9 million, respectively, before Superstorm Sandy restoration costs. Solar equipment expenditures during FY2012 were $100.3 million.
Outlook, risks, contingencies, and unusual items
- Superstorm Sandy: The October 2012 storm damaged NJNG infrastructure after fiscal year-end and led to service shutdowns affecting approximately 30,100 customers. NJR could not estimate the loss or range of loss; lower revenue and margin, restoration costs, and higher capital expenditures were possible. Recovery through regulatory mechanisms was uncertain. A 1.5 MW commercial solar array was also damaged; the extent and potential insurance recovery were not yet clear.
- Growth and regulation: NJNG expected 12,000–14,000 new customers over FY2013–FY2014, with approximately $3.3 million in annual utility gross margin under its CIP tariff. The CIP was scheduled to expire September 30, 2013; an extension was anticipated but not assured. NJNG’s BGSS incentive programs were extended through October 31, 2015.
- Infrastructure plans: The BPU approved a four-year SAFE program of up to $130 million, excluding AFUDC, to replace certain distribution infrastructure. NJNG also had an approved pilot to invest up to $10 million in compressed-natural-gas vehicle refueling stations.
- Environmental contingency: NJNG’s estimated future remediation costs for five former manufactured-gas-plant sites ranged from $159.6 million to $266.4 million; $182 million was accrued with a corresponding regulatory asset. Recovery depends on BPU approval, and actual costs may differ.
- Derivative and counterparty exposure: NJRES results can be volatile due to fair-value accounting and hedge timing. The company also disclosed wholesale counterparty credit risk and exposure to market volatility. An NJRES claim related to MF Global was sold after year-end for $17.1 million; a $1.4 million allowance had been recorded in FY2012.
- Other material risks include access to credit, interest rates, debt covenant compliance, pension and postemployment benefit funding, renewable-energy tax-credit and SREC market changes, gas supply and weather, regulatory cost recovery, and environmental or operational events. No consolidated earnings guidance is stated in the filing text summarized here.
Key facts for investors to verify
- Assess the full financial impact of Superstorm Sandy, restoration spending, service restoration, insurance proceeds, and regulatory cost recovery.
- Confirm whether the CIP was extended beyond September 30, 2013, and review the terms and outcomes of NJNG rate and infrastructure filings.
- Separate GAAP earnings from NFE and segment financial margin; examine how derivative timing and gas-market volatility affect reported results.
- Track solar project performance, ITC eligibility, SREC prices, and the risks and returns associated with the OwnEnergy investment.
- Review liquidity and borrowing needs against elevated short-term debt, capital spending, debt maturities, pension obligations, and remediation commitments.