New Jersey Resources Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2010. Unaudited results compare with the corresponding 2009 periods. NJR operates regulated New Jersey gas distribution, wholesale energy services, midstream investments, and retail and other businesses. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Key financial results
| Metric | Three months ended June 30, 2010 | Nine months ended June 30, 2010 | Comparable 2009 period |
|---|---|---|---|
| Operating revenue | $479.9 million | $2,007.8 million | $441.1 million / $2,179.9 million |
| Operating income (loss) | $(18.8) million | $188.6 million | $(23.8) million / $77.5 million |
| Net income (loss) | $(10.2) million | $115.9 million | $(14.2) million / $46.1 million |
| Diluted EPS | $(0.25) | $2.78 | $(0.34) / $1.08 |
| Dividends per share | $0.34 | $1.02 | $0.31 / $0.93 |
For the nine-month period, revenue fell 7.9%, while operating income and net income increased substantially. Management attributed the earnings improvement primarily to favorable changes in NJRES derivative values and related transactions; these accounting effects can create substantial period-to-period earnings volatility. In the quarter, NJR remained loss-making, although the loss narrowed year over year.
- Cash flows: The cash flow statement reports $155.9 million of operating cash flow, versus $350.7 million in 2009; investing used $60.7 million and financing used $39.8 million. Cash and temporary investments increased $55.5 million to $91.7 million. The MD&A describes operating cash flow as “used” $155.9 million, which conflicts with the positive amount in the cash flow statement; investors should verify the presentation.
- Margins and segments: NJNG utility gross margin was $224.8 million for nine months, nearly flat against $225.5 million. NJRES financial margin, a non-GAAP measure intended to reduce hedge-accounting timing effects, was $58.2 million versus $69.9 million. NJR’s nine-month net financial earnings, also non-GAAP, were $103.0 million versus $106.2 million.
- Debt and liquidity: At June 30, cash was $91.7 million; long-term debt was $434.9 million, current maturities $27.3 million, and short-term debt $164.3 million. NJR and NJNG had $525 million of committed facilities, with approximately $351 million available. Management stated the companies were in compliance with debt covenants and expected cash flow and borrowing capacity to meet foreseeable needs.
- Balance sheet: Total assets were $2.445 billion, compared with $2.321 billion at September 30, 2009. Current assets of $768.1 million exceeded current liabilities of $611.5 million.
Material changes and management commentary
- NJRES nine-month net income improved to $44.3 million from a $13.8 million loss, principally reflecting changes in realized and unrealized hedge-related results. Its financial margin nevertheless declined, which management linked to weak industrial demand, increased shale gas supply, lower volatility, and compressed basis spreads.
- Midstream Assets nine-month net income rose to $5.2 million from $2.1 million, largely because Steckman Ridge began commercial operations in 2009 and contributed more earnings.
- NJNG nine-month net income increased modestly to $70.1 million from $68.8 million. Utility gross margin was essentially flat; lower usage and warmer weather were partly offset by CIP accruals and higher transportation activity.
- Natural gas refunds and bill credits to NJNG customers totaled $110.4 million in the first nine months, compared with $49.1 million in 2009. NJNG’s BPU filing sought a 2.8% decrease for an average residential heating customer, including a 3.5% commodity-cost reduction, partly offset by a 0.7% CIP increase.
- Management projected NJNG customer growth of about 1.2% for fiscal 2010 and expected 12,000–14,000 new customers across fiscal 2010 and 2011. Estimated NJNG capital expenditures were $106.6 million for fiscal 2010 and $79 million for fiscal 2011.
- NJR expected approximately $26 million of solar-project spending through mid-fiscal 2011. Solar projects had not contributed to earnings as of June 30; management expected contributions to begin in the fourth quarter of fiscal 2010.
Risks, contingencies, and unusual items
- MGP remediation: NJNG recorded a $146.7 million remediation liability and corresponding regulatory asset, the low end of an estimated $146.7–$244.3 million future-cost range for five sites. Recovery depends on BPU approval; potential natural-resource-damage claims had not been quantified. A change in the expected recoverability of regulatory assets could affect earnings materially.
- Auction-rate securities: Auctions for approximately $97 million of NJNG variable-rate debt had failed. The debt was then bearing a weighted-average rate of 0.62%; higher LIBOR or continued auction illiquidity could increase borrowing costs. NJR was reviewing refinancing alternatives.
- Derivatives and counterparty exposure: Commodity prices, hedge timing, market liquidity, and counterparty performance may affect reported earnings, cash needs, and results. If all specified credit-related collateral thresholds had been invoked, the company estimated an additional $12.6 million collateral posting requirement.
- One-time tax item: Health-care legislation prompted an approximately $2.6 million non-cash after-tax charge related to Medicare Part D subsidy tax treatment. NJNG recorded a regulatory asset for the portion it believed recoverable through rates.
- Other commitments: NJR guaranteed about $290 million of certain NJNG and NJRES gas-purchase and demand-fee commitments. Solar returns depend in part on tax credits and Solar Renewable Energy Certificate markets. Management identified weather, economic conditions, regulation, credit markets, and natural-gas supply and price volatility as risks.
Important facts for investors to verify
- Reconcile the cash flow statement’s positive $155.9 million operating cash flow with the MD&A’s description of the same amount as cash “used.”
- Track NJRES hedge-related GAAP earnings against its non-GAAP financial margin and net financial earnings, including subsequent settlement and physical gas sales.
- Monitor BPU approval and customer recovery of MGP remediation costs, CIP balances, and infrastructure spending.
- Assess NJNG’s failed auction-rate debt exposure, refinancing progress, and sensitivity to interest rates and credit availability.
- Evaluate actual spending, incentives, and returns for solar projects and the associated NJNG customer-growth and capital-expenditure outlook.