New Jersey Resources Corporation — FY2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2011, not a calendar-year quarter. NJR operates regulated New Jersey Natural Gas (NJNG), wholesale energy services (NJRES), solar investments, midstream interests, and other retail businesses. Its four reportable segments are Natural Gas Distribution, Energy Services, Clean Energy Ventures, and Midstream Assets.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Operating revenue | $3,009.2 million | $2,639.3 million |
| Operating income | $143.0 million | $188.1 million |
| Net income | $101.3 million | $117.5 million |
| Diluted EPS | $2.44 | $2.82 |
| Net financial earnings (non-GAAP) | $106.5 million | $101.8 million |
| Cash from operations | $250.1 million | $139.4 million |
| Cash used in investing | $175.1 million | $101.4 million |
| Cash used in financing | $68.5 million | $73.3 million |
- Revenue increased 14.0%, mainly on higher NJRES sales volumes; gas purchases also rose, and operating income declined 24.0%. Operating margin was approximately 4.8% of revenue versus 7.1% in FY2010.
- Net income fell 13.8%, while non-GAAP net financial earnings rose 4.7%. The difference chiefly reflects derivative and inventory-hedge timing effects; FY2011 included after-tax unrealized derivative losses of $23.3 million and realized inventory-hedge gains of $18.1 million.
- Operating cash flow improved substantially, with management citing working-capital changes, gas-cost recoveries, lower gas in storage, and margin deposits as important factors. Cash at year-end was $7.4 million.
- Total assets were $2.65 billion. Common equity was $776.3 million; long-term debt was $426.8 million and short-term debt was $159.4 million. Capital structure was 57% equity, 31% long-term debt, and 12% short-term debt.
- Dividends declared were $1.44 per share, up from $1.36. NJR’s credit facility had $132.9 million outstanding; NJNG had $26.5 million outstanding. The filing reports NJR and NJNG were in compliance with debt covenants. NJNG’s ratings were investment grade with stable outlooks.
Material changes versus the prior year
- NJNG net income increased to $71.3 million from $70.2 million; utility gross margin rose to $269.0 million from $259.6 million. Year-end customers increased to approximately 495,000.
- NJRES net income fell to $13.5 million from $42.7 million, and financial margin, a non-GAAP measure, declined to $43.7 million from $55.7 million. Management attributed the pressure to lower market volatility and compressed regional gas-price spreads associated in part with expanding Marcellus Shale supply.
- Clean Energy Ventures became a separate reportable segment effective October 1, 2010. It reported $6.8 million net income, including substantial solar investment tax credits; solar assets and expenditures expanded considerably.
- Cash used in investing increased as solar-equipment and utility-plant spending rose. Capital expenditures were $177.5 million in segment reporting; the cash-flow statement reports $72.0 million of solar equipment and $93.6 million of utility plant expenditures, plus other items.
- NJNG refinanced $97 million of auction-rate securities with variable-rate demand notes and obtained a separate $100 million liquidity facility supporting those notes. The new notes had a 0.16% weighted-average rate at year-end, but rates can change.
Outlook, risks, contingencies, and unusual items
- Management expected NJNG customer growth of about 1.4% annually, or 12,000–14,000 new customers over FY2012–FY2013, representing approximately $3.4 million of annual utility gross margin under its tariff calculation.
- Expected capital expenditures included NJNG spending of $121.2 million in FY2012 and $70 million in FY2013, and solar-related spending of approximately $88 million and $90 million, respectively. Solar project timing, permitting, grid connections, tax-credit eligibility, and SREC prices could affect returns.
- NJNG’s five manufactured-gas-plant cleanup obligations were estimated at $161.5–$278.5 million. The company recorded a $182.9 million liability and corresponding regulatory asset and expected to seek recovery through BPU-approved rates; recovery is not assured.
- After year-end, NJNG announced approximately $71.2 million in customer bill credits. This is a subsequent event, not a FY2011 operating-period adjustment described in the filing.
- After year-end, NJRES had $27.8 million of margin at clearing broker MF Global. Open positions were transferred to a new broker along with $3.6 million of margin; the amount and timing of any further recovery were uncertain at filing. This was a material liquidity and potential-loss contingency.
- Other key risks include commodity-price and derivative volatility, counterparties’ creditworthiness, access to financing, pension and postemployment benefit funding, regulatory recovery of deferred costs, weather, and possible work stoppages. NJNG’s union contract was due to expire in December 2011.
- FY2011 fourth-quarter net loss was $7.5 million, compared with net income of $1.5 million in FY2010’s fourth quarter; quarterly results are seasonal and affected by derivative timing.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Review the MF Global claims and any eventual recovery of NJRES margin funds, and assess resulting liquidity or earnings effects.
- Track NJNG’s MGP remediation estimates, actual spending, and BPU approval and recovery of costs.
- Assess whether solar projects meet construction and interconnection schedules and qualify for expected investment tax credits and SREC revenues.
- Monitor NJRES financial margin and net financial earnings separately from GAAP results, including derivative and inventory timing reconciliations.
- Confirm current debt-facility availability, variable-rate exposure, covenant headroom, and pension contribution needs.
- Check subsequent filings for the status and accounting treatment of the $71.2 million NJNG customer credits and FY2012 capital plans.