New Jersey Resources Corporation — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended June 30, 2011; fiscal year ends September 30. Unaudited results. NJR operates regulated natural gas distribution, wholesale energy services, midstream investments, clean energy projects, and other businesses.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $648.2 million, up 35.1% | $2,338.3 million, up 16.5% |
| Operating income (loss) | $27.2 million; prior year loss of $18.8 million | $160.6 million, down from $188.6 million |
| Net income (loss) | $20.4 million; prior year loss of $10.2 million | $108.8 million, down from $115.9 million |
| Diluted EPS | $0.49; prior year loss of $0.25 | $2.62, versus $2.78 |
| Cash from operating activities | $227.2 million for nine months, versus $155.9 million |
Quarterly revenue growth primarily reflected higher NJRES sales volumes and prices and the nonrecurrence of prior-year NJNG customer bill credits and refunds. Revenue includes substantial natural-gas pass-through and wholesale activity; it should not be read as a direct measure of profitability. NJNG’s non-GAAP utility gross margin was $47.0 million for the quarter and $233.6 million year to date, compared with $45.8 million and $224.8 million.
Quarterly earnings improved substantially year over year, partly because of derivative and inventory-hedging timing effects: NJR reported after-tax unrealized gains of $2.9 million and realized gains associated with gas inventory of $7.8 million, versus prior-year losses. For nine months, reported net income declined despite $36.8 million of after-tax realized inventory-hedging gains, as unrealized derivative losses and other factors weighed on GAAP results. NJR’s non-GAAP consolidated net financial earnings were $9.7 million for the quarter and $105.9 million year to date, versus $11.6 million and $103.0 million.
Cash, debt and liquidity
- Cash and cash equivalents were $60.8 million at June 30, 2011, versus $0.9 million at September 30, 2010. Nine-month investing cash outflow was $97.9 million; financing cash outflow was $69.5 million.
- At June 30, balance-sheet long-term debt was $428.2 million and short-term debt was $138.0 million. Common equity was 58% of the reported capital structure; long-term debt was 31% and short-term debt 11%.
- NJR had $187 million available under its $325 million committed facility after borrowings and letters of credit. NJNG had no borrowings under its $200 million committed facility. Management said existing borrowing availability and operating cash flow should meet foreseeable working-capital, capital spending and dividend needs, and reported compliance with debt covenants.
- Dividends were $0.36 per share for the quarter and $1.08 for nine months, up from $0.34 and $1.02, respectively, in the prior-year periods.
Changes, outlook and material risks
- Energy Services remained exposed to weaker natural-gas price volatility and compressed storage and transportation spreads, which management attributed in part to shale-gas supply growth. NJRES financial margin, a non-GAAP measure, fell to $0.4 million for the quarter from $7.9 million and to $38.5 million for nine months from $58.2 million. Management expected NJRES to contribute 10%–20% of consolidated net financial earnings in fiscal 2011.
- Clean Energy Ventures became a reportable segment in fiscal 2011. Solar projects are expected to generate federal investment tax credits and SRECs. Fiscal 2011 solar capital expenditures were estimated at $70–$80 million, with $77.6 million committed or spent; fiscal 2012 spending was estimated at $65.6 million. Delays in construction, permitting or grid interconnection could defer or jeopardize tax credits and SREC revenue.
- NJNG estimated fiscal 2011 and 2012 capital expenditures of $108.2 million and $116.1 million, respectively. The BPU approved a $60.2 million extension of its infrastructure program. NJNG also filed for a 9.1% residential-heating BGSS price decrease, proposed for October 1, 2011, subject to approval.
- NJNG’s $97 million of auction-rate variable debt continued to experience failed auctions. The debt was not in default, but the company said refinancing was planned by fiscal year-end, subject to closing and market conditions. Higher LIBOR could increase borrowing costs.
- NJNG recorded a $201.6 million MGP remediation liability and corresponding regulatory asset. Recovery depends on BPU approval; any determination that recovery is not probable could materially affect results, financial position or cash flows.
- A $4.3 million expected New Jersey tax refund produced a $2.4 million after-tax, or $0.06 per-share, benefit in the quarter. Solar investment tax credits also reduced the nine-month effective tax rate to 30.9%, from 35.0%.
- Other disclosed risks include commodity-price and derivative volatility, counterparty credit exposure, access to wholesale-market liquidity and capital, weather, regulatory decisions, environmental obligations, and benefit-plan costs. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reported quarterly earnings reflect sustainable operating performance or primarily derivative, inventory-timing and tax effects; compare GAAP results with the company’s non-GAAP measures.
- Whether NJRES margins and earnings can withstand persistently lower regional price volatility and storage spreads.
- Solar project completion and interconnection schedules, actual capital spending, and eligibility for investment tax credits and SRECs.
- Progress and terms of NJNG’s planned auction-rate debt refinancing, and sensitivity to interest-rate increases.
- Regulatory recovery of the MGP remediation balance and pending NJNG rate and incentive-program filings.
- Seasonal working-capital needs, available credit capacity, and the funding of planned utility and solar capital expenditures.