New Jersey Resources Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010; the filing also reports fourth-quarter results. Amounts are in millions unless stated otherwise.
Business context
NJR is an energy-services holding company. Its principal businesses are regulated natural-gas distribution through New Jersey Natural Gas (NJNG), wholesale energy services through NJR Energy Services (NJRES), and midstream investments in Iroquois and Steckman Ridge. NJNG served approximately 490,400 customers. Effective October 1, 2009, NJR began reporting Midstream Assets as a separate segment and restated prior-period segment presentation.
Financial results and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Operating revenue | $2,639.3 | $2,592.5 |
| Operating income | $188.1 | $48.1 |
| Net income | $117.5 | $27.2 |
| Diluted EPS | $2.82 | $0.64 |
| Cash from operating activities | $139.4 | $267.2 |
| Cash used in investing activities | $(101.4) | $(121.3) |
| Cash used in financing activities | $(73.3) | $(152.4) |
| Total assets | $2,563.1 | $2,321.0 |
| Common stock equity | $725.5 | $689.7 |
| Long-term debt | $428.9 | $455.5 |
| Short-term debt | $147.6 | $143.4 |
Operating margin was approximately 7.1% in FY2010 versus 1.9% in FY2009, calculated from reported operating income and revenue. NJNG utility gross margin, a non-GAAP measure, was $259.6 million, compared with $260.3 million. NJRES financial margin, also non-GAAP, was $55.7 million versus $64.7 million; NJRES net income was $42.7 million, compared with a $32.6 million loss.
At year-end, cash and temporary investments were $0.9 million. NJR and NJNG had $525 million of combined committed credit facilities, with $368.7 million available. NJR reported covenant compliance. The company’s capital structure was 55% common equity, 32% long-term debt and 13% short-term debt.
FY2010 fourth-quarter revenue was $631.5 million, operating loss was $0.5 million and net income was $1.5 million, versus fourth-quarter FY2009 revenue of $412.6 million, operating loss of $29.4 million and net loss of $18.9 million.
Material changes versus FY2009
- Net income rose by $90.2 million. The rebound was substantially affected by derivative and hedge accounting: after-tax unrealized gains were $16.8 million in FY2010 versus losses of $39.3 million in FY2009, alongside lower realized inventory-hedge losses.
- Revenue increased $46.8 million while gas purchases declined $77.6 million. NJRES revenue increased with higher sales volumes and derivative valuation effects; NJNG revenue fell amid lower gas rates, customer credits and refunds, and warmer weather.
- Operating cash flow fell $127.8 million, primarily from working-capital movements, including higher NJRES gas inventory costs and receivables, partly offset by higher payables.
- Midstream equity earnings increased to $13.0 million from $6.9 million, mainly as Steckman Ridge contributed a fuller year of operating results.
- NJNG’s MGP remediation liability and corresponding regulatory asset increased to $201.6 million from $146.7 million following the annual reassessment.
- Dividends declared per share increased to $1.36 from $1.24. NJR repurchased 637,000 shares during the year for $23.3 million.
Outlook, commentary, risks and unusual items
- Management expected NJNG customer growth of approximately 1.3% annually and 12,000–14,000 additions over FY2011–FY2012, representing about $3.4 million in annual utility gross margin under the company’s CIP calculation.
- NJNG forecast capital expenditures of $88.2 million in FY2011 and $70.8 million in FY2012. NJR and its subsidiaries expected financing needs in FY2011–FY2012 to be met primarily through short-term debt, meter sale-leasebacks and the dividend reinvestment plan.
- NJRES warned that reduced natural-gas price volatility, narrower basis spreads and increased Northeast shale-gas supply had constrained asset-optimization opportunities; absent improved supply-demand conditions or volatility, management expected continued pressure on financial margin and net financial earnings.
- NJNG’s $201.6 million MGP remediation estimate is recorded as both a liability and regulatory asset, but recovery remains subject to BPU approval and actual costs may differ. Non-recovery could materially affect results, financial position or cash flows.
- NJNG had $97 million of auction-rate debt whose auctions had failed; the debt was not in default, and its weighted-average rate was 0.46% at year-end. Higher LIBOR or refinancing constraints could raise borrowing costs.
- Other key exposures include weather and economic conditions, commodity-price and derivative valuation volatility, counterparties and credit availability, pension and postemployment benefit costs, regulatory recovery, environmental obligations, and solar-project execution and incentive risks.
- Solar investments were in development: NJRHS and NJRCEV had agreements for residential and commercial installations, with estimated total project costs of approximately $26 million. Project timing, permitting, incentives and SREC market prices could affect returns.
- The filing reports effective internal controls and unqualified audit opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of FY2010’s earnings rebound reflects recurring operating performance versus unrealized derivative gains and hedge timing effects.
- Whether NJRES can sustain margins amid compressed spreads, lower volatility and changing regional gas supply.
- Whether the BPU permits recovery of MGP remediation, CIP, infrastructure and other regulatory assets, and whether remediation estimates change.
- Available liquidity and borrowing costs, including refinancing plans for auction-rate securities and compliance with debt covenants.
- Actual customer growth, capital spending, solar project completion and economics, and future pension and OPEB funding needs.