New Jersey Resources Corporation — Form 10-Q
Reporting period: Third fiscal quarter and nine months ended June 30, 2014. The company provides regulated natural-gas distribution and unregulated energy services, clean-energy, midstream, and other operations. Results are seasonal; interim results are not necessarily indicative of the full fiscal year.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 | Prior comparable period |
|---|---|---|---|
| Operating revenue | $688.3 million | $3,146.2 million | $767.5 million and $2,464.4 million |
| Operating income (loss) | $(29.2) million | $230.0 million | $47.0 million and $191.2 million |
| Net income (loss) | $(14.3) million; diluted EPS $(0.34) | $166.4 million; diluted EPS $3.92 | $29.2 million, diluted EPS $0.70; and $134.8 million, diluted EPS $3.22 |
| Dividends declared per share | $0.42 | $1.26 | $0.40 and $1.20 |
| Operating cash flow | Not presented for the quarter | $376.5 million | $125.1 million |
Margins and earnings: NJNG utility gross margin, a company-defined non-GAAP measure, was $55.3 million for the quarter and $254.7 million for nine months, versus $49.4 million and $238.3 million. NJRES reported a quarterly net loss of $28.3 million but nine-month net income of $63.0 million. Its non-GAAP net financial earnings (NFE) were a loss of $8.6 million for the quarter and earnings of $90.2 million year to date, versus $2.1 million and $21.5 million, respectively.
Cash, investment and debt: Cash was $3.3 million at June 30. Nine-month investing cash outflow was $193.8 million and financing cash outflow was $182.3 million. Capital expenditures were $201.3 million. Balance-sheet debt comprised $626.8 million long-term debt, $9.5 million current maturities and $174.5 million short-term debt. Shareholders’ equity was $1,013.1 million; reported capitalization was 56% equity, 34% long-term debt and 10% short-term debt.
Liquidity: Available borrowing was reported at $304.8 million under NJR’s revolving facility and $168.3 million under NJNG’s facility. Management stated that available borrowing and operating cash flow should meet working-capital, capital-expenditure and dividend needs for the next 12 months, and that the companies were in compliance with debt covenants.
Changes versus the prior comparable period
- Quarterly revenue declined 10.3%, while nine-month revenue rose 27.7%. The quarterly decline primarily reflected lower NJRES sales volumes and lower NJNG off-system sales and BGSS rates. Year-to-date growth reflected extreme cold weather, higher gas demand and prices, and increased sales volumes.
- Quarterly net income fell from $29.2 million to a $14.3 million loss. Management attributed the deterioration principally to NJRES derivative and hedge-settlement timing effects; NJNG net income also declined. A one-time $9.9 million credit-support payment at Clean Energy Ventures partly offset these factors.
- Nine-month net income increased 23.4%, mainly on higher NJRES margins from unusually cold weather, NJNG customer growth and infrastructure investment, and the Clean Energy Ventures payment.
- Operating cash flow increased to $376.5 million from $125.1 million, substantially reflecting working-capital movements and higher NJRES gas sales and profitability during unusually cold weather. Investing outflow increased with solar, wind and utility investment.
- Clean Energy Ventures assets increased to $362.2 million from $253.7 million at September 30, 2013, reflecting solar and wind spending. Long-term debt increased, while short-term debt declined from $365.6 million to $174.5 million.
Outlook, commentary and material risks
- Utility and infrastructure: NJNG expects customer growth of approximately 1.5% annually over the next two years and projected 14,000–16,000 new customers over fiscal 2014–2015. Estimated NJNG capital expenditures are $167.9 million in fiscal 2014 and $161.1 million in fiscal 2015. The BPU approved the $102.5 million NJ RISE program after quarter-end, for six resilience projects over five years; cost recovery remains subject to regulatory processes.
- Clean energy: The 9.7 MW Two Dot wind project was completed in June 2014. A 20 MW Iowa wind project, with estimated investment of $42 million, was expected to be operational in fiscal 2015. Solar spending and project timing affect eligibility for tax credits and exposure to SREC prices. Management estimated $70–$80 million of fiscal 2014 solar capital expenditures.
- Derivatives and commodity exposure: NJRES does not designate most commodity derivatives as accounting hedges, so fair-value changes and settlement timing can create substantial GAAP earnings volatility even when the intended economic hedge is operating. The filing illustrates that a 10% Henry Hub price move would change fair value of specified open futures and swaps by approximately $20.2 million. Wholesale counterparty credit and liquidity, collateral and margin requirements are additional risks.
- Environmental and storm obligations: NJNG recorded a $183.6 million MGP remediation liability and corresponding regulatory asset; estimated future remediation costs range from $159.8 million to $261.2 million. Recovery depends on BPU approval and actual costs could differ. Superstorm Sandy had affected approximately 30,100 customers; about 75% had service restored by June 30, 2014. Deferred restoration O&M costs were $15.2 million, with recovery timing and amount not assured.
- Other items: In July 2014, the company implemented a voluntary early-retirement program and expected approximately $5.1 million of one-time expense in fiscal fourth-quarter 2014. NJR also signed a post-quarter commitment letter for $100 million of 10-year notes at 3.48%, subject to final documentation and customary conditions. No specific consolidated earnings guidance is stated in the filing text provided.
- Management cited weather, economic conditions, natural-gas and SREC price volatility, regulatory approvals and cost recovery, project construction and tax-credit timing, access to capital, credit and counterparties, and environmental, operational and extreme-weather events as risks. It reported no material change in risk factors from its 2013 Form 10-K.
Important facts for investors to verify
- How much of the quarterly GAAP loss reflects temporary derivative timing versus realized NJRES economics; review the non-GAAP NFE reconciliation and subsequent settlements.
- Whether NJNG’s planned infrastructure spending and regulatory recovery, including NJ RISE and Sandy-related costs, proceed on schedule and at the expected amounts.
- Whether solar and wind projects meet construction, placed-in-service, interconnection and tax-credit requirements, and how SREC and power-market prices affect returns.
- Updates to MGP remediation estimates, regulatory-asset recoverability, and any related insurance or third-party recoveries.
- Liquidity and collateral needs during winter or periods of commodity-price volatility, as well as debt covenant compliance and financing costs.
- The effect of the announced retirement-program charge and the proposed $100 million note issuance on subsequent-period results and leverage.