Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for its fiscal second quarter and six months ended March 31, 2012. NJR operates a regulated New Jersey gas utility, wholesale energy services, solar and other clean-energy investments, and natural-gas transportation and storage investments. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2011 period.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenues | $612.9 vs. $977.0 | $1,255.3 vs. $1,690.1 |
| Operating income | $67.7 vs. $93.2 | $142.9 vs. $133.5 |
| Net income | $54.5 vs. $63.9 | $111.9 vs. $88.4 |
| Diluted EPS | $1.31 vs. $1.54 | $2.68 vs. $2.13 |
| Dividends per share | $0.38 vs. $0.36 | $0.76 vs. $0.72 |
- Quarterly revenue fell 37.3% and net income fell 14.7%; six-month revenue fell 25.7% while net income rose 26.5%. Lower commodity prices and customer bill credits reduced reported revenue. The quarterly earnings decline primarily reflected higher realized and unrealized losses at Energy Services.
- Six-month operating cash flow was $104.6 million, down from $181.0 million. Investing cash outflow was $111.3 million, including $61.8 million of solar-equipment spending; financing provided $7.0 million. Cash ended at $7.8 million. Operating cash flow less reported capital expenditures was approximately negative $6.8 million, a derived measure.
- At March 31, current assets were $674.7 million and current liabilities $634.2 million. Cash was limited, while short-term debt was $191.3 million, long-term debt $429.5 million, and current maturities $8.1 million. NJR and NJNG reported $155.5 million and $166.0 million, respectively, available under their credit facilities. NJR’s $325 million credit facility was due to expire in December 2012.
- Common equity was 58% of capitalization, long-term debt 29%, and short-term debt 13%. Management said the company and NJNG were complying with debt covenants and expected available borrowing capacity and operating cash flow to cover foreseeable needs.
- NJNG utility gross margin, a company-defined non-GAAP measure, was $111.6 million for the quarter and $192.0 million for six months, versus $108.7 million and $186.5 million. Six-month net financial earnings, another non-GAAP measure, were $119.4 million versus $96.2 million; this differs from GAAP net income largely because of derivative and inventory-hedging timing effects.
Material changes, outlook and risks
- Energy Services reported a quarterly net loss of $3.6 million versus income of $12.9 million a year earlier, but six-month income increased to $16.1 million from $11.5 million. Management cited derivative-related timing volatility, higher fee-based revenue and improved transportation arbitrage over the six-month period. It warned that shale-gas supply and compressed market volatility could continue to constrain margins.
- Clean Energy Ventures’ six-month net income rose to $22.0 million from $5.2 million, primarily due to federal investment tax credits. The six-month effective tax rate fell to 19.5% from 32.4%; management’s tax estimate includes projects forecast to be completed during the fiscal year.
- NJNG added 3,492 customers in six months. Management expected 12,000–14,000 new customers over fiscal 2012 and 2013. Warmer weather reduced gas usage; NJNG issued $90.7 million in customer bill credits during the six-month period and planned a 3.6% BGSS rate decrease effective April 1, 2012.
- Management estimated fiscal 2012 NJNG capital expenditures of $121.2 million and solar expenditures of $82.6 million; fiscal 2013 estimates were $70 million and $90 million, respectively. Solar spending and tax-credit benefits depend on project completion, permitting, interconnection, and eligibility. The filing gives no clear consolidated earnings guidance.
- NJNG petitioned for a proposed SAFE infrastructure program involving up to $204 million of investment over five years; approval and cost recovery remained pending. Recovery of utility regulatory assets generally depends on BPU approval.
- NJNG recorded a $182.9 million manufactured-gas-plant remediation liability and corresponding regulatory asset. Its estimated future remediation costs ranged from $161.5 million to $278.5 million; actual costs and regulatory recovery remain uncertain.
- NJR Energy Services had $20.2 million remaining exposed in the MF Global liquidation at March 31, after receiving $7.6 million in distributions. The amount and timing of any further recovery were uncertain.
- Other key risks include natural-gas price and derivative volatility, counterparty and collateral exposure, weather and customer usage, access to financing, and execution of solar projects. NJR reported $161.6 million of gross wholesale credit exposure; it also disclosed that a ratings downgrade or other contractual triggers could require additional collateral.
Important facts for investors to verify
- How much of the six-month earnings increase came from solar investment tax credits and derivative or inventory-hedging timing effects, and how those items may reverse or change.
- Progress on solar projects, forecast capital spending, tax-credit qualification, and expected SREC economics.
- Recovery prospects and timing for the $20.2 million MF Global exposure, and any changes in counterparty or collateral exposure.
- BPU decisions on the SAFE proposal and continuing recovery of gas, efficiency, and MGP-related regulatory assets.
- Refinancing or renewal plans for NJR’s credit facility expiring in December 2012, alongside seasonal liquidity needs and projected capital spending.