New Jersey Resources Corporation (NJR) — Q3 FY2013 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended June 30, 2013, in NJR’s fiscal year ending September 30. NJR operates regulated New Jersey gas distribution, wholesale energy services, clean-energy projects, midstream investments and other businesses. The utility served approximately 497,400 customers. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $767.5 million, up 80.5% from $425.1 million | $2,464.4 million, up 46.6% from $1,680.5 million |
| Operating income (loss) | $47.0 million vs. $(19.9) million | $191.2 million vs. $123.0 million |
| Net income (loss) | $29.2 million vs. $(10.3) million | $134.8 million, up 32.7% from $101.6 million |
| Diluted EPS | $0.70 vs. $(0.25) | $3.22 vs. $2.44 |
| Operating cash flow | Not presented for the quarter | $125.1 million vs. $59.9 million |
| Investing / financing cash flow | Not presented for the quarter | $(132.5) million / $4.8 million, versus $(158.2) million / $97.9 million |
Margins and segment performance. NJNG utility gross margin was $238.3 million for nine months, slightly below $239.9 million a year earlier; NJNG net income declined to $76.9 million from $78.5 million. NJRES reported nine-month GAAP net income of $42.8 million versus a $3.8 million loss, while its management-defined net financial earnings were $21.5 million versus $18.1 million. Consolidated net financial earnings, a non-GAAP measure, were $113.9 million versus $123.6 million. NJRES’ GAAP results were materially affected by derivative valuation and settlement timing.
Liquidity and debt. At June 30, cash was $1.9 million, compared with $4.5 million at September 30, 2012. Balance-sheet short-term debt was $296.9 million; long-term debt was $516.2 million, with $68.5 million of current maturities. NJR reported $107.7 million available under its revolving facility after outstanding letters of credit; NJNG reported $154.0 million available. Management said existing borrowing availability and operating cash flow should meet foreseeable requirements and that NJR and NJNG were in compliance with debt covenants. Total capitalization consisted of 50% equity, 29% long-term debt and 21% short-term debt.
Material changes and drivers
- Quarterly earnings rebounded from a year-earlier loss, principally because NJRES’ realized and unrealized derivative results improved. NJRES’ quarter GAAP net income was $22.2 million versus a $19.9 million loss.
- Revenue growth largely reflects higher natural-gas prices and volumes at NJRES, as well as the nonrecurrence of $85.9 million in NJNG customer bill credits issued in the prior-year nine-month period. Revenue growth should be interpreted alongside gas purchases, which also rose substantially.
- NJNG’s nine-month gross margin was broadly flat; higher operating and depreciation expenses contributed to lower operating income and net income.
- Clean Energy Ventures’ nine-month net income fell to $9.1 million from $20.8 million, chiefly due to lower solar investment tax credits, partly offset by higher revenue. Solar projects placed in service and tax-credit recognition affect reported earnings.
- Operating cash flow improved year over year, influenced by working-capital movements, nonrecurring prior-year customer credits and $17.9 million received from sale of an NJRES bankruptcy claim. Investing outflows remained substantial.
Outlook, commentary and risks
- Management estimated FY2013 NJNG capital expenditures of $146.3 million and FY2014 of $119.9 million. Solar-related capital expenditures were estimated at $55–$60 million for FY2013 and $70–$90 million for FY2014.
- NJNG estimated 13,000–15,000 new customers over FY2013–FY2014. The company also expected $30–$40 million in Sandy-related utility restoration capital spending and $15–$17 million in FY2013 incremental storm operating costs.
- The BPU approved deferral accounting for NJNG’s uninsured Sandy-related operating costs; $14.9 million was recorded as a regulatory asset. Recovery and timing remain subject to regulatory review. A separate BPU proceeding will examine the prudency of storm costs.
- NJNG recorded a $182 million liability and corresponding regulatory asset for manufactured-gas-plant remediation. Estimated total future remediation costs ranged from $159.6 million to $266.4 million; recovery remains subject to BPU approval and could be materially affected by regulatory decisions or actual costs.
- NJRES’ earnings remain exposed to natural-gas price volatility, derivative accounting timing, market liquidity, counterparty credit and reduced regional price spreads and volatility associated with shale-gas supply. The filing illustrates that a 10% change in Henry Hub futures prices would change the fair value of open futures and fixed swaps by approximately $20.5 million.
- Solar results depend on project completion and placement in service, permitting, grid interconnection, SREC markets and eligibility for federal investment tax credits. Weather, customer growth and usage, capital-market access, debt covenants and recovery of regulated costs are other stated risks.
Important facts for investors to verify
- How much of NJRES’ reported earnings reflects derivative marks and timing effects versus realized underlying margins; compare GAAP earnings with the company’s non-GAAP measures.
- Whether NJNG receives regulatory recovery for Sandy restoration costs and manufactured-gas-plant remediation, and on what schedule.
- Actual progress and spending against utility and solar capital plans, including project completion, interconnection and tax-credit qualification.
- Seasonal working-capital needs, short-term borrowing, facility availability and compliance with debt covenants, particularly given low cash balances.
- Whether NJRES can sustain margins amid lower market volatility and narrower transportation and storage price spreads.