Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for the quarter and six months ended March 31, 2015, its fiscal second quarter and first half. NJR combines regulated New Jersey gas distribution with wholesale energy services, clean-energy investments, midstream interests, and home services. Results are seasonal and interim results are not necessarily indicative of full-year performance. Share and per-share figures reflect the company’s 2-for-1 stock split, distributed March 3, 2015.
Key financial metrics
| Metric | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 | Prior-year comparison |
|---|---|---|---|
| Operating revenue | $1.013 billion | $1.837 billion | Down 35.9% and 25.2%, respectively |
| Operating income | $82.8 million | $251.5 million | Down 66.5%; down 3.0% |
| Net income | $60.9 million | $184.2 million | Down 64.8%; up 2.0% |
| Diluted EPS | $0.71 | $2.14 | Versus $2.04; versus $2.13 |
| Net financial earnings (non-GAAP) | $99.1 million | $154.3 million | Down 34.7%; down 19.6% |
| Cash from operations | Not separately presented | $326.5 million | Versus $383.4 million |
Six-month operating cash flow exceeded investment cash outflow of $160.2 million; financing used $65.1 million. Cash at March 31 was $103.3 million, versus $2.2 million at September 30, 2014.
At March 31, total assets were $3.333 billion and common equity was $1.151 billion. Long-term debt was $699.2 million, current maturities $36.3 million, and short-term debt $146.0 million. Capital structure was 57% equity, 34% long-term debt, and 9% short-term debt. NJR reported $417.3 million available on its $425 million revolving facility and an additional $100 million under an uncommitted line; NJNG had $103.3 million available under its facility. Management said the company was in compliance with debt covenants and expected available borrowing capacity and operating cash flow to cover needs for the next 12 months.
For the second quarter, NJNG’s non-GAAP utility gross margin was $120.5 million, up from $116.0 million. For six months it was $207.7 million, versus $199.4 million. The company does not provide a consolidated gross margin figure in the presented statements; consolidated operating margin comparisons should be interpreted in light of wholesale gas-price and derivative accounting effects.
Material changes versus the prior comparable period
- Quarterly GAAP net income fell sharply, primarily because Energy Services (NJRES) earnings were much lower than in the unusually volatile, extremely cold prior-year period. NJRES quarterly net income was $6.7 million versus $110.6 million; its six-month net income was $85.6 million versus $91.3 million.
- Consolidated revenue declined substantially as average natural-gas prices and related wholesale transaction values fell. Lower revenue does not by itself indicate an equivalent decline in underlying economics; NJRES uses non-GAAP financial margin and net financial earnings to adjust for derivative and inventory timing differences.
- First-half GAAP net income increased modestly, supported in part by Clean Energy Ventures. Six-month segment net income was $18.8 million versus $12.2 million, reflecting greater forecast tax credits, SREC sales, and wind-energy revenue. First-half consolidated NFE nevertheless declined, primarily because NJRES performance weakened.
- Utility results improved: NJNG six-month net income increased 2.8% to $76.8 million, with higher utility gross margin and customer growth partly offset by higher operating, depreciation, and interest costs.
- Cash used in investing rose to $160.2 million from $110.2 million, mainly because solar and wind spending increased. Short-term debt fell from $301 million at September 30 to $146 million at March 31, while long-term debt increased.
Outlook, commentary, risks, and unusual items
- NJNG expected customer growth of approximately 1.6% annually over the next two years and targeted 15,000–17,000 new customers in fiscal 2015 and 2016. The company estimated NJNG capital expenditures of $189.4 million in fiscal 2015 and $233.7 million in fiscal 2016.
- NJR estimated fiscal 2015 solar capital expenditures of $100–$110 million and wind capital expenditures of $90–$110 million. Solar and wind returns depend on project execution, interconnection, SREC markets, and availability and timing of federal tax credits. A 48.3 MW Kansas wind project was under construction and expected to be completed in fiscal Q1 2016.
- NJNG’s base rate case was due no later than November 15, 2015. The BPU had approved recovery of Superstorm Sandy deferred operating costs in that case. NJNG had also petitioned to extend SAVEGREEN through June 2018 and sought continuation of BGSS incentive programs scheduled to expire October 31, 2015.
- NJNG’s Southern Reliability Link petitions were filed April 2, 2015, after quarter-end. NJNG issued $150 million of senior notes on April 15, 2015, also after quarter-end, for general purposes, debt refinancing, and capital spending.
- Environmental remediation at five former manufactured-gas-plant sites is a material contingency. NJNG recorded a $177 million liability and matching regulatory asset; estimated future remediation costs ranged from $151.3 million to $249.8 million. Recovery depends on BPU approval, and any determination that recovery is not probable could materially affect results.
- Commodity-price, derivative, counterparty-credit, weather, regulatory, funding, project-completion, and tax-credit risks remain important. Management warned that NJRES GAAP earnings can be volatile because derivative gains and losses may be recognized in different periods from the related physical gas sales. A 10% move in Henry Hub prices was estimated to change the fair value of open futures and fixed swaps by about $3.9 million.
- The company declared dividends of $0.23 per share for the quarter and $0.45 per share for the six months. The 2-for-1 stock split and issuance of new shares through the dividend reinvestment plan increased the share base.
Most important facts for investors to verify
- Whether NJRES’ weaker results reflect lower underlying financial margin or temporary commodity-market and hedge-timing effects; compare GAAP earnings with the company’s non-GAAP measures and reconciliations.
- Progress and financing for NJRCEV solar and wind projects, including completion schedules, tax-credit eligibility, SREC values, and the expected fiscal-year capital spending.
- Outcomes of NJNG’s next base rate case and pending regulatory filings, including infrastructure cost recovery and continuation of BGSS incentive programs.
- Updated estimates and regulatory recoverability of the $177 million MGP remediation obligation.
- Liquidity and leverage after the post-quarter $150 million NJNG note issuance, planned capital expenditures, and seasonal working-capital requirements.