New Jersey Resources Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless stated otherwise. The company operates a regulated New Jersey gas utility and energy services, clean energy, midstream, and other businesses. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Operating revenue | $878.4 million | $736.0 million |
| Operating income | $12.2 million | $87.2 million |
| Net income | $7.7 million | $60.2 million |
| Diluted EPS | $0.18 | $1.44 |
| Net financial earnings (non-GAAP) | $39.9 million; $0.95 per share | $35.5 million; $0.85 per share |
| Cash flow from operations | $(68.8) million | $(45.0) million |
- Revenue rose 19.3%, while gas purchases increased 36.7% to $774.7 million. Management attributed much of the revenue and purchase growth to higher natural gas prices and volumes at NJRES, and colder weather, customer growth, and recovering Sandy-affected customers at NJNG.
- GAAP earnings fell sharply, primarily reflecting a $65.7 million unrealized derivative loss at NJRES, compared with a $23.4 million gain in the prior-year quarter. Management’s non-GAAP NFE measure, which adjusts for specified derivative and inventory timing effects, increased about 12% to $39.9 million. NFE is not a substitute for GAAP results.
- NJNG net income increased to $27.6 million from $25.5 million, supported by higher utility gross margin and infrastructure investment. NJRES reported a GAAP net loss of $19.4 million versus income of $27.8 million, but NFE rose to $7.4 million from $3.0 million. Clean Energy Ventures reported a $1.5 million net loss versus $5.3 million income, primarily reflecting lower tax credits and revenue.
- Operating cash use widened to $68.8 million, mainly due to working-capital movements, including higher broker margin requirements. Investing cash use was $54.0 million, including $60.5 million of capital expenditures. Financing provided $129.9 million, mainly through increased short-term borrowing. Cash ended the quarter at $10.0 million.
- At December 31, total assets were $3.20 billion, long-term debt including current maturities was approximately $587.6 million, and short-term debt was $503.6 million. Current assets were $898.3 million versus current liabilities of $1.05 billion, reflecting seasonal working-capital needs. Capital structure was 45% equity, 26% long-term debt, and 29% short-term debt.
- The quarterly dividend was $0.42 per share, up from $0.40. Total capital expenditures were $60.5 million, up from $49.6 million.
Changes, outlook, and material matters
- Management said colder weather, customer growth, and the return of approximately 75% of customers affected by Superstorm Sandy supported NJNG results. NJNG served approximately 501,600 customers; management expected annual customer growth of about 1.5% over the next two years and projected 14,000–16,000 additions during fiscal 2014 and 2015.
- Management estimated NJNG capital expenditures of $157.7 million in fiscal 2014 and $161.8 million in fiscal 2015. Solar-related capital expenditures for fiscal 2014 were estimated at $70–$95 million. The Two Dot wind project was expected to cost about $22 million and enter service in the second half of fiscal 2014; a second, 20-MW Iowa project was expected to require about $42 million and be completed in fiscal 2015. These are project estimates, not consolidated earnings guidance.
- On January 31, 2014, after quarter-end, NJR increased its revolving credit facility from $325 million to $425 million; a temporary $50 million credit line was terminated in connection with the increase. Management stated that available borrowing capacity and operating cash flows should meet working-capital, capital expenditure, and dividend needs for the next 12 months, and reported compliance with debt covenants.
- Natural gas distribution is seasonal, and interim results are not necessarily indicative of full-year results. NJRES earnings are exposed to commodity prices, derivative valuation and settlement timing, storage and transportation economics, counterparty credit, and margin requirements. Management noted that shale-gas supply changes could continue to challenge capacity values and margins.
- NJNG’s manufactured-gas-plant remediation liability and corresponding regulatory asset were each $183.6 million. Estimated total remediation costs ranged from $159.8 million to $261.2 million; recovery depends on regulatory approval. NJNG also carried $14.9 million of deferred Superstorm Sandy costs, with recovery to be addressed in a future rate case. The company cautioned that recovery is not assured.
- Renewable project returns depend on timely construction, permitting and grid interconnection, tax-credit eligibility, and SREC values. Management identified potential project delays and changes in tax incentives or renewable-credit markets as risks to earnings.
- Management reported no material change in previously disclosed risk factors and no material developments in reportable legal proceedings during the quarter. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of the gap between GAAP net income and NFE reflects timing-related derivative and inventory adjustments, and how those positions subsequently settle.
- The drivers and sustainability of NJRES’s improved NFE, given its wholesale-market, counterparty, and collateral risks.
- Available liquidity and seasonal borrowing needs, including the effect of the post-quarter increase in NJR’s credit facility and the maturity of facilities during 2014–2015.
- Regulatory approval and timing of recovery for MGP remediation and Sandy-related costs, and whether estimated remediation costs change.
- Progress, cost, tax-credit qualification, and expected returns for solar and wind projects, alongside the planned capital expenditure program.
- Continuation of NJNG’s Conservation Incentive Program and other regulatory mechanisms that support margin recovery.