New Jersey Resources Corporation (NJR) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparisons are with the three months ended December 31, 2011, unless otherwise noted. NJR operates a regulated New Jersey gas utility and businesses in energy services, clean energy, energy holdings, and retail services. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Operating revenue | $736.0 million | $642.4 million | +14.6% |
| Operating income | $87.2 million | $75.2 million | +15.9% |
| Net income | $60.2 million | $57.4 million | +5.0% |
| Diluted EPS | $1.44 | $1.38 | +4.3% |
| Dividend per share | $0.40 | $0.38 | +5.3% |
| Operating cash flow | $(45.0) million | $(77.5) million | Cash use improved |
Gas purchases rose 15.2% to $566.7 million. NJR reported $23.4 million of realized and unrealized derivative gains at NJRES in the quarter; mark-to-market and hedge timing effects make GAAP earnings volatile. Management’s non-GAAP net financial earnings were $35.5 million, down from $45.3 million. NJRES net income increased to $27.8 million, while its net financial earnings fell to $3.0 million from $7.6 million. NJNG net income declined to $25.5 million from $26.0 million, and Clean Energy Ventures net income fell to $5.3 million from $10.1 million.
At December 31, 2012, cash was $3.3 million and total assets were $2.95 billion. Short-term debt was $394.4 million, long-term debt $530.0 million, and current maturities of long-term debt $8.6 million. NJR reported $116.5 million available under its credit facility after letters of credit; NJNG reported $45.2 million available. Management stated the companies were in compliance with debt covenants and believed available borrowing capacity and operating cash flows would meet foreseeable needs. Net cash used in investing was $49.2 million; financing provided $92.9 million. Operating cash flows remain sensitive to seasonal working-capital swings.
Material changes and drivers
- Revenue growth mainly reflected higher NJRES volumes and the absence of $24.3 million in prior-year NJNG customer bill credits; lower average gas prices partly offset the volume increase.
- Consolidated net income rose despite lower Clean Energy Ventures earnings, as NJRES benefited from changes in realized and unrealized derivative results. NJR’s results excluding hedge timing effects, measured by net financial earnings, declined.
- NJNG utility gross margin decreased to $78.5 million from $80.5 million. Superstorm Sandy service interruptions reduced firm margin, partly offset by colder weather and customer additions. NJNG’s quarter included 1,959 new customers, compared with 2,001 a year earlier.
- Cash used in operations improved year over year, but remained negative. Management attributed the change to working-capital movements, including the nonrecurrence of prior-year customer credits and cash distributions related largely to the sale of an NJRES bankruptcy claim.
Outlook, risks and notable items
- Capital spending: NJNG estimated fiscal 2013 and 2014 capital expenditures of $131.2 million and $119.9 million, respectively. Solar-related spending was estimated at $70–$90 million in each year. These are estimates, subject to project timing and approvals.
- Superstorm Sandy: NJNG estimated $30–$40 million in distribution-system restoration capital costs, including $20–$27 million in fiscal 2013. Fiscal 2013 incremental operating and maintenance costs were estimated at $15–$20 million. About $14.1 million of Sandy-related costs had been deferred as a regulatory asset; recovery of uninsured costs remained subject to regulatory action. A damaged solar asset also resulted in a $758,000 pretax write-off, which the company expected insurance to cover.
- Regulatory investment: The BPU approved a four-year SAFE infrastructure program of up to $130 million, with a 6.9% return on investment under the approved mechanism. NJNG requested an annual $6.9 million base-rate increase related to AIP investments; the filing described the request as pending.
- Environmental contingency: NJNG recorded a $182 million MGP remediation liability and corresponding regulatory asset. Its estimated future remediation and monitoring costs ranged from $159.6 million to $266.4 million. Cost recovery depends on BPU approval; a disallowance could materially affect results, financial position, or cash flows.
- Market and business risks: NJRES cited reduced natural-gas price volatility and narrower regional and time spreads as constraints on storage and transportation optimization margins. Other material exposures include commodity and counterparty credit risk, weather, regulatory recovery, renewable-project delays, and eligibility for solar tax credits and renewable certificates.
- Tax and seasonality: The effective tax rate was 28.5%, versus 21.9%, primarily reflecting lower solar investment tax credits recognized in the quarter. Management’s estimates depend on projects being completed and placed in service. The utility and wholesale businesses are seasonal.
- The filing reported no material change to previously disclosed risk factors, no newly reportable legal proceedings, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether NJRES’s GAAP earnings gains convert into realized margins as associated stored gas is sold, and how its net financial earnings trend develops.
- Actual spending, restoration progress, and regulatory recovery of Sandy-related capital and operating costs.
- BPU decisions on the AIP rate filing and recovery of deferred regulatory costs, including the MGP remediation balance.
- Solar project completion and interconnection schedules, and the resulting qualification for investment tax credits and SRECs.
- Seasonal liquidity needs, short-term borrowing levels, credit-facility availability, and compliance with debt covenants.