Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2010. NJR operates regulated natural gas distribution through New Jersey Natural Gas (NJNG), wholesale energy services through NJR Energy Services (NJRES), midstream investments, and other businesses. Clean Energy Ventures became a reportable segment on October 1, 2010.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2010 | Prior-year quarter |
|---|---|---|
| Operating revenues | $713.2 million | $609.5 million |
| Operating income | $40.3 million | $85.4 million |
| Net income | $24.5 million | $51.9 million |
| Diluted EPS | $0.59 | $1.24 |
| Dividends per share | $0.36 | $0.34 |
| Cash used in operating activities | $131.9 million | $52.2 million |
| Cash used in investing activities | $29.3 million | $15.7 million |
| Cash from financing activities | $166.9 million | $42.1 million |
Amounts are in U.S. dollars; financial-statement figures are rounded. NJR’s reported net income fell 52.8%, while revenue rose 17.0%. Operating expenses increased to $672.9 million from $524.2 million, with higher nonutility gas purchases a major factor. The filing does not provide a consolidated gross-margin measure that is directly comparable across the businesses.
Management’s non-GAAP consolidated net financial earnings were $29.1 million, versus $27.4 million. NJNG net income increased to $24.4 million from $23.5 million; NJRES reported a $1.5 million GAAP net loss versus $27.6 million of income a year earlier, but non-GAAP net financial earnings rose to $3.2 million from $2.5 million.
At December 31, 2010, cash and temporary investments were $6.7 million. Short-term debt was $341.1 million, long-term debt was $432.5 million, and current maturities of long-term debt were $12.1 million. Committed credit facilities totaled $525 million, with approximately $175 million available at quarter-end. NJR subsequently arranged an additional $50 million credit line on January 11, 2011. Total assets were $2.71 billion and current liabilities were $841.6 million.
Material changes versus the prior-year quarter
- Reported earnings were substantially lower, principally because derivative fair-value and inventory-hedge timing effects shifted: NJR recorded after-tax unrealized losses of $34.4 million in 2010 versus gains of $4.1 million in 2009. Management states these accounting timing effects do not necessarily reflect the eventual economics of the hedged transactions.
- NJNG utility gross margin increased to $77.8 million from $75.0 million, helped by colder weather, customer growth and rate changes. Weather was 11.9% colder than the prior year.
- NJRES gross margin declined to $1.5 million from $50.0 million under GAAP, chiefly reflecting unrealized derivative losses rather than gains. Its non-GAAP financial margin was $8.8 million, compared with $9.2 million.
- Operating cash use widened, primarily due to working-capital movements, including higher receivables and broker-margin deposits. Short-term debt rose from $147.6 million at September 30, 2010 to $341.1 million at December 31, 2010.
- Utility plant expenditures were higher, and NJR began reporting Clean Energy Ventures as a separate segment.
Outlook, commentary, risks and contingencies
- Management expects NJNG to add approximately 12,000–14,000 customers in fiscal 2011 and 2012. Fiscal 2011 NJNG capital expenditures were estimated at $93.2 million; fiscal 2012 at $75.8 million.
- NJR estimated fiscal 2011 solar-project capital expenditures of $50–$70 million, with $19.7 million committed. Execution depends on project timing, construction logistics, permitting, regulatory approvals, federal investment tax credits and the solar renewable energy certificate market.
- Management expected NJRES to contribute 5%–10% of consolidated net financial earnings in fiscal 2011, citing shale-gas supply growth and reduced volatility in the Northeast as pressures on storage and transportation optimization opportunities.
- NJNG’s petition to extend its Accelerated Infrastructure Investment Program was amended to $60.2 million in January 2011; approval and cost recovery remained subject to the BPU. Existing NJNG gas-cost and infrastructure recovery mechanisms are also subject to regulatory terms.
- NJNG recorded a $201.6 million manufactured-gas-plant remediation liability and corresponding regulatory asset. Cost estimates may change, and recovery depends on BPU approval; any disallowance could materially affect results, financial position or cash flows. NJNG estimated fiscal 2011 remediation expenditures of $19 million.
- All auctions for NJNG’s $97 million of auction-rate variable debt had failed. The debt was still accruing interest at a reported weighted average 0.46%; higher LIBOR or prolonged auction illiquidity could raise borrowing costs. Management said it was reviewing refinancing alternatives.
- Other exposures include commodity-price and derivative volatility, counterparty credit risk, margin-call liquidity needs, and pension/OPEB funding uncertainty. NJR reported $297.8 million of gross wholesale credit exposure and potential additional collateral requirements under credit-related provisions.
- Management believed available borrowing capacity and operating cash flows would meet foreseeable needs and reported compliance with debt covenants. The filing notes that interim results are not indicative of full-year results because the businesses are seasonal.
Important facts for investors to verify
- How much of the GAAP earnings decline reflects temporary derivative and inventory timing effects, and how actual hedge settlements compare with management’s non-GAAP measures.
- Whether NJR can fund seasonal working capital and planned investment while short-term borrowings remain elevated; confirm credit availability and terms, including the post-quarter $50 million line.
- Progress and BPU approval of the amended $60.2 million infrastructure program, and continued recoverability of NJNG’s regulatory assets and MGP remediation costs.
- Solar project commissioning, committed versus total spending, and the continuing availability and value of tax credits and renewable energy certificates.
- Whether Northeast shale-gas development and market volatility lead NJRES to meet its fiscal 2011 contribution outlook, and whether failed auction-rate bond auctions or rising rates increase NJNG financing costs.