New Jersey Resources Corporation — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017; fiscal year ends September 30. NJR provides regulated natural-gas distribution and operates energy services, clean-energy, midstream, and home-services businesses. Amounts below are in millions unless noted.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Operating revenue | $457.5 | $393.2 | $1,732.1 | $1,411.7 |
| Operating income (loss) | $18.0 | $(28.3) | $199.1 | $125.1 |
| Net income (loss) | $19.0 | $(17.4) | $168.6 | $106.3 |
| Diluted EPS | $0.22 | $(0.20) | $1.94 | $1.23 |
| Net financial earnings (non-GAAP) | $17.4 | $11.0 | $161.9 | $140.1 |
Q3 revenue increased 16%; nine-month revenue rose 23%. Nine-month net income increased 59%. Management attributed improvement primarily to higher NJRES gross margin and derivative gains, higher NJNG margin following the rate-case increase, and more clean-energy tax credits. Results were also affected by timing differences from derivatives; NFE is a company-defined non-GAAP measure intended to reduce that volatility.
- Cash flow: Operating cash flow was $223.1 million for nine months, versus $96.6 million. Investing used $243.3 million; financing provided $44.8 million. Cash ended at $62.2 million.
- Investment and margins: NJNG utility gross margin was $301.6 million for nine months, up from $267.0 million. NJRES financial margin, a non-GAAP measure, fell to $43.9 million from $57.0 million, reflecting fewer transportation-market opportunities, transaction timing, and milder weather. NJRES NFE declined to $20.2 million from $27.6 million.
- Liquidity and debt: At June 30, cash was $62.2 million; short-term debt was $263.4 million, current maturities of long-term debt $186.3 million, and long-term debt $897.7 million. NJR had $146.6 million available under its $425 million facility; NJNG had $249.3 million available under its $250 million facility. Management reported covenant compliance and expected funding to meet needs for the next 12 months.
- Capital spending: Nine-month capital expenditures were $238.7 million, including $115.8 million for gas distribution and $122.0 million for solar and wind. PennEast equity-investment contributions were $24.1 million.
- Dividend: $0.765 per share was declared for the first nine months, compared with $0.72 in the prior-year period.
Material changes and notable items
- Q3 GAAP net income improved from a loss to profit, while nine-month GAAP and non-GAAP earnings increased. Q3 NJRES reported earnings were particularly affected by derivative fair-value movements; its financial margin and NFE provide different, non-GAAP views of underlying performance.
- NJNG’s September 2016 rate-case settlement raised annual base rates by $45 million, effective October 1, 2016. For the nine-month period, the settlement contributed to higher utility margin and operating income.
- Clean Energy Ventures’ nine-month net income rose to $30.5 million from $19.4 million, supported substantially by tax benefits. NJR’s forecast effective tax rate was 13.1%; recognized tax credits, net of deferred taxes, were $37.1 million at the segment for the nine months.
- In January 2017, NJNG purchased $35.8 million of first-mortgage bonds in lieu of redemption. Nine-month operating cash flow benefited from lower broker-margin requirements and the absence of the prior-year $30 million discretionary pension contribution.
- One-time gains included $5.4 million from sales of available-for-sale securities and $1.9 million from an office-property sale.
Outlook, risks, and contingencies
- No consolidated full-year earnings guidance is stated in the provided filing text. NJNG projected customer growth of approximately 1.7% annually through FY2019 and 26,000–28,000 customer additions over FY2017–FY2019.
- Management estimated FY2017–FY2018 NJNG capital expenditures of $181.7 million and $337.2 million, respectively; FY2017 solar ITC-eligible capital expenditures were estimated at $95–$105 million. PennEast was estimated to enter service in the first quarter of FY2019, subject to FERC certification and project-timeline reassessment.
- On July 27, 2017, after quarter-end, NJR agreed to acquire specified Talen retail and wholesale natural-gas business assets for approximately $54.3 million; $44.3 million was paid at closing. Purchase-price allocation remained under evaluation.
- Key risks include weather and commodity-price volatility, derivative and counterparty exposure, access to capital, clean-energy project timing and eligibility for tax incentives, regulatory cost recovery, and required approvals and land rights for projects including PennEast. NJNG’s Southern Reliability Link approvals were under third-party appeal.
- NJNG’s five manufactured-gas-plant sites had estimated total future remediation costs of $143.9–$231.6 million; the recorded liability and corresponding regulatory asset were $161 million at June 30, 2017. Recovery depends on regulatory treatment and actual remediation costs.
- Management stated that no material risk-factor changes or reportable legal-proceeding developments occurred during the quarter. It also stated disclosure controls were effective and no material change in internal control occurred.
Investor verification priorities
- Separate recurring operating performance from derivative fair-value and inventory-hedging timing effects; reconcile GAAP earnings with NFE and NJRES financial margin.
- Track NJRES margin trends, market opportunities, seasonal cash requirements, and counterparty exposure; reported gross credit exposure was $201.2 million.
- Confirm progress, approvals, costs, and funding for PennEast, SAFE II, NJ RISE, and the Southern Reliability Link.
- Monitor clean-energy project completion, tax-credit qualification and utilization, SREC prices, and the impact of tax incentives on earnings.
- Assess MGP remediation estimates and regulatory cost recovery, and review the final allocation and integration of the Talen asset purchase.
- Review debt maturities, short-term borrowing availability, capital-spending plans, and the effect of seasonal working-capital needs.