NEW JERSEY RESOURCES CORP annual report, FY2018

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New Jersey Resources Corporation — FY2018 Form 10-K

Reporting period: Fiscal year ended September 30, 2018. This is an annual report, not a quarterly filing. NJR operates a regulated New Jersey gas utility and unregulated energy services, clean energy, and midstream businesses.

Financial results and key metrics

  • Revenue: $2.915 billion, up 28.5% from $2.269 billion. Gas purchases rose to $2.275 billion from $1.704 billion; much of the revenue increase reflects higher natural-gas volumes and prices, rather than equivalent growth in underlying margin.
  • Profit: GAAP net income was $233.4 million, or $2.66 per basic share, versus $132.1 million, or $1.53 per share. Operating income was $196.1 million versus $167.0 million. The effective tax rate was negative 29.9%, compared with 12.2% in FY2017.
  • Non-GAAP earnings: Net financial earnings (NFE) were $240.5 million, or $2.74 per basic share, versus $149.4 million, or $1.73 per share. NFE adjusts for timing differences in derivative and economic hedge accounting; it is not a substitute for GAAP results.
  • Cash flow: Operating cash flow was $398.3 million, up from $248.0 million. Investing used $373.1 million; financing used $26.0 million. Cash and cash equivalents ended the year at $1.5 million.
  • Debt and liquidity: Reported long-term debt was $1.181 billion, with $123.5 million of current maturities and $152.0 million of short-term debt. NJR and NJNG had $322.1 million and $185.3 million, respectively, available under their revolving facilities at year-end. Management said available borrowing capacity, equity proceeds, and operating cash flow should cover needs for the next 12 months.
  • Capital and dividends: Common equity was $1.419 billion; the reported capital structure was 49% common equity, 41% long-term debt, and 10% short-term debt. Dividends declared were $1.11 per share, up from $1.038. Capital expenditures were $384.6 million.

Material changes and segment performance

  • Energy Services: Net income increased to $53.1 million from $0.5 million; financial margin, a non-GAAP measure, rose to $121.6 million from $49.8 million. Management attributed the improvement mainly to colder weather, higher demand and greater natural-gas price spreads and volatility.
  • Clean Energy Ventures: Net income rose to $75.8 million from $24.9 million, primarily due to tax benefits from the Tax Act. The segment had 231.3 MW of solar capacity and 116.9 MW of wind capacity at year-end; wind assets were classified as held for sale.
  • Natural Gas Distribution: Net income declined to $84.0 million from $86.9 million. Utility gross margin, a non-GAAP measure, fell to $320.3 million from $348.0 million, including a $33.7 million adverse Tax Act-related rate impact, higher costs, and weaker incentive-program results. Customer count increased 1.8% to approximately 538,700.
  • Midstream: Net income increased to $24.4 million from $12.9 million, largely reflecting Tax Act benefits, despite lower equity earnings from Steckman Ridge.
  • Home Services and Other: Recorded a $3.6 million net loss versus $6.8 million of income, principally because of higher tax expense, including a Tax Act-related charge.
  • Portfolio changes: NJR sold its retail-services subsidiary in February 2018, receiving $9.5 million cash and a natural-gas swap; the sale produced a $3.7 million pretax gain. It also sold a 9.7 MW wind farm for $18.5 million, recognizing a $1.0 million pretax gain.

Outlook, risks and unusual items

  • Tax Act: FY2018 results included a $59.6 million income-tax benefit for nonutility entities and approximately $17 million of tax benefit for NJNG. The benefits materially boosted reported earnings; NJNG also recorded a $205.4 million regulatory liability for excess deferred taxes to be returned to customers over time.
  • Utility growth and investment: NJNG expects approximately 28,000–30,000 customer additions over FY2019–FY2021, or about 1.8% annual growth. It projected capital expenditures of $475.2 million in FY2019 and $343.2 million in FY2020. Clean Energy Ventures projected $134.4 million of FY2019 solar spending.
  • Projects and approvals: The planned Adelphia pipeline acquisition remained subject to regulatory approvals and other conditions. The purchase price was $166 million, with up to $23 million in additional contingent consideration; total project expenditures including related costs were estimated at $306–$310 million if completed. PennEast was expected to enter service in 2019, but could be delayed. SRL construction was expected to begin in FY2019, with permits and approvals under appeal.
  • Environmental contingency: NJNG estimated remediation costs for five former manufactured-gas sites at $117.7–$204.1 million and recorded a $130.8 million liability with a corresponding regulatory asset. Recovery depends on regulatory approval; disallowed costs could affect earnings.
  • Credit and financing: NJNG remained investment grade, but S&P lowered its ratings in August 2018 and both S&P and Moody’s outlooks were negative. The filing cites rising capital spending, tax reform and leverage as factors. NJNG’s $250 million credit facility was due to expire in May 2019.
  • Other risks: Results remain exposed to natural-gas price and weather volatility, derivative accounting and counterparty risk, regulatory cost recovery, solar incentives and SREC prices, project approvals and construction, pension and healthcare assumptions, and access to capital. Management reported no material adverse effect expected from pending litigation taken as a whole, while noting actual outcomes could exceed reserves.
  • Quarterly volatility: FY2018 included strong first- and second-quarter earnings and losses in the third and fourth quarters; Q4 net loss was $16.3 million. Management attributes substantial quarterly variation to seasonality and energy-market activity.

Most important facts for investors to verify

  • How much FY2018 earnings growth was attributable to the one-time Tax Act remeasurement versus recurring operating performance; compare GAAP net income with NFE.
  • Whether Energy Services can sustain FY2018’s unusually strong financial margin as weather, price spreads and market volatility change.
  • Whether NJNG’s substantial planned capital spending and regulatory recovery keep credit metrics and liquidity adequate, particularly given the negative rating outlook and facility maturity.
  • Progress, total costs, approvals and expected returns for Adelphia, PennEast and SRL; confirm whether project schedules and estimates have changed.
  • Wind-asset sale timing and proceeds, and the sensitivity of solar returns to tax credits, SREC prices and project execution.
  • Updated MGP remediation estimates and the continued recoverability of the associated regulatory asset.