New Jersey Resources Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. Although the request metadata says “2017 Q4,” this is an annual filing; quarterly data are identified separately below. NJR is an energy-services holding company with regulated New Jersey gas distribution and clean-energy, energy-services, midstream, and home-services businesses.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Operating revenue | $2,268.6 million | $1,880.9 million |
| Operating income | $167.0 million | $167.5 million |
| Net income | $132.1 million | $131.7 million |
| Diluted EPS | $1.52 | $1.52 |
| Net financial earnings (NFE, non-GAAP) | $149.4 million; $1.73 basic per share | $138.1 million; $1.61 basic per share |
| Cash from operations | $248.0 million | $142.6 million |
| Cash used in investing | $390.7 million | $363.2 million |
| Total assets | $3,928.5 million | $3,718.6 million |
| Long-term debt | $997.1 million | $1,055.0 million |
| Dividends declared per share | $1.0375 | $0.9750 |
- Revenue rose about 21%, but operating income was essentially flat. Operating margin fell to about 7.4% from 8.9%; net margin declined to about 5.8% from 7.0%.
- The reported net income increase was only $0.4 million. NFE, a company-defined non-GAAP measure that adjusts derivative and inventory hedge timing, increased about 8%.
- Year-end cash was $2.2 million, down from $37.5 million. Working capital was negative $223.5 million, largely because about $150 million of debt was reclassified as current maturities. Management said available borrowing capacity, equity proceeds, and operating cash flow should cover working capital, capital expenditures, and dividends for the next 12 months.
- At year-end, NJR had $255 million drawn on its $425 million revolving facility, with about $156.6 million available; NJNG had $11 million of short-term borrowings and about $238.3 million available on its $250 million facility. NJR and NJNG reported compliance with debt covenants.
Segments and changes versus prior year
- Natural Gas Distribution: Net income increased to $86.9 million from $76.1 million. Utility gross margin, a non-GAAP measure, rose to $348.0 million from $309.4 million, principally following a $45 million base-rate increase effective October 2016 and customer growth. NJNG served about 529,800 customers; fiscal-year customer growth was approximately 1.7%.
- Clean Energy Ventures: Net income decreased to $24.9 million from $28.4 million despite revenue growth to $64.4 million from $53.5 million. Higher depreciation, operating, and interest costs partly offset greater sales and tax credits. Installed capacity was 189.1 MW solar and 126.6 MW wind.
- Energy Services: GAAP net income fell to $0.5 million from $14.3 million; NFE fell to $18.6 million from $21.9 million, and financial margin (non-GAAP) declined to $49.8 million from $55.4 million. Management cited fewer market opportunities, lower sales volumes, weather, and hedge-related timing/valuation effects. Revenue increased partly because of higher gas prices and the July 2017 Talen contract-asset acquisition.
- Midstream: Net income rose to $12.9 million from $9.4 million, mainly due to PennEast AFUDC earnings. Home Services and Other net income rose to $6.8 million from $2.9 million, including a $5.4 million pretax gain on sale of available-for-sale securities.
- Consolidated revenue growth also reflected higher natural-gas prices and the Talen acquisition; commodity pass-throughs and trading activity make revenue less indicative of underlying profitability. The filing reports a fiscal fourth-quarter net loss of $36.5 million, or diluted loss per share of $0.42, versus fourth-quarter net income of $25.4 million, or $0.29 per diluted share, in FY2016. The supplied filing text does not clearly attribute the fourth-quarter loss to specific items.
Outlook, material items, and risks
- Management expected NJNG customer growth of approximately 1.7% annually, with 26,000–28,000 additional customers over FY2018–FY2020. It estimated about $5.3 million of annual utility gross margin from that growth under the current CIP tariff.
- Projected NJNG capital expenditures were $399.8 million in FY2018 and $235 million in FY2019. Solar capital expenditures for ITC-eligible projects were estimated at $132–$140 million in FY2018. PennEast project expenditures were expected to total $220–$280 million; the pipeline was then estimated to enter service in 2019, subject to approvals and timing.
- The proposed Southern Reliability Link, estimated to cost $180–$200 million, had received key approvals, but permits and approvals were appealed by third parties. Construction timing depended on remaining permits and easements.
- After year-end, NJR agreed to acquire IEC for a base price of $166 million, plus up to $23 million contingent consideration. Closing was subject to regulatory approvals and other conditions; the filing describes an 84-mile Pennsylvania pipeline and planned conversion of parts to natural-gas service.
- Environmental remediation at five former manufactured-gas-plant sites was estimated at $117.6–$205.2 million; NJNG accrued $149 million and recorded a corresponding regulatory asset, assuming recovery through BPU-approved mechanisms. The company noted that disallowance of recovery or revised remediation requirements could affect earnings.
- Key risks include regulatory decisions and recovery of deferred costs, gas-price and weather volatility, Energy Services’ ability to optimize storage and transportation positions, clean-energy tax-credit and SREC economics, construction and permitting delays, counterparty and financing risk, pension/OPEB assumptions, cybersecurity, and litigation. Management considered pending litigation, collectively, not materially adverse based on information then available, while noting actual outcomes could exceed reserves.
- Auditor Deloitte & Touche issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- How much of reported revenue growth reflects gas prices, pass-through costs, and the Talen contracts versus sustainable margin growth.
- The drivers and accounting/hedge effects behind the FY2017 fourth-quarter net loss and the gap between GAAP net income and NFE.
- Availability and cost of financing for the elevated capital program, including upcoming debt maturities, variable-rate exposure, and the negative working-capital position.
- Regulatory recovery assumptions, updated cost and timing estimates for MGP remediation, and the status of the RAC and other NJNG riders.
- Permitting, appeals, construction costs, and expected returns for PennEast, the Southern Reliability Link, and the proposed IEC acquisition.
- Solar and wind project returns under changing tax-credit eligibility, SREC pricing, and operating-cost assumptions.