New Jersey Resources Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. This is an annual report, not a stand-alone fourth-quarter filing; quarterly results are seasonal and volatile.
Business context
NJR is an energy holding company with four reportable segments: regulated natural gas distribution through NJNG; wholesale Energy Services through NJRES; solar and wind investments through Clean Energy Ventures; and Midstream investments. NJNG served approximately 512,300 customers in central and northern New Jersey. The company also operates home services and other businesses.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Operating revenue | $2.734 billion | $3.738 billion |
| Operating income | $248.5 million | $201.2 million |
| Net income | $181.0 million | $142.0 million |
| Diluted EPS | $2.10 | $1.67 |
| Net financial earnings (NFE; non-GAAP) | $151.5 million; $1.76 per diluted share | $176.9 million; $2.08 per diluted share |
| Cash from operations | $387.9 million | $356.8 million |
| Cash used in investing | $321.7 million | $282.6 million |
| Capital expenditures | $320.1 million | $289.3 million |
Revenue fell 26.9%, largely reflecting lower natural gas prices and pass-through commodity revenues. Net income rose 27.5%, while NFE declined 14.3%; management’s NFE measure removes specified derivative and inventory-hedging timing effects and is not GAAP. Consolidated operating margin is not presented as a comparable standardized measure; NJNG’s utility gross margin was $307.5 million, up from $297.3 million, while NJRES financial margin was $91.0 million, down from $172.4 million.
Segments and changes versus FY2014
- Natural Gas Distribution: Net income increased to $76.3 million from $74.2 million. Utility gross margin improved with customer growth and incentive-program results; O&M and depreciation costs also increased. NJNG ended the year with 512,252 customers, up from 504,274.
- Energy Services: Net income rose to $72.0 million from $44.4 million, but NFE fell to $42.1 million from $79.7 million. FY2014 benefited from exceptional cold-weather volatility and trading opportunities that were less pronounced in FY2015.
- Clean Energy Ventures: Net income increased to $20.1 million from $12.7 million, supported by higher SREC prices and sales, additional renewable generation, and tax credits. Solar capacity in service reached 117.7 MW.
- Midstream: Net income increased to $9.8 million from $7.5 million, mainly from higher Steckman Ridge storage and hub-service earnings. NJR exchanged its 5.53% Iroquois interest for about 1.84 million Dominion Midstream units; the $24.6 million pre-tax gain was deferred, not recognized in FY2015 income.
Debt, liquidity and capital
At September 30, 2015, total assets were $3.339 billion, common equity was $1.107 billion, long-term debt was $843.6 million, and short-term debt was $66.4 million. Current maturities of long-term debt were $11.1 million. The company reported common equity at 54% of its capital structure, long-term debt at 42%, and short-term debt at 4%. Cash and cash equivalents were $4.9 million.
NJR and NJNG reported $369.2 million and $222.3 million, respectively, available under their committed credit facilities at year-end. Management stated that borrowing availability and operating cash flow should meet working-capital, capital-expenditure and dividend needs for the next 12 months; it also reported compliance with debt covenants. The $425 million NJR facility was refinanced in September 2015 and extended to 2020; NJNG’s $250 million facility runs to 2019.
Operating cash flow exceeded investing outflows in FY2015, but substantial investment continued in utility infrastructure and renewable projects. Dividends declared were $0.915 per share, compared with $0.855 in FY2014; a two-for-one stock split was reflected retroactively in share data.
Outlook, material matters and risks
- NJNG projected customer growth of about 1.6% annually and 16,000–18,000 additions over FY2016–FY2017. It filed a base-rate case seeking a $147.6 million increase on November 13, 2015; this was a request, not an approved increase.
- For FY2016, projected capital expenditures included $291.1 million for NJNG, $80–$100 million for solar, $90–$110 million for wind, and $40–$50 million for PennEast. Estimates are subject to regulatory, construction, permitting, financing and other uncertainties.
- NJNG expected approximately $76 million of customer bill credits for November 2015–February 2016, estimated to reduce the average residential heating customer’s bill by about 17%.
- Management planned a discretionary $30 million pension contribution in the first quarter of FY2016. Pension funding needs may change with asset returns, discount rates, actuarial assumptions and demographics.
- NJNG’s five former manufactured-gas-plant sites carry estimated future remediation costs of $150.9–$242.1 million; $180.4 million was accrued with a corresponding regulatory asset. Recovery depends on continued regulatory approval, and actual costs may differ.
- Renewable returns depend in part on federal investment and production tax credits, SREC prices, project completion and interconnection. NJRES results remain exposed to gas-price volatility, weather, storage and transportation spreads, counterparty credit and derivative accounting timing.
- Other material risks include regulatory cost recovery, access to capital, interest rates, natural-gas supply and delivery disruptions, severe weather, environmental obligations, pension liabilities, litigation and cyber or information-system incidents.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control; management and the auditor concluded internal control over financial reporting was effective at September 30, 2015.
Important facts for investors to verify
- Track the BPU’s decision and timing on NJNG’s $147.6 million base-rate request and recovery of infrastructure, storm and remediation costs.
- Reconcile GAAP net income with NFE and assess how derivative timing, gas inventory and the exceptional FY2014 weather affected comparisons.
- Monitor the execution, costs, tax-credit eligibility and returns of the Alexander wind project, solar pipeline and PennEast investment.
- Review remediation estimates and regulatory recovery, along with pension funding assumptions and the planned FY2016 contribution.
- Assess liquidity through seasonal working-capital needs, capital spending, debt maturities, facility availability and the company’s ability to maintain covenant and credit-rating headroom.