Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2018, compared with the quarter ended December 31, 2017. NJR operates regulated natural gas distribution and unregulated energy services, clean energy, midstream, and home services businesses. Management cautions that seasonal interim results are not indicative of full-year results.
Key financial metrics
Amounts are in millions of dollars, except per-share data. Comparisons are year over year unless stated otherwise.
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter |
|---|---|---|
| Operating revenue | $811.8 | $705.3 |
| Operating income | $88.7 | $76.2 |
| Net income | $86.2 | $123.7 |
| Diluted EPS | $0.97 | $1.42 |
| Net financial earnings (NFE, non-GAAP) | $54.1 | $135.3 |
| Operating cash flow | $(104.8) | $(23.5) |
| Investing cash flow | $(93.7) | $(76.9) |
| Financing cash flow | $204.7 | $102.9 |
- Revenue increased 15%, while operating income rose 16%; net income fell 30% and diluted EPS fell from $1.42 to $0.97.
- NJNG utility gross margin, a non-GAAP measure, was $95.2 million versus $100.9 million. Energy Services financial margin, also non-GAAP, was $18.0 million versus $40.3 million.
- Capital expenditures were $94.3 million. Cash and cash equivalents were $7.7 million at quarter-end; working-capital changes contributed to operating cash use.
- At December 31, 2018, long-term debt was $1,184.8 million, current maturities of long-term debt were $124.8 million, and short-term debt was $371.7 million. Short-term debt increased from $152.0 million at September 30, 2018.
- Common equity represented 47% of capitalization, long-term debt 37%, and short-term debt 16%. NJR reported $239.8 million available under its facilities; NJNG reported $157.6 million available under its facility.
Material changes and drivers
- The prior-year quarter included a $57.6 million tax benefit from remeasurement of deferred taxes following the Tax Act. Its nonrecurrence was the main reason reported net income and NFE declined. The current quarter recorded a $7.0 million income tax benefit.
- Energy Services GAAP net income increased to $33.4 million from $11.1 million, largely reflecting increased unrealized derivative gains and lower tax expense. However, its financial margin fell to $18.0 million from $40.3 million, primarily due to narrower pricing spreads and less natural-gas price volatility.
- NJNG net income declined to $31.7 million from $34.1 million, reflecting lower utility gross margin and higher operating and maintenance costs. Clean Energy Ventures net income was $17.5 million versus $69.3 million, principally because the prior period included a substantial Tax Act-related tax benefit.
- Revenue comparisons were affected by accounting presentation: adoption of ASC 606 moved sales taxes to a net presentation, and the filing says 2018 revenue would have included $14.4 million of sales tax under the prior presentation. ASC 606 also increased Home Services revenue by $2.4 million for the quarter through changed service-contract revenue timing.
Outlook, commentary, risks, and unusual items
- Management expects existing borrowing availability, equity proceeds, and operating cash flow to meet working-capital, capital expenditure, and dividend needs for the next 12 months; it also reported compliance with debt covenants.
- Fiscal 2019 capital expenditure estimates include $475.2 million for NJNG, $163 million to $179 million for solar projects, $230 million to $270 million for Adelphia, and $4 million to $14 million for PennEast. Estimates may change with regulatory approvals, construction schedules, capital access, and other factors.
- NJR expects to add approximately 28,000 to 30,000 NJNG customers over fiscal 2019–2021. The company reported 543,761 total customers at December 31, 2018, up from 534,442 a year earlier.
- The remaining wind assets were classified as held for sale; a sale agreement was signed in November 2018 and closing was expected in fiscal Q2 2019. The filing reports FERC approval of the joint authorization filing on December 31, 2018.
- PennEast construction was expected to begin in late 2019, but could be delayed by approvals, land rights, or construction issues. The Adelphia acquisition remained subject to permits and regulatory actions; its stated base purchase price is $166 million, with up to $23 million of contingent consideration.
- NJNG’s estimated future remediation and monitoring costs for five manufactured gas plant sites range from $117.7 million to $204.1 million; the recorded liability was $129.6 million and is paired with a regulatory asset. Recovery depends on regulatory approval, and actual costs could differ.
- Other key exposures include commodity-price and derivative volatility, counterparty credit and liquidity risks, weather and seasonal working-capital swings, tax-credit availability and project completion, regulatory cost recovery, and access to capital. Management says no material risk-factor changes occurred versus its 2018 Form 10-K.
Important facts for investors to verify
- How much of the reported earnings decline reflects the prior-year Tax Act benefit versus current operating performance; review both GAAP results and the company’s non-GAAP NFE and financial-margin reconciliations.
- Whether Energy Services’ lower financial margin, derivative exposures, and working-capital needs improve or worsen in subsequent quarters.
- Actual funding needs and execution against the large fiscal 2019 capital plans, particularly NJNG, solar, and Adelphia projects, and the timing and approvals for PennEast.
- Completion and proceeds of the remaining wind-asset sale, and the impact of the subsequent Dominion merger conversion of NJR’s DM Common Units into approximately 458,000 Dominion shares.
- Developments in MGP remediation estimates and regulatory recovery, and the effect of credit ratings, borrowing costs, and seasonal short-term debt on liquidity.