New Jersey Resources Corporation — Q1 FY2020 10-Q
Business context and reporting period. The filing covers the three months ended December 31, 2019, the company’s fiscal first quarter. NJR operates regulated natural-gas distribution in New Jersey and unregulated energy services, clean-energy and midstream businesses. Results are seasonal and interim results are not necessarily indicative of the full fiscal year.
Financial performance
Amounts below are in millions, except per-share data.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Operating revenues | $615.0 | $811.8 |
| Operating income | $101.5 | $88.7 |
| Net income | $89.4 | $86.2 |
| Diluted EPS | $0.97 | $0.97 |
| Net financial earnings (NFE, non-GAAP) | $40.4 | $54.1 |
| NFE per share (non-GAAP) | $0.44 | $0.61 |
| Cash used in operating activities | $43.1 | $104.8 |
- Revenue declined 24%, mainly reflecting lower Energy Services commodity-related revenue; fair-value derivative accounting makes reported revenue and earnings volatile. Net income increased about 4%, while NFE fell about 25%.
- Energy Services’ financial margin, a non-GAAP measure, was $1.6 million versus $18.0 million, as narrower pricing spreads and lower wholesale volumes reduced market opportunities. GAAP segment net income was $36.0 million versus $33.4 million, supported by unrealized derivative gains.
- Natural Gas Distribution net income rose to $43.9 million from $31.7 million. Utility gross margin, a non-GAAP measure, increased to $112.1 million from $95.2 million, principally due to new base rates and higher incentive-program margins.
- Clean Energy Ventures net income decreased to $5.4 million from $17.5 million, primarily due to SREC transfer timing and the absence of wind-asset revenue following the 2019 wind-asset sale. Midstream net income was $3.0 million versus $3.7 million.
- Net interest expense was $16.1 million, up from $13.5 million. The reported income-tax benefit was $0.3 million; the company cited solar tax credits and forecasted tax items as important to its effective tax rate.
Liquidity, debt and investment
- At December 31, 2019, cash and cash equivalents were $15.7 million; total assets were $5.10 billion. Current liabilities were $805.5 million, including $390.7 million of short-term debt.
- Long-term debt was $1.54 billion. Capital structure was 48% common equity, 41% long-term debt and 11% short-term debt. NJR reported $365.5 million available under its revolving facilities; NJNG reported $199.7 million available under its facility.
- Investing cash outflow was $494.2 million, including $368.1 million for the Leaf River acquisition; financing cash inflow was $551.4 million. Capital expenditures were $126.2 million. Operating cash outflow improved from the prior year, but remained negative, with working-capital movements a major factor.
- NJR acquired the Leaf River natural-gas storage facility for a stated purchase price of $367.5 million in October 2019. Adelphia Gateway closed in January 2020; the company reported the remaining purchase price of approximately $156 million as a fiscal 2020 funding requirement.
Material changes, outlook and risks
- The BPU approved a $62.2 million annual NJNG base-rate increase effective November 15, 2019, including a 9.6% return on common equity and a 6.95% overall rate of return on rate base. An energy-efficiency recovery-rate increase also took effect in November.
- Management estimated NJNG capital expenditures of $425 million in fiscal 2020 and $305 million in fiscal 2021; solar investment of $140–$150 million in fiscal 2020; Adelphia investment of $225–$250 million in fiscal 2020; and PennEast investment of $7–$8 million in fiscal 2020. These estimates may change.
- NJNG expected to add approximately 28,000–30,000 customers over fiscal 2020–2022. Management stated that available borrowing capacity, equity proceeds and operating cash flows should be sufficient for working capital, capital expenditures and dividends over the next 12 months. No consolidated earnings guidance is provided in the supplied filing text.
- PennEast faces legal and permitting uncertainty, including a Third Circuit decision concerning condemnation of state property and unresolved permits. NJR reported no impairment at quarter-end but warned that adverse legal outcomes, delays, higher costs or lower project prospects could require an impairment charge.
- NJNG’s estimated future manufactured-gas-plant remediation expenditures ranged from $115.9 million to $186.2 million; its recorded liability and corresponding regulatory asset were $129.2 million. Recovery depends on regulatory approval, and actual costs may differ.
- Other key exposures include commodity-price and derivative volatility, wholesale counterparty credit risk, weather and seasonal working-capital needs, access to capital, regulatory approvals, solar tax-credit availability and project execution. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Track Energy Services’ realized financial margin and volumes separately from GAAP derivative gains and losses; Q1 GAAP net income and NFE moved in opposite directions.
- Monitor NJNG’s rate recovery, capital program spending, customer growth and the timing of cash collections and gas-cost recoveries.
- Verify financing and execution of Leaf River and Adelphia, and the legal, regulatory and impairment status of PennEast.
- Assess solar project completion, SREC sales timing and eligibility for federal investment tax credits against the company’s capital-spending plans.
- Review remediation-cost estimates and recoverability, short-term borrowing needs, available credit and compliance with debt covenants.