New Jersey Resources Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results; FY2016 Q4 net income was $25.4 million and diluted EPS was $0.29.
Business context and financial results
NJR is an energy-services holding company with four reportable segments: regulated natural gas distribution, clean energy, wholesale energy services and midstream investments. Its utility, New Jersey Natural Gas (NJNG), served approximately 521,200 customers.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Operating revenue | $1.881 billion | $2.734 billion |
| Net income | $131.7 million | $181.0 million |
| Diluted EPS | $1.52 | $2.10 |
| Net financial earnings (NFE, non-GAAP) | $138.1 million; $1.59 diluted per share | $151.5 million; $1.76 diluted per share |
| Cash flow from operations | $142.6 million | $390.9 million |
| Cash flow used in investing | $363.2 million | $321.7 million |
| Cash flow from (used in) financing | $253.2 million | ($66.4 million) |
At September 30, 2016, cash was $37.5 million; total assets were $3.727 billion; common equity was $1.167 billion; long-term debt was $1.064 billion, with $61.5 million of current maturities and $121.7 million of short-term debt. Capital structure was 48% common equity, 44% long-term debt and 8% short-term debt. NJR and NJNG had $288.9 million and $249.3 million, respectively, available under their revolving facilities.
NJNG utility gross margin, a non-GAAP measure, increased to $309.4 million from $307.5 million. NJRES financial margin, also non-GAAP, fell to $55.4 million from $91.0 million. Segment net income was $76.1 million for Natural Gas Distribution, $28.4 million for Clean Energy Ventures, $14.3 million for Energy Services, $9.4 million for Midstream and $2.9 million for Home Services and Other.
Material changes versus the prior year
- Revenue fell 31% and net income fell 27%. The revenue decline largely reflected lower natural gas prices and reduced sales activity; revenue is affected by commodity pass-throughs and is not directly comparable to margin.
- NJRES net income declined $57.8 million, principally due to lower gross margin and a $59.7 million adverse change related to financial hedges. Warm winter weather reduced volatility and narrowed market price spreads; NJRES financial margin fell $35.6 million.
- Clean Energy Ventures net income rose $8.3 million, supported by higher SREC and energy/capacity sales, while depreciation, operating costs and interest expense increased.
- Operating cash flow declined $248.3 million, reflecting weaker NJRES working-capital and profitability effects, $61.6 million of NJNG customer gas-cost credits, and a $30 million discretionary pension contribution.
- Long-term debt increased from $843.6 million to $1.064 billion, and short-term debt increased from $66.4 million to $121.7 million. The company issued $150 million of senior notes; NJNG issued $125 million of long-term notes.
Outlook, management commentary and key risks
- The BPU approved a $45 million NJNG base-rate increase effective October 1, 2016, below the revised $112.9 million request. Approval also provided for recovery of specified infrastructure and deferred costs.
- NJNG expects annual customer growth of approximately 1.6%, with 24,000–27,000 new customers projected over FY2017–FY2019. Management estimated this growth could add about $5 million of annual utility gross margin.
- Projected capital spending includes NJNG expenditures of $275 million in FY2017 and $239.8 million in FY2018. Clean-energy estimates for FY2017 were $80–$100 million for solar and $25–$35 million for wind; Midstream expected $20–$30 million for PennEast.
- Management said available borrowing capacity, equity proceeds and operating cash flow should cover working capital, capital spending and dividends for the next 12 months. It reported compliance with debt covenants. NJNG’s investment-grade ratings were affirmed at S&P A+ secured and Moody’s Aa2 secured, both with stable outlooks.
- Five former manufactured-gas-plant sites carry estimated future remediation costs of $143.9–$231.6 million; NJNG recorded a $172 million liability and corresponding regulatory asset. Recovery depends on regulatory approval, and actual costs may differ.
- Third parties appealed BPU approvals for the proposed Southern Reliability Link, estimated to cost $175–$180 million; construction had not commenced and rate treatment was not included in the new base rates. PennEast was expected to enter service by FY2019, subject to approvals, property rights, financing and construction execution.
- Key exposures include weather and commodity-price volatility, derivative accounting and counterparty risk, access to capital, recovery of regulatory assets and environmental costs, clean-energy tax credits and SREC prices, project delays, pension/OPEB funding, cybersecurity and operational incidents. An NJNG gas leak and fire resulted in estimated claims of $0.6–$3.2 million; the company accrued the low end and expected substantial insurance coverage.
The company reported effective disclosure controls and internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile GAAP net income with NFE and NJRES financial margin, including derivative and gas-inventory timing adjustments.
- Track NJRES market spreads, volatility, storage/transport optimization and working-capital needs, given its substantial contribution to the year-over-year earnings and cash-flow decline.
- Confirm continued BPU recovery of NJNG’s regulatory assets, particularly the $172 million MGP balance, and monitor remediation estimates and appeals.
- Monitor delivery and financing of planned NJNG, solar, wind and PennEast investment, including tax-credit eligibility and the SRL appeal process.
- Review debt maturities, seasonal liquidity, credit-facility availability, variable-rate exposure and pension/OPEB assumptions and funding requirements.