NEW JERSEY RESOURCES CORP quarterly report, Q2 FY2019

New Jersey Resources Corporation — Q2 FY2019 Form 10-Q

Reporting period: Fiscal quarter and six months ended March 31, 2019. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless noted. NJR provides regulated natural gas distribution in New Jersey and operates clean energy, energy services, midstream, and home services businesses.

Financial results and liquidity

Metric	Three months ended March 31, 2019	Prior year	Six months ended March 31, 2019	Prior year
Operating revenue	$866.3 million	$1,019.0 million	$1,678.0 million	$1,724.3 million
Operating income	$77.0 million	$178.7 million	$165.7 million	$254.9 million
Net income	$73.6 million	$140.3 million	$159.8 million	$264.0 million
Diluted EPS	$0.82	$1.59	$1.79	$3.01
Net financial earnings (non-GAAP)	$112.4 million	$142.1 million	$166.5 million	$277.4 million

For the quarter, revenue declined about 15% and net income about 48% year over year. For the six-month period, revenue declined about 3% and net income about 39%.
Quarterly operating margin was approximately 8.9%, compared with 17.5% a year earlier; six-month operating margin was approximately 9.9%, compared with 14.8%.
Management attributed weaker consolidated and non-GAAP earnings chiefly to Energy Services’ lower financial margin, amid narrower pricing spreads and less natural-gas market volatility. Energy Services reported a quarterly net loss of $4.5 million versus $75.8 million income; six-month income was $28.9 million versus $86.9 million.
Natural Gas Distribution net income improved to $68.5 million for the quarter and $100.3 million for six months, supported by customer growth and SAFE II/NJ RISE rate increases. Utility gross margin, a non-GAAP measure, was $140.9 million for the quarter versus $137.6 million; six-month margin was $236.0 million versus $238.5 million.
Clean Energy Ventures reported quarterly net income of $7.7 million versus $5.8 million, but six-month net income fell to $25.3 million from $75.0 million. The prior-year comparison included a substantial Tax Act-related deferred-tax benefit; that benefit did not recur.
Cash from operations was $171.8 million for six months, down from $312.5 million. Investing activities provided $42.5 million, versus $168.8 million used in the prior-year period, principally reflecting wind-asset and Dominion-share sale proceeds. Financing activities used $132.5 million. Ending cash, cash equivalents and restricted cash were $83.6 million.
At March 31, long-term debt was $1,179.7 million, current maturities $124.6 million, and short-term debt $45.9 million. Capital structure was 54% common equity, 40% long-term debt and 6% short-term debt. Cash and cash equivalents were $83.2 million; available capacity was $421.3 million under NJR’s facilities and $203.4 million under NJNG’s facility.

Material changes and unusual items

The $58.5 million Tax Act-related benefit recognized in the prior-year six-month period did not recur, materially affecting year-over-year net income. For fiscal 2019, management forecast an effective tax rate of negative 5.8% for the six-month period, reflecting anticipated tax credits and forecast earnings; estimates may change.
Clean Energy Ventures sold its remaining wind assets on February 7, 2019, for $208.6 million, recognizing a $0.645 million pretax gain. NJR also sold its Dominion investment for approximately $34.5 million and recognized $1.6 million in realized and unrealized gains.
Accounting adoption effects included ASC 606’s change to sales-tax presentation and straight-line recognition of Home Services service-contract revenue. Management said ASC 606 had no material overall impact on financial position, results or cash flows.
Quarterly reported earnings are affected by derivative fair-value accounting and timing mismatches between financial hedges and physical gas sales. NJR’s non-GAAP NFE and Energy Services’ financial margin adjust for specified timing effects and should be considered alongside, not instead of, GAAP results.

Outlook, risks and contingencies

The filing provides no consolidated earnings guidance. Management says operating results for interim periods are not necessarily indicative of full-year results because of seasonal utility and wholesale-energy operations.
NJR expects NJNG to spend approximately $338.9 million on capital expenditures in fiscal 2019 and $448.6 million in fiscal 2020. Solar-related capital expenditures are estimated at $153 million to $167 million in fiscal 2019. Adelphia project expenditures are estimated at $230 million to $270 million in fiscal 2019; PennEast investment expenditures at $4 million to $14 million.
NJNG filed for a five-year Infrastructure Investment Program totaling approximately $507 million and a base-rate increase of $128.2 million, including a requested overall rate of return on rate base of 7.87%. These are requests subject to BPU approval, not granted increases. A separate $8.7 million rate increase request for SAFE II/NJ RISE costs anticipated rates effective October 1, 2019.
Management expects existing borrowing availability, equity proceeds and operating cash flow to cover working capital, capital expenditures and dividends for the next 12 months, and reported compliance with debt covenants. NJNG’s ratings remained investment grade; Moody’s lowered its secured rating to Aa3, citing expected weaker credit measures from tax-reform cash-flow effects and elevated capital spending. Ratings outlooks were negative at S&P and Moody’s and stable at Fitch.
Key execution and market risks include regulatory and land-use approvals, project timing, natural-gas price volatility, weather, counterparty credit and liquidity, derivative valuation and collateral needs, access to capital, tax-credit availability, and cybersecurity. PennEast expected construction to start in 2020 but could be delayed by approvals, land rights or construction issues. SRL construction began in December 2018, with service estimated in 2020; approvals were under appeal and some permits remained to be secured.
NJNG’s five known manufactured-gas-plant sites have estimated future remediation costs of $117.7 million to $204.1 million; the recorded liability and corresponding regulatory asset were $128.9 million. Recovery is through BPU-approved rates, and future recovery is not assured. Costs for two additional sites cannot yet be reasonably estimated; investigation costs at one were estimated at about $0.6 million more, with approximately $1.4 million incurred to date.
The company said pending litigation, taken together, was not expected to materially adversely affect financial condition, results or cash flows, while noting actual outcomes could exceed accruals. Most Stafford Township incident claims had settled subject to documentation as of April 30, 2019; NJR expected related costs to be substantially covered by insurance.

Important facts for investors to verify

How much of the sharp Energy Services earnings decline reflects underlying economics versus derivative and inventory timing, and whether market spreads and volatility improve.
Whether BPU approves the requested $128.2 million base-rate increase, the $507 million investment program and other pending rate-recovery requests, and on what terms.
Whether projected capital spending, tax credits and project schedules are achieved, especially for solar, Adelphia, PennEast and SRL.
How remediation estimates evolve, whether additional MGP obligations arise, and whether NJNG continues to recover costs through regulatory mechanisms.
Whether operating cash flow and available credit remain adequate through seasonal working-capital needs and the planned capital program, while maintaining investment-grade ratings and covenant compliance.