New Jersey Resources Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; comparative period ended December 31, 2019. Financial statements are unaudited. NJR operates a regulated New Jersey natural gas utility alongside clean energy, energy services, storage and transportation, and home services businesses.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Operating revenue | $454.3 million | $615.0 million |
| Operating income | $111.5 million | $104.6 million |
| Net income | $81.0 million | $75.8 million |
| Diluted EPS | $0.84 | $0.82 |
| Net financial earnings (NFE, non-GAAP) | $44.7 million; $0.46 per share | $34.9 million; $0.38 per share |
| Operating cash flow | $31.7 million | $(43.1) million |
| Investing cash flow | $(108.8) million | $(494.2) million |
| Financing cash flow | $(17.6) million | $551.4 million |
- Revenue fell 26%, while operating income and net income increased. Revenue includes substantial Energy Services derivative-related amounts; revenue from derivatives in that segment was $220.9 million versus $361.0 million a year earlier. NJR explains that derivative valuation and settlement timing can make GAAP earnings volatile.
- NFE, management’s non-GAAP measure that adjusts for certain hedge timing effects, increased to $44.7 million from $34.9 million. NJR cautions that NFE is supplemental and not a substitute for GAAP results.
- Natural Gas Distribution utility gross margin, also non-GAAP, rose to $125.7 million from $112.1 million, primarily on higher base rates and returns from infrastructure programs. The segment’s net income increased to $49.5 million from $43.9 million.
- Cash and cash equivalents were $22.4 million at December 31, 2020, down from $117.0 million at September 30, 2020. Current assets were $609.2 million and current liabilities $518.7 million.
- Long-term debt was $2.265 billion; current maturities were $26.9 million and short-term debt $134.4 million. NJR had $294.7 million available under its $425 million facility; NJNG had $234.9 million available under its $250 million facility. Management said liquidity was sufficient for current obligations and expected borrowing availability, operating cash flow and equity proceeds to meet needs for the next 12 months.
- Capital structure was 41% common equity, 55% long-term debt and 4% short-term debt. Capital expenditures were $109.9 million for the quarter. Operating cash flow improved year over year mainly because of a smaller working-capital outflow; investing outflow was lower largely because the prior-year period included the Leaf River acquisition.
Material changes and notable items
- Energy Services net income increased to $38.9 million from $36.0 million, while its NFE improved to $1.5 million from a $5.1 million loss. Management attributed the improvement in financial margin to stronger pricing spreads and volumes amid increased natural-gas price volatility.
- Clean Energy Ventures’ net loss widened to $10.3 million from $8.2 million, primarily due to higher operating and maintenance costs, partly offset by lower depreciation. It received $12.1 million from solar asset sale-leasebacks, recorded as financing obligations.
- Storage and Transportation net income rose to $3.5 million from $3.0 million, with higher revenue from Leaf River and Adelphia Gateway, partly offset by higher operating costs and interest expense.
- The 2019 comparative results were retrospectively adjusted for a change in Clean Energy Ventures’ ITC accounting from the flow-through method to the deferral method. The change reduced comparative-quarter net income from $89.4 million to $75.8 million and EPS from $0.97 to $0.82; comparisons should use the adjusted figures.
- Operating cash flow moved from negative to positive, but cash declined during the quarter as investing and financing cash uses exceeded operating inflows. The company paid $31.9 million in dividends.
Outlook, risks and contingencies
- NJR forecasts fiscal 2021 capital expenditures of $434–$452 million for NJNG, $162–$168 million for solar projects, and $136–$156 million for Adelphia Gateway plus $12–$32 million for Leaf River. Energy Services anticipates no significant capital expenditures in fiscal 2021 or 2022. Estimates may change with regulatory approvals, construction timing and access to capital.
- NJNG expects to add approximately 28,000–30,000 customers over fiscal 2021–2023. Management estimates this growth could add about $6.3 million in annual utility gross margin under the CIP tariff.
- The BPU approved $150 million of NJNG transmission and distribution investments over five years under the IIP. NJNG also extended BGSS bill credits: estimated at $10.0 million for December 2020 and $12.5 million for January 2021.
- COVID-19 had no material adverse impact on reported results through December 31, 2020, according to management. The company said the pandemic’s future effects on operations, customers, collections, markets and financing remain uncertain. Interim results are seasonal and are not necessarily indicative of full-year performance.
- NJNG’s former manufactured-gas-plant remediation costs are estimated at $143.1–$181.7 million; the recorded liability and corresponding regulatory asset were $148.0 million. Recovery depends on regulatory approval, and actual costs could differ from estimates.
- PennEast faces permitting and eminent-domain litigation. The Supreme Court granted review on February 3, 2021, after quarter-end; the filing said argument was expected in April. NJR recorded no impairment of its investment, but delays, legal outcomes or higher costs could lead to an impairment.
- Other key exposures include natural-gas and energy-price volatility, derivative timing and counterparty credit risk, regulatory cost recovery, solar incentives and project execution, and access to capital. NJR reported compliance with debt covenants and investment-grade NJNG ratings.
Important facts for investors to verify
- How much of earnings growth reflects recurring regulated utility margin versus volatile Energy Services derivative accounting and the non-GAAP NFE adjustments.
- Whether forecast capital spending, regulatory recovery and project execution remain on schedule, particularly for NJNG infrastructure, solar and Adelphia Gateway.
- Developments in PennEast’s Supreme Court case and any resulting effects on the investment’s recoverability.
- Updated MGP remediation estimates and the continued probability of recovering costs from customers through the regulatory mechanism.
- Working-capital needs, available credit capacity, debt levels and the effects of seasonal gas demand and market volatility on liquidity.