New Jersey Resources Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; comparisons are with the three months ended December 31, 2016, unless otherwise noted. NJR combines regulated natural gas distribution with clean energy, energy services, midstream, and home services businesses. The interim results are unaudited and seasonal.
Financial performance
Amounts are in millions of dollars except per-share data.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Operating revenue | $705.3 | $541.0 |
| Operating income | $75.2 | $41.5 |
| Net income | $123.7 | $34.9 |
| Diluted EPS | $1.42 | $0.40 |
| Dividends declared per share | $0.2725 | $0.255 |
| Cash flow from operations | $(23.5) | $(46.1) |
| Cash flow from investing | $(76.9) | $(86.5) |
| Cash flow from financing | $102.9 | $141.9 |
- Revenue growth reflected higher nonutility revenue, including Energy Services activity, as well as increased utility revenue. Operating income rose $33.8 million year over year.
- Net income included a $57.6 million income tax benefit from remeasuring deferred taxes at nonutility entities following federal tax reform. This is a significant, nonrecurring contributor to reported earnings; NJNG’s separate $228 million deferred-tax remeasurement was recorded as a regulatory liability for customers, not as an earnings benefit.
- Management’s non-GAAP net financial earnings (NFE) were $135.3 million, or $1.56 per basic share, versus $40.4 million, or $0.47, in the prior period. NFE adjusts for derivative and gas-inventory hedge timing effects and includes a tax adjustment; it is not a substitute for GAAP results.
- NJNG utility gross margin, a non-GAAP measure, was $100.9 million versus $97.9 million. Energy Services financial margin, also non-GAAP, was $40.3 million versus $10.7 million.
Balance sheet, debt, and liquidity
- At December 31, 2017, total assets were $4.19 billion, compared with $3.93 billion at September 30, 2017. Cash was $4.7 million; current assets were $826.1 million and current liabilities were $991.0 million.
- Long-term debt was $1.00 billion, current maturities of long-term debt were $166.2 million, and short-term debt was $373.2 million. The company reported capitalization of 47% common equity, 35% long-term debt, and 18% short-term debt.
- NJR reported $161.8 million available under its revolving facilities, and NJNG reported $203.3 million available under its credit facility at quarter end. Management said available borrowing capacity, equity proceeds, and operating cash flow should meet working capital, capital expenditure, and dividend needs for the next 12 months; it reported compliance with debt covenants.
- Operating cash flow remained negative, primarily reflecting working-capital needs, including receivables and the seasonal demands of gas and energy operations. Financing cash flow included $107.2 million of net short-term borrowings and $22.7 million from the DRP waiver-discount share issuance.
Material changes and management commentary
- The Tax Act reduced the federal corporate rate from 35% to 21%, effective January 1, 2018. NJR expected to use a 24.5% federal statutory rate in fiscal 2018 and 21% beginning in fiscal 2019. NJNG’s deferred-tax benefit is expected to be returned to ratepayers; the BPU directed utilities to file proposed rate changes and refund methods.
- Management attributed the increase in Energy Services earnings to colder December weather, higher natural-gas prices and volumes, and greater volatility that improved storage and spread opportunities. Management also cautioned that milder weather, reduced volatility, and changes in supply and demand could pressure future results.
- Clean Energy Ventures reported $69.3 million of GAAP net income versus $4.2 million, primarily because of the tax-reform benefit; its operating loss was $0.5 million. Solar-related fiscal 2018 capital spending was estimated at $132–$140 million.
- NJNG served approximately 534,400 customers. Management expected customer growth of about 1.7% annually through fiscal 2020 and 26,000–28,000 additional customers over fiscal 2018–2020.
- Fiscal 2018 and 2019 NJNG capital expenditures were projected at $421.4 million and $235.2 million, respectively. PennEast expenditures were estimated at $240–$280 million in fiscal 2018; its pipeline was expected to enter service in 2019, subject to approvals and project timing.
- The proposed acquisition of IEC, which owns an 84-mile Pennsylvania pipeline, had a $166 million base price plus up to $23 million contingent consideration. NJR had paid $10 million; closing remained subject to permits and regulatory approvals.
Risks, contingencies, and unusual items
- NJNG’s five manufactured-gas-plant sites had estimated future remediation and monitoring costs of $117.6–$205.2 million. The recorded liability was $144 million, with recovery through a regulatory mechanism considered probable. NJNG was also investigating a parcel identified by NJDEP as a possible additional former MGP site.
- Appeals remained outstanding against permits and approvals for NJNG’s Southern Reliability Link project. Construction timing depended on final permits, road-opening approvals, and easements.
- Moody’s changed NJNG’s outlook from stable to negative in January 2018, citing potential effects of tax reform on regulated utilities and uncertainty about regulatory action. The filing said this did not then affect borrowing rates.
- Energy Services’ commodity derivatives can create substantial reported earnings volatility from fair-value changes and timing mismatches, even where management intends to economically hedge exposures. A 10% movement in NYMEX natural-gas futures prices was estimated to change fair value of specified open positions by approximately $11.6 million.
- Other stated risks include commodity-price and weather volatility, counterparty credit and collateral exposure, regulatory cost recovery, clean-energy incentive eligibility and project execution, environmental obligations, and access to capital. Management reported no material changes to previously disclosed risk factors and no new reportable legal proceedings during the quarter.
Important facts for investors to verify
- Separate recurring operating performance from the $57.6 million tax benefit; compare GAAP net income with NFE and review the non-GAAP reconciliations.
- Track BPU decisions on customer refunds and prospective rates following tax reform, including the treatment and timing of NJNG’s $228 million regulatory liability.
- Monitor working-capital use, seasonal borrowing, facility availability, debt maturities, and the effect of the negative Moody’s outlook.
- Assess whether forecast NJNG, solar, and PennEast capital spending proceeds on schedule and remains financeable, and whether SRL and PennEast receive required approvals.
- Follow MGP remediation estimates and recovery, the possible additional site inquiry, and the IEC acquisition’s approvals, contingent payments, and transportation commitments.
- Evaluate Energy Services’ results across weather and commodity conditions, including derivative-driven volatility, credit exposure, and the distinction between GAAP earnings and management’s financial-margin and NFE measures.