New Jersey Resources Corporation — Q2 FY2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended March 31, 2018, the second quarter and first half of NJR’s fiscal 2018. NJR operates a regulated New Jersey gas utility and businesses in clean energy, wholesale energy services, midstream investments, and home services. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $1.019 billion, versus $733.5 million in 2017 | $1.724 billion, versus $1.275 billion |
| Operating income | $177.8 million, versus $139.7 million | $253.0 million, versus $181.1 million |
| Net income | $140.3 million, versus $114.7 million | $264.0 million, versus $149.6 million |
| Diluted earnings per share | $1.59, versus $1.32 | $3.01, versus $1.72 |
| Dividends declared per share | $0.2725, versus $0.255 | $0.545, versus $0.51 |
For the first half, operating cash flow was $312.5 million, compared with $171.8 million a year earlier. Investing used $168.8 million, including $164.9 million of capital expenditures; financing used $140.9 million. Cash at March 31 was $4.9 million. Working capital and cash flows are affected by seasonal utility demand, commodity prices, storage activity, and broker margin requirements.
At March 31, total assets were $3.961 billion and common equity was $1.467 billion. Balance-sheet debt comprised $997.9 million of long-term debt, $165.9 million of current maturities, and $150.9 million of short-term debt. NJR reported $363.3 million available under its revolving facilities; NJNG had $249.3 million available. Management said available borrowing, equity proceeds, and operating cash flow should be sufficient for the next 12 months and reported compliance with debt covenants.
Material changes and notable items
- Revenue and earnings rose substantially, driven mainly by Energy Services: colder weather and greater natural-gas price volatility supported higher trading and storage margins. Energy Services’ non-GAAP financial margin was $96.8 million for Q2 versus $29.6 million, and $137.1 million for the first half versus $40.3 million.
- First-half net income included a $58.5 million Tax Act-related income tax benefit outside NJNG; NJNG recorded a $228.4 million reduction in deferred tax liabilities as a regulatory liability to be returned to ratepayers. The company’s first-half income tax provision was a benefit of $19.3 million, versus a $26.0 million provision in 2017. Tax accounting remained provisional and subject to updated estimates.
- Natural Gas Distribution first-half net income was $94.6 million versus $90.6 million. Utility gross margin, a non-GAAP measure, was $238.5 million versus $241.1 million, reflecting rate and Tax Act customer refunds partly offset by growth.
- Clean Energy Ventures first-half net income was $75.0 million versus $24.4 million, substantially reflecting tax effects; Q2 net income declined to $5.8 million from $20.2 million as tax credits recognized were lower. The company recorded a $17.8 million impairment of Dominion Midstream units after a FERC policy change adversely affected their value, and reduced the related deferred gain by the same amount.
- NJR sold NJR Retail Services on February 28, 2018, receiving $9.5 million cash and a natural-gas swap; the sale produced a $3.7 million pretax gain. Clean Energy Ventures classified $224.9 million of wind assets as held for sale and said it planned to pursue sales of its remaining wind assets. A separate 9.7 MW wind-farm sale for $18.5 million was pending FERC approval.
- NJR’s capital structure was 53% common equity, 36% long-term debt, and 11% short-term debt. It priced a $100 million, 10-year senior-note offering for June 2018; NJNG priced $125 million of 30-year first mortgage bonds for May 2018 to coincide with the maturity of existing $125 million notes.
Outlook, commitments, and risks
- NJR expects NJNG customer growth of about 1.7% annually through FY2020 and approximately 26,000–28,000 customer additions over FY2018–FY2020. Management estimated this growth could add about $5.3 million of annual utility gross margin under NJNG’s CIP tariff.
- NJNG projected capital expenditures of $272.6 million for FY2018 and $384.2 million for FY2019. Clean Energy Ventures estimated FY2018 solar capital expenditures of $132–$145 million. These estimates may change with regulatory approvals, construction, interconnection, and financing conditions.
- PennEast received a FERC certificate in January 2018 and was expected by its sponsor to enter service in 2019, but approvals, land rights, or construction could delay it. NJNG’s Southern Reliability Link was also targeted for 2019 service, subject to outstanding permits and easements and appeals of state approvals.
- NJNG’s estimated future costs for five manufactured-gas-plant remediation sites ranged from $117.6 million to $205.2 million; the recorded liability and corresponding regulatory asset were $142.5 million. Recovery depends on regulatory treatment, and actual costs could differ. NJNG was also investigating a newly identified parcel that may have been an MGP site.
- Moody’s changed NJNG’s outlook to negative, citing potential credit effects of tax reform and uncertainty about regulatory responses; the filing said this had not then affected borrowing rates. Other key exposures include volatile gas prices, derivative timing and counterparty credit risk, regulatory recovery, clean-energy tax incentives, and project approvals.
- NJNG proposed a $19.7 million annual base-rate reduction and customer refunds of approximately $31 million, including sales tax, following the Tax Act. The BPU approved the rate reduction on an interim basis effective April 1, 2018; a decision on refunds was expected in Q3 FY2018.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operating performance versus Tax Act benefits and other discrete items; compare GAAP net income with management’s non-GAAP NFE.
- Whether Energy Services can sustain elevated margins if weather, price volatility, storage spreads, or market liquidity normalize.
- Completion, pricing, and funding of the May and June debt offerings and the effect of rate changes on NJNG’s financing costs and credit outlook.
- Regulatory decisions and timing for NJNG’s Tax Act refunds, rate changes, capital recovery, and proposed SAVEGREEN investment program.
- Execution and proceeds from planned wind-asset sales, and the associated effect on tax-credit utilization and earnings.
- Progress, approvals, costs, and schedules for PennEast, the Southern Reliability Link, and the Adelphia/IEC acquisition, which remained subject to regulatory actions.
- Changes in MGP remediation estimates and the continued probability of recovering costs from ratepayers.