Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for the fiscal quarter and six months ended March 31, 2017. NJR combines regulated New Jersey gas distribution with wholesale energy services, clean-energy investments, midstream interests, and home services. Its utility and energy businesses are seasonal; interim results are not necessarily indicative of full-year performance. Unless noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 | Comparable 2016 period |
|---|---|---|---|
| Operating revenue | $733.5 | $1,274.6 | $574.2 quarterly; $1,018.5 six months |
| Operating income | $139.7 | $181.1 | $93.9 quarterly; $153.4 six months |
| Net income | $114.7 | $149.6 | $73.4 quarterly; $123.6 six months |
| Diluted EPS | $1.32 | $1.72 | $0.84 quarterly; $1.42 six months |
| Dividends declared per share | $0.255 | $0.51 | $0.24 quarterly; $0.48 six months |
- Quarterly revenue rose about 28% and six-month revenue about 25% year over year. Net income increased about 56% quarterly and 21% for six months. Management cited NJNG’s higher base rates, clean-energy tax credits, and NJRES derivative gains as principal contributors.
- Management’s non-GAAP net financial earnings (NFE) were $104.1 million for the quarter and $144.5 million for six months, versus $77.9 million and $129.2 million. NFE per basic share was $1.21 and $1.68, respectively, versus $0.91 and $1.51. NFE removes specified derivative and inventory-hedge timing effects and is not a substitute for GAAP earnings.
- NJNG utility gross margin, a non-GAAP measure, was $241.1 million for six months, up from $211.6 million. NJRES financial margin was $40.3 million, down from $51.2 million; its six-month NFE declined to $19.2 million from $27.3 million, reflecting fewer market opportunities, storage-transaction timing, and warmer-than-normal weather.
- Six-month operating cash flow was $171.8 million, compared with $118.0 million. Investing used $155.9 million, including $58.8 million for utility plant and $89.9 million for solar and wind equipment. Financing provided $39.3 million. Cash ended at $92.7 million, up from $37.5 million at September 30, 2016.
- At March 31, total debt was approximately $1.32 billion, comprising $1,024.0 million long-term debt, $60.7 million current maturities, and $237.9 million short-term debt. NJR’s $425 million revolving facility had $173.7 million available; NJNG’s $250 million facility had $249.3 million available. Management said the companies were in covenant compliance and expected liquidity to cover needs for the next 12 months. NJR’s capital structure was 50% common equity, 39% long-term debt, and 11% short-term debt.
- Total assets were $3.86 billion; current assets of $678.0 million compared with current liabilities of $626.3 million. Operating cash flow and working capital are affected by seasonality, commodity prices, customer collections, storage activity, and broker margin requirements.
Material changes and unusual items
- NJNG’s $45 million annual base-rate increase, effective October 1, 2016, supported higher utility margin. The approved rate case included a 9.75% return on equity and a 52.5% common-equity ratio.
- Natural gas prices and derivative accounting materially affected reported results. NJRES recorded volatile unrealized derivative gains; gains and losses may be recognized in periods different from the related physical gas sales. Consolidated six-month cash-flow reconciliation includes a $26.6 million unrealized derivative gain.
- Clean Energy Ventures’ six-month net income increased to $24.4 million from $17.0 million, largely due to tax benefits and higher revenues, partly offset by depreciation, operating costs, and interest. NJR’s forecast effective tax rate was 15.6%, and clean-energy tax credits are dependent on project completion and production.
- Home Services and Other benefited from a $1.9 million pretax gain on a March office-building sale and $5.4 million pretax realized gains on available-for-sale securities during the six months. These gains are not necessarily recurring.
- Short-term debt increased to $237.9 million from $121.7 million at September 30, 2016. NJR also purchased $35.8 million principal amount of NJNG first-mortgage bonds in lieu of redemption.
Outlook, risks, and contingencies
- NJNG expects customer growth of approximately 26,000–28,000 over fiscal 2017–2019, or about 1.7% annually through fiscal 2019. Management estimates this growth could add about $5.2 million of annual utility gross margin. Actual growth depends on economic, demographic, regulatory, and competitive factors.
- NJNG filed for a $4.3 million base-rate change to recover NJ RISE and SAFE II investment costs, with rates proposed to take effect October 1, 2017, subject to BPU review.
- Estimated NJNG capital expenditures are $177.6 million in fiscal 2017 and $337.2 million in fiscal 2018. Fiscal 2017 solar investment for ITC-eligible projects is estimated at $97–$110 million; PennEast investment is expected to be $25–$35 million. Estimates may change.
- The PennEast pipeline, in which NJR owns 20%, is targeted to enter service in the first quarter of fiscal 2019. NJNG’s proposed Southern Reliability Link is estimated to cost $175–$180 million; third parties appealed BPU orders, and construction had not commenced.
- NJNG’s five manufactured-gas-plant sites have estimated future remediation costs of $143.9–$231.6 million. The recorded liability and corresponding regulatory asset were $165.8 million; recovery depends on regulatory treatment, final remediation requirements, other responsible parties, and insurance.
- Claims relating to a 2015 gas fire and explosion carried an estimated liability range of $0.6–$3.2 million; NJNG accrued the low end and expects insurance to substantially cover costs. The company said other ordinary-course legal matters were not expected to have a material effect.
- Key risks include weather and commodity-price volatility, derivative and counterparty exposure, access to capital and covenant compliance, regulatory cost recovery, clean-energy project delays and tax-credit eligibility, environmental obligations, permitting and land rights, and pipeline and infrastructure approvals. Management identified no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable regulated margin and operating performance versus derivative timing gains, tax credits, and asset-sale or securities gains.
- Whether NJRES can improve financial margin and NFE amid lower market opportunities, weather sensitivity, and commodity-price volatility.
- Progress and regulatory outcomes for the $4.3 million NJNG rate filing, SAFE II, NJ RISE, the Southern Reliability Link, and PennEast.
- Clean-energy project execution, tax-credit realization, capital needs, and exposure to SREC and electricity prices.
- Liquidity and debt trends, including seasonal short-term borrowing, planned capital spending, and the recoverability and ultimate cost of MGP remediation.