Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for the quarter and six months ended March 31, 2016, its fiscal second quarter. NJR operates a regulated New Jersey gas utility and unregulated energy services, clean energy, midstream, and home services businesses. Results are seasonal; interim performance is not necessarily indicative of full-year results.
Financial results and liquidity
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2015 periods.
| Metric | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2016 |
|---|---|---|
| Operating revenue | $574.2 (down 43% from $1,013.1) | $1,018.5 (down 45% from $1,837.2) |
| Operating income | $93.9 (up from $82.8) | $153.4 (down from $251.5) |
| Net income | $73.3 (up 20% from $60.9) | $122.0 (down 34% from $184.2) |
| Diluted EPS | $0.84 (versus $0.71) | $1.41 (versus $2.14) |
| Dividends declared per share | $0.24 (versus $0.23) | $0.48 (versus $0.45) |
- Margins: NJNG utility gross margin, a non-GAAP measure, was $121.8 million for the quarter and $211.6 million for six months, compared with $120.5 million and $207.7 million. NJRES financial margin, also non-GAAP, was $31.3 million for the quarter and $51.2 million for six months, versus $64.5 million and $94.5 million.
- Cash flow: Operating cash flow for six months was $114.8 million, down from $326.5 million. Investing cash outflow was $171.4 million; financing cash inflow was $53.5 million. Cash ended at $1.9 million.
- Debt and liquidity: At March 31, total long-term debt was $844.4 million, current maturities $11.7 million, and short-term debt $152.5 million. NJR had $286.4 million available under its $425 million revolving facility; NJNG had $212.3 million available under its $250 million facility. Management said it believed borrowing availability and operating cash flow would cover working capital, capital spending, and dividends for the next 12 months, and reported compliance with debt covenants.
- Balance sheet: Total assets were $3.42 billion, up from $3.28 billion at September 30, 2015. Common stock equity was $1.21 billion. The declared dividend was $0.48 per share for the six-month period.
Material changes versus prior period
- Second-quarter consolidated net income rose, primarily reflecting improved NJRES reported results from derivative valuation/timing effects and higher clean-energy tax benefits. Six-month net income fell substantially, mainly because NJRES margins declined amid unusually warm weather, lower market volatility, and narrower gas-price spreads.
- NJRES six-month GAAP net income fell to $22.7 million from $85.6 million; its non-GAAP NFE fell to $27.0 million from $52.8 million. NJNG six-month net income increased to $79.5 million from $76.8 million, while clean-energy six-month net income declined to $16.8 million from $18.8 million.
- NJNG recorded $61.6 million of customer bill credits during November 2015–February 2016. Warmer weather reduced gas usage and NJRES sales volumes; reported six-month operating cash flow also reflected a $30 million discretionary pension contribution.
Outlook, management commentary, risks and unusual items
- The filing does not provide a clear consolidated earnings forecast. Management expected NJNG customer growth of about 1.6% annually through fiscal 2018 and 24,000–28,000 additional customers over fiscal 2016–2018.
- Capital spending estimates included NJNG expenditures of $203.4 million in fiscal 2016 and $318.2 million in fiscal 2017; fiscal 2016 solar spending of $75–$95 million and wind spending of $80–$100 million; and $10–$15 million for PennEast in fiscal 2016. Estimates may change with approvals, construction timing, permitting, financing, and other conditions.
- NJNG requested a $147.6 million base-rate increase. The Southern Reliability Link (SRL), estimated to cost $175–$180 million, received BPU approvals, but third parties appealed the orders. NJNG said the project would not be completed by December 31, 2016 and sought quarterly rate adjustments for project spending.
- NJNG’s five manufactured-gas-plant sites carried an accrued remediation liability of $178.5 million, matched by a regulatory asset; estimated total future remediation costs ranged from $150.9 million to $242.1 million. Recovery depends on regulatory approval and actual costs may differ.
- Key risks include weather and commodity-price volatility, derivative and counterparty exposure, liquidity needs and margin calls, regulatory cost recovery, project approvals and completion, renewable-energy tax credits and SREC prices, and environmental remediation. NJR disclosed $13 million of derivative liabilities with credit-related collateral triggers that could require additional posting if applicable conditions were invoked.
- NJR agreed to issue $150 million of senior notes in August 2016: $50 million at 3.2% due 2023 and $100 million at 3.54% due 2026. The company also made a $30 million discretionary pension contribution in the first half.
Most important facts for investors to verify
- Whether NJRES results normalize as weather, market volatility, storage spreads, and derivative timing effects change; compare GAAP results with the company’s non-GAAP NFE and financial margin reconciliations.
- Progress and regulatory recovery in NJNG’s base-rate case, SRL construction and appeals, and other infrastructure spending.
- Cash generation and seasonal borrowing needs, particularly given low period-end cash, short-term debt, derivative collateral requirements, and planned capital expenditures.
- Clean-energy project completion dates, expected tax-credit eligibility, SREC hedging/prices, and the realization of stated capital-spending plans.
- Actual MGP remediation expenditures, BPU recovery decisions, and changes in estimated liabilities.