New Jersey Resources Corporation — Form 10-Q
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016; unaudited. NJR operates a regulated New Jersey gas utility and businesses in wholesale energy services, clean energy, midstream investments, and home services. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter |
|---|---|---|
| Operating revenue | $541.0 million | $444.3 million |
| Operating income | $41.5 million | $59.5 million |
| Net income | $34.9 million | $50.3 million |
| Diluted EPS | $0.40 | $0.58 |
| Dividends declared per share | $0.255 | $0.24 |
| Net financial earnings (non-GAAP) | $40.4 million; $0.47 basic per share | $51.3 million; $0.60 basic per share |
- Operating cash flow was negative $46.1 million, versus negative $36.2 million. Investing cash flow was negative $86.5 million; financing cash flow was positive $141.9 million. Cash ended at $46.9 million.
- Capital expenditures were $85.8 million, including $38.9 million for Natural Gas Distribution and $46.8 million for Clean Energy Ventures.
- At December 31, total assets were $3.95 billion, common equity $1.19 billion, long-term debt $1.03 billion, current maturities of long-term debt $96.8 million, and short-term debt $284.6 million. NJR’s $425 million revolving facility had $126.0 million available; NJNG’s $250 million facility had $249.3 million available. Management reported covenant compliance and said available borrowing, equity proceeds, and operating cash flows should meet needs for the next 12 months.
- NJNG’s utility gross margin, a non-GAAP measure, increased to $97.9 million from $89.8 million. Consolidated operating margin is not presented as a separate filing metric.
Material changes versus the prior-year quarter
- Revenue grew about 22%, but operating income fell about 30% and net income fell about 31%. Management attributed the earnings decline principally to NJRES derivative-related volatility and higher operating costs, plus higher Clean Energy Ventures depreciation and interest expense.
- NJRES reported a $4.8 million net loss versus $9.4 million net income. Its non-GAAP financial margin declined to $10.7 million from $19.9 million, primarily due to fewer transportation-market opportunities and the timing of storage withdrawals. NJR’s NFE excludes specified derivative and inventory-hedging timing effects; it is not GAAP earnings.
- Natural Gas Distribution net income was $30.3 million versus $30.9 million. Utility gross margin rose with the new base rates and customer growth, partly offset by lower CIP-related margin and other cost increases. The quarter’s weather was colder year over year, but warmer than the 20-year average.
- Clean Energy Ventures net income declined to $4.2 million from $8.4 million. Midstream income was broadly steady at $2.4 million; Home Services and Other income increased to $1.5 million from $0.3 million, including a $2.6 million pretax gain on securities sales.
- Short-term debt increased to $284.6 million from $121.7 million at September 30, 2016, while cash rose to $46.9 million from $37.5 million. Operating cash use reflected working-capital needs, including receivables, commodity prices, and broker margin requirements.
Outlook, risks, and unusual items
- The BPU-approved NJNG base-rate increase of $45 million annually took effect October 1, 2016. Management expects customer growth of approximately 1.6% annually through fiscal 2019; it estimates 24,000–27,000 additional customers over fiscal 2017–2019.
- Projected fiscal 2017–2018 NJNG capital expenditures are $177.6 million and $337.2 million, respectively. Fiscal 2017 Clean Energy Ventures solar investment is estimated at $90–$110 million, and PennEast spending at $20–$30 million. These plans depend on approvals, construction, interconnection, financing, and other conditions.
- PennEast, in which NJR owns 20%, was estimated to enter service in the first quarter of fiscal 2019; NJNG has a 15-year capacity agreement. Required regulatory approvals and project timing remain material uncertainties. Appeals also challenge BPU approvals and routing for the Southern Reliability Link pipeline.
- 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 $168.5 million; recovery depends on regulatory treatment and actual remediation costs. Stafford Township gas-fire claims were estimated at $0.6–$3.2 million; NJNG accrued the low end and expects insurance to cover substantially associated costs.
- Commodity-price movements, derivative valuation and settlement timing, wholesale counterparty credit, weather, working-capital and margin calls, regulatory cost recovery, clean-energy tax credits and SREC prices are key risks. A 10% change in NYMEX gas futures prices was estimated to change fair value of specified open positions by about $22.5 million.
- The filing gives no consolidated earnings guidance. It reports an estimated fiscal 2017 effective tax rate of 8.7%, affected by forecast tax credits and project completion. In January 2017, NJNG completed the purchase of three bonds totaling approximately $35.8 million that had been reclassified as current maturities.
Important facts for investors to verify
- Whether NJRES’s weaker financial margin and derivative-driven GAAP volatility persist, and how reported earnings compare with non-GAAP NFE.
- Funding needs and available liquidity as planned utility, solar, wind, and PennEast investments proceed, particularly given higher short-term borrowing and seasonal working-capital swings.
- Execution, approval, and in-service timing for PennEast, the Southern Reliability Link, and clean-energy projects, including eligibility for expected tax incentives.
- Whether MGP remediation costs remain recoverable from customers and within the disclosed estimated range, and the eventual resolution and insurance coverage of Stafford claims.
- Updates to commodity and counterparty exposures, broker-margin requirements, and NJNG’s regulatory proceedings and customer-growth assumptions.