Business context and reporting period
New Jersey Resources Corporation (NJR) filed this Form 10-K for the fiscal year ended September 30, 2021. NJR is a diversified energy holding company with four reporting segments: regulated natural gas distribution, clean energy, energy services, and natural gas storage and transportation. Its utility subsidiary, NJNG, served approximately 564,000 customers in New Jersey.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Operating revenue | $2,156.6 million | $1,953.7 million |
| Operating income | $288.4 million | $228.9 million |
| Net income | $117.9 million | $163.0 million |
| Diluted EPS | $1.22 | $1.71 |
| Operating cash flow | $391.0 million | $213.5 million |
| Capital expenditures | $624.6 million | $448.1 million |
- Revenue rose 10.4% and operating income increased, while net income fell 27.7%, principally because of a $92.0 million pre-tax impairment of the PennEast investment.
- Management’s non-GAAP net financial earnings (NFE) were $207.7 million, or $2.16 per basic share, compared with $165.3 million, or $1.74 per share, in FY2020. NFE excludes derivative timing effects and the PennEast impairment; it is not a GAAP measure.
- Cash flows used in investing activities were $622.1 million. Financing activities provided $117.8 million, per the cash flow statement. Cash, cash equivalents and restricted cash ended the year at $6.0 million, down from $119.4 million.
- At year-end, total assets were $5.72 billion, long-term debt was $2.16 billion, current maturities of long-term debt were $72.8 million, and short-term debt was $377.3 million. Capital structure was 38% common equity, 51% long-term debt and 11% short-term debt.
- NJR reported $270.3 million available under its $500 million revolving credit facility; NJNG reported $91.1 million available under its $250 million facility. Both facilities mature in September 2026. Management said available borrowing capacity, equity proceeds and operating cash flow should meet requirements for at least 12 months; the company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Energy Services returned to profitability, with GAAP net income of $59.0 million versus an $11.0 million loss. Management attributed the improvement largely to market volatility and extreme cold weather in February 2021; non-GAAP financial margin increased to $146.1 million from $9.9 million.
- Natural Gas Distribution net income declined to $107.4 million from $126.9 million. Higher operations and maintenance, depreciation and interest costs outweighed higher utility gross margin, which increased to $432.8 million from $408.1 million.
- Clean Energy Ventures net income decreased to $16.8 million from $22.1 million, mainly on higher operating and interest costs and lower SREC revenue timing. Storage and Transportation swung to a $67.8 million net loss from $18.3 million income, primarily due to the PennEast impairment.
- Operating cash flow increased by $177.5 million, mainly reflecting Energy Services’ stronger earnings. Investing cash outflow declined from FY2020, which included acquisitions of Leaf River and Adelphia Gateway.
- NJR changed Clean Energy Ventures’ accounting for investment tax credits from the flow-through method to the deferral method and retrospectively adjusted prior periods. This reduced reported FY2020 net income from $193.9 million as previously reported to $163.0 million as adjusted, and FY2019 from $169.5 million to $123.9 million.
Outlook, commentary, risks and unusual items
- NJNG expects customer growth of approximately 1.7% annually and 28,000–30,000 customer additions over FY2022–FY2024. The filing estimates this growth could add about $6.2 million in annual utility gross margin under the current CIP tariff.
- After year-end, the BPU approved a $79.0 million annual NJNG base-rate increase effective December 1, 2021, below NJNG’s updated request of $162.5 million. The settlement authorized a 9.6% return on common equity and a 6.84% overall rate of return on rate base.
- Management projected NJNG capital expenditures of $350.4 million in FY2022 and $324.3 million in FY2023. Clean Energy Ventures estimated $235 million–$301 million of solar projects to be placed in service in FY2022. Adelphia Gateway FY2022 spending was projected at $90 million–$110 million.
- Energy Services’ capacity-release agreements are expected to provide approximately $260 million in cash during FY2022–FY2024 and $34 million annually during FY2025–FY2031; the filing describes aggregate net proceeds of approximately $500 million through November 2030.
- The PennEast partnership ceased further project development on September 27, 2021. NJR recorded a $92.0 million impairment, approximately $74.5 million after tax; its remaining investment carrying value was $5.5 million. Further impairment remains possible.
- NJNG’s former manufactured gas plant remediation liability was $135.0 million, with estimated total future expenditures ranging from $115.4 million to $178.4 million. Recovery depends on BPU approval; disallowed costs could be charged to earnings.
- Key risks include regulatory cost recovery and rate decisions, project approvals and construction, natural gas price and weather volatility, counterparty credit and liquidity, cybersecurity, environmental obligations, and changing solar incentives and tax credits. NJR said COVID-19 had not materially affected the company as of September 30, 2021, while noting uncertainty about future effects.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with management’s higher non-GAAP NFE, especially the treatment of derivative timing effects and the PennEast impairment.
- Review the PennEast impairment assumptions, project wind-down and potential recovery of the remaining investment.
- Track implementation and realized customer revenue from the $79 million NJNG rate settlement, alongside future infrastructure spending and regulatory recovery.
- Assess NJR and NJNG debt maturities, seasonal short-term borrowing, available credit capacity and the cash timing and terms of the capacity-release agreements.
- Monitor actual MGP remediation costs and whether the BPU continues to permit recovery through customer rates.
- Check solar project execution, incentive eligibility, REC pricing and the effects of the revised accounting policy for investment tax credits.