Business context and reporting period
New Jersey Resources Corporation (NJR) filed this unaudited Form 10-Q for its fiscal third quarter ended June 30, 2019, and the nine months ended that date. NJR operates a regulated New Jersey gas utility, clean-energy and wholesale energy businesses, midstream investments, and home-services operations. The company notes that seasonal operations make interim results an imperfect indicator of full-year performance.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. The quarter is the three months ended June 30; YTD is the nine months ended June 30.
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Operating revenue | $434.9 | $543.4 | $2,113.0 | $2,267.8 |
| Operating income (loss) | $(4.0) | $(36.7) | $161.7 | $218.2 |
| Net income (loss) | $(8.4) | $(14.3) | $151.4 | $249.7 |
| Diluted EPS | $(0.09) | $(0.16) | $1.69 | $2.84 |
| Operating cash flow | Not presented separately | Not presented separately | $165.8 | $392.6 |
For the quarter, revenue fell about 20% year over year, while the net loss narrowed. YTD revenue fell about 7% and net income fell about 39%. The company’s non-GAAP net financial earnings (NFE) were a loss of $17.5 million for Q3 and $149.0 million YTD, versus losses of $8.0 million and earnings of $269.4 million, respectively, in the comparable periods. NFE excludes certain derivative and inventory-hedging timing effects and is not a substitute for GAAP results.
- Margins: NJNG’s non-GAAP utility gross margin was $59.5 million in Q3 versus $38.1 million, and $295.5 million YTD versus $276.6 million. Energy Services’ non-GAAP financial margin was a loss of $14.2 million in Q3 versus a loss of $7.1 million, and $36.3 million YTD versus $130.0 million.
- Cash flow and investment: YTD investing cash outflow was $105.0 million, including $344.0 million in capital expenditures, partly offset by proceeds from wind-asset and Dominion-share sales. Financing cash outflow was $35.8 million. Cash and cash equivalents were $26.3 million at June 30, 2019.
- Debt and liquidity: At June 30, long-term debt was $1.212 billion, current maturities were $124.6 million, and short-term debt was $99.3 million. NJR had $420.8 million available under its $425 million revolving facility; NJNG had about $150 million available under its $250 million facility. Current assets of $510.0 million were below current liabilities of $582.0 million. Management said available borrowing capacity, equity proceeds, and operating cash flow should cover expected needs for the next 12 months.
- Capital structure and dividends: Capitalization was 52% common equity, 40% long-term debt, and 8% short-term debt. Dividends paid YTD were $77.7 million.
Material changes versus the prior comparable period
- YTD GAAP net income was lower in part because the prior-year period included a $57.7 million income tax benefit associated with the Tax Act. The 2019 period also included an approximately $6 million tax benefit following a favorable IRS ruling on investment tax credits.
- Energy Services’ YTD financial margin declined substantially, which management attributed primarily to narrower price spreads, reduced volumes, and less volatility in the physical natural gas market.
- Clean Energy Ventures revenue and earnings were affected by the February 2019 sale of its remaining wind assets. The sale generated $208.6 million in proceeds and a $0.6 million pretax gain; solar investment continued.
- Operating cash flow declined by $226.8 million YTD, which management attributed primarily to lower Energy Services financial margin and increased working-capital requirements.
- Customer growth continued: NJNG served approximately 546,500 customers at June 30, up from approximately 537,700 a year earlier.
Outlook, management commentary, risks and unusual items
- Investment and rate recovery: NJNG estimated fiscal 2019 and 2020 capital expenditures of $347.9 million and $454.6 million, respectively. It sought approval for a five-year, approximately $507 million infrastructure investment program. A base-rate case initially seeking $128.2 million was updated to $129.8 million; the outcome remained subject to BPU review. NJNG also updated a separate rate filing for SAFE II and NJ RISE investments to a requested $7.8 million increase effective October 1, 2019.
- Other project spending: Fiscal 2019 solar capital expenditures were estimated at $150 million–$170 million; Adelphia project spending at $175 million–$200 million; and PennEast spending at $3 million–$10 million. These estimates are subject to permitting, construction, interconnection, financing, and other risks.
- Projects and regulatory risk: PennEast construction depended on outstanding permits and land-use rights, with potential delays, litigation, and cost increases. NJR’s planned Adelphia acquisition also remained subject to regulatory approvals. NJNG’s Southern Reliability Link was under construction, with estimated completion cost of $200 million–$230 million.
- Environmental contingencies: NJNG recorded a $125.6 million liability for remediation of five manufactured-gas-plant sites; its estimated future remediation range for those sites was $117.7 million–$204.1 million. Costs for two additional potential sites could not yet be reasonably estimated.
- Market and operating risks: Energy Services earnings are exposed to gas-market volatility, spreads, weather, counterparties, and derivative-accounting timing. Clean-energy returns depend in part on tax credits, SREC prices, project completion, and regulatory incentives. The filing also identifies credit, financing, environmental, regulatory, cyber, and extreme-weather risks.
- Credit ratings: NJNG’s Moody’s outlook was negative and Fitch’s was stable; Moody’s had lowered its secured rating to Aa3. The company cited capital spending and tax-reform-related cash-flow effects as considerations. Management reported covenant compliance.
- Post-quarter financing and leadership: In July 2019, NJNG issued $185 million of long-term notes at 3.76% and 3.86%; NJR issued $50 million of 3.29% notes and planned to issue another $100 million subject to closing conditions. CEO Laurence Downes announced retirement effective September 30, 2019, with President and COO Stephen Westhoven designated as successor.
- The company reported no material changes in risk factors from its 2018 Form 10-K and no material developments in previously reported legal proceedings during the quarter. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the decline in YTD GAAP earnings and NFE, distinguishing the prior-year Tax Act benefit from underlying segment performance and 2019 tax credits.
- Track BPU decisions and timing for the $129.8 million base-rate request, the infrastructure investment program, and other rider recoveries.
- Assess Energy Services’ exposure to commodity spreads, volatility, working-capital needs, and derivative valuation swings.
- Monitor actual spending, approvals, and financing for solar, Adelphia, PennEast, and NJNG infrastructure projects against management estimates.
- Review the range and recoverability of MGP remediation costs, including the two additional sites whose potential liabilities were not estimable.
- Confirm financing completed after quarter-end, liquidity and covenant headroom, rating developments, and the planned CEO succession.