New Jersey Resources Corporation — Form 10-Q Summary
Business context and reporting period. The filing covers the quarter and nine months ended June 30, 2018, in the company’s fiscal year ending September 30. NJR operates regulated New Jersey gas distribution through NJNG, alongside energy services, clean energy, midstream investments and home services. Results are seasonal, and interim performance may not indicate full-year results.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $543.4 million, versus $457.5 million | $2,267.8 million, versus $1,732.1 million |
| Operating income (loss) | $(37.7) million, versus $18.0 million | $215.4 million, versus $199.1 million |
| Net income (loss) | $(14.3) million, or $(0.16) per diluted share; prior year $19.0 million, or $0.22 | $249.7 million, or $2.84 per diluted share; prior year $168.6 million, or $1.94 |
| Dividends declared per share | $0.2725, versus $0.255 | $0.818, versus $0.765 |
| Operating cash flow | Not presented separately for the quarter | $392.6 million, versus $223.1 million |
For the nine months, non-GAAP net financial earnings (NFE) were $269.4 million, or $3.08 per basic share, versus $161.9 million, or $1.88. NFE adjusts for derivative and inventory-hedge timing effects and should not be treated as GAAP earnings.
- Margins: NJNG utility gross margin, a non-GAAP measure, was $38.1 million for the quarter and $276.6 million year to date, versus $60.5 million and $301.6 million, respectively. Energy Services financial margin, also non-GAAP, was $(7.1) million for the quarter and $130.0 million year to date, versus $3.6 million and $43.9 million.
- Investing and cash: Nine-month cash used in investing was $254.2 million; capital expenditures were approximately $266.7 million. Cash and equivalents were $1.1 million at June 30, versus $2.2 million at September 30, 2017.
- Debt and liquidity: At June 30, long-term debt was $1.220 billion, current maturities $40.5 million and short-term debt $57.1 million. Current assets were $736.9 million and current liabilities $506.9 million. NJR and NJNG had approximately $373.5 million and $234.3 million, respectively, available under committed credit facilities. Management said available borrowing capacity, equity proceeds and operating cash flow should meet needs for the next 12 months.
Material changes versus the prior comparable period
- Quarterly revenue increased, but the company moved from profit to loss, largely reflecting Energy Services’ higher demand fees and operating and maintenance costs and volatile derivative-related results. Energy Services reported a quarterly net loss of $20.8 million, versus income of $2.5 million.
- Nine-month net income rose 48% and NFE rose 66%. Management attributed the improvement primarily to a $57.7 million Tax Act-related income tax benefit and stronger Energy Services results amid colder weather, higher storage withdrawals and more favorable natural-gas price-spread opportunities.
- Revenue growth was concentrated in nonutility activities, especially Energy Services; the filing cautions that commodity sales and purchases can increase reported revenue without a corresponding increase in margin.
- Debt composition shifted: long-term debt increased from $997.1 million at September 30, 2017, while short-term debt fell from $266.0 million to $57.1 million. NJR and NJNG issued $100 million and $125 million of senior notes, respectively.
Outlook, commentary, risks and unusual items
- Tax and regulation: The Tax Act reduced the federal corporate tax rate. NJNG recorded a $228.4 million decrease in net deferred tax liabilities as a regulatory liability and returned approximately $31 million in customer credits in June. The BPU approved an interim $19.7 million annual base-rate reduction effective April 1, 2018. The tax accounting remains subject to updated estimates and regulatory treatment.
- Investment and growth: NJNG expected customer growth of approximately 1.7% annually through fiscal 2020 and projected 27,000–29,000 customer additions over fiscal 2018–2020. The company estimated NJNG capital expenditures of $226.6 million in fiscal 2018 and $414.2 million in fiscal 2019; Clean Energy Ventures estimated fiscal 2018 solar expenditures of $130–$144 million.
- Projects and asset sales: PennEast, in which NJR owns 20%, was expected to enter service in 2019, but could be delayed by approvals, land rights or construction. NJR had committed to sell its remaining wind assets; $206.9 million of assets and $4.2 million of related liabilities were classified as held for sale. It sold a 9.7-MW Montana wind farm for $18.5 million and sold NJR Retail Services in February.
- Unusual items: NJR recorded a $17.8 million impairment of its Dominion Energy Midstream common-unit investment after a FERC policy change; it also reduced the related deferred gain by $17.8 million. A voluntary early-retirement program generated $4.6 million of expense year to date, with approximately $6.4 million expected in total.
- Key risks: Energy Services earnings and liquidity are exposed to natural-gas price volatility, weather, storage and transportation economics, derivative valuation timing, counterparty credit and broker-margin requirements. Other material exposures include regulatory recovery, clean-energy tax incentives and project execution, environmental remediation, financing costs and access to capital.
- Contingencies: NJNG’s estimated remediation costs for five former manufactured-gas-plant sites range from $117.6 million to $205.2 million; the recorded liability was $140.8 million and recovery is sought through regulatory mechanisms. The company also disclosed Stafford Township incident claims estimated at $0.6 million–$3.2 million, with the low end accrued, and said insurance is expected to cover a substantial portion.
Important facts for investors to verify
- How much of year-to-date earnings improvement is attributable to the $57.7 million Tax Act benefit rather than recurring operations, and how final tax estimates may change.
- Whether Energy Services can sustain margins under different weather, price-spread and demand-fee conditions; review non-GAAP NFE and financial margin alongside GAAP results.
- Progress on remaining wind-asset sales, PennEast approvals and construction, and NJR’s planned capital spending and financing needs.
- Whether NJNG’s regulatory filings and customer refunds, including tax-related rate changes, affect future utility margins and cash flows as expected.
- Updates to MGP remediation estimates and recoverability, counterparty exposures, credit ratings and the company’s very low reported cash balance relative to its seasonal funding needs.