New Jersey Resources Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. NJR operates regulated natural gas distribution and unregulated energy services, clean energy, midstream, and home services businesses. Results are seasonal, and the company cautions that interim results may not indicate full-year performance. Unless noted, amounts below are in millions.
Financial performance
| Metric | Three months ended June 30, 2016 | Prior-year quarter | Nine months ended June 30, 2016 | Prior-year period |
|---|---|---|---|---|
| Operating revenue | $393.2 | $458.5 | $1,411.7 | $2,295.7 |
| Operating income (loss) | $(28.3) | $(9.3) | $125.1 | $242.2 |
| Net income (loss) | $(17.4) | $(7.5) | $106.3 | $176.8 |
| Diluted EPS | $(0.20) | $(0.09) | $1.23 | $2.05 |
| Net financial earnings (NFE, non-GAAP) | $11.0 | $2.5 | $140.1 | $156.7 |
- Revenue declined substantially year over year, mainly reflecting lower natural-gas prices and sales volumes, warmer weather, and lower pass-through gas costs. Revenue includes costs passed through to utility customers, so revenue changes alone do not indicate changes in underlying margins.
- Management attributed the nine-month net-income decline principally to lower Energy Services gross margin, reflecting record warmth, lower market volatility and narrower price spreads, as well as derivative valuation and timing effects. Nine-month Energy Services net income moved to a $5.5 million loss from $69.2 million income.
- GAAP quarterly results were particularly affected by derivative valuation timing: NJR reported $55.9 million of unrealized derivative losses and related transactions in the quarter. NFE, which adjusts for specified hedge timing effects and is not a GAAP measure, was higher than GAAP net income in the quarter.
- NJNG utility gross margin, a company-defined non-GAAP measure, was $267.0 million for nine months, up from $264.5 million. NJRES financial margin, also non-GAAP, was $57.0 million, down from $89.6 million.
Cash flow, liquidity and debt
- Operating cash flow for nine months was $96.6 million, versus $382.7 million a year earlier. Management cited weaker Energy Services activity and working capital, warmer-weather-related lower utility usage and $61.6 million of customer bill credits, and a $30 million discretionary pension contribution.
- Investing cash outflow was $255.3 million, including $111.8 million for utility plant and $115.7 million for solar and wind equipment. Cash at June 30 was $94.8 million, compared with $4.9 million at September 30, 2015.
- At June 30, current assets were $604.7 million and current liabilities $601.5 million. NJR had $244.6 million of short-term debt and $967.8 million of long-term debt; the company’s reported capital structure was 49% common equity, 40% long-term debt and 11% short-term debt.
- Available borrowing capacity was approximately $169.0 million under NJR’s $425 million facility and $249.3 million under NJNG’s $250 million facility. Management said existing availability and operating cash flow should meet working-capital, capital-expenditure and dividend needs for the next 12 months, and reported compliance with debt covenants.
- NJNG issued $125 million of 3.63% senior notes due 2046 in June. NJR had agreed to issue $150 million of senior notes in August 2016.
Outlook, material developments and risks
- NJNG’s base-rate case request was revised to a $112.9 million increase; new rates were expected in early fiscal 2017, subject to BPU proceedings. Management expected customer growth of approximately 1.6% annually through fiscal 2018 and 24,000–28,000 additional customers over fiscal 2016–2018.
- Management projected NJNG capital expenditures of $203.4 million for fiscal 2016 and $318.2 million for fiscal 2017. NJRCEV estimated fiscal 2016 solar spending of $72–$99 million and wind spending of $75–$100 million. These are estimates, not earnings guidance.
- The approximately 30-mile Southern Reliability Link pipeline was estimated to cost $175–$180 million. BPU approvals were appealed by third parties; NJR said it believed the approvals would be upheld. The project was not expected to be complete by December 31, 2016.
- Environmental remediation for five former manufactured-gas-plant sites is estimated at $150.9–$242.1 million. NJNG recorded a $175.3 million liability and corresponding regulatory asset, with recovery dependent on regulatory approval and continued cost recovery.
- Key exposures include weather and gas-price volatility, derivative valuation and liquidity/margin requirements, counterparty credit risk, regulatory recovery and approvals, renewable-energy tax-credit and SREC economics, project execution, and access to capital. If specified credit triggers were invoked, the company estimated up to $22.7 million of additional derivative collateral could be required.
- The company reported no material change in previously disclosed risk factors and no new reportable legal proceedings during the quarter. Management concluded disclosure controls were effective.
Investor verification priorities
- Track the BPU base-rate case outcome, effective date, and recovery treatment for SAFE and Southern Reliability Link spending; monitor the pipeline appeals and construction schedule.
- Reconcile GAAP earnings with NFE and assess how much of the reported volatility reflects derivative marks and hedge timing versus realized operating performance.
- Review Energy Services margins, weather and market-spread assumptions, and working-capital and broker-margin needs.
- Monitor operating cash flow, short-term borrowing, planned debt issuance, capital spending, and availability under both credit facilities.
- Check actual remediation spending and regulatory recovery against the $175.3 million accrual and the disclosed range, and follow renewable-project completion, tax-credit eligibility, and SREC prices.