New Jersey Resources Corporation — FY2019 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended September 30, 2019; comparisons are primarily with FY2018. NJR operates a regulated New Jersey natural-gas utility and businesses in clean energy, wholesale energy services, midstream assets, and home services. NJNG served approximately 547,600 customers.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Operating revenue | $2,592.0 million | $2,915.1 million |
| Operating income | $153.9 million | $199.9 million |
| Net income | $169.5 million | $233.4 million |
| Diluted EPS | $1.89 | $2.64 |
| Net financial earnings (NFE, non-GAAP) | $175.0 million | $240.5 million |
| Operating cash flow | $189.4 million | $398.3 million |
| Capital expenditures | $521.2 million | $384.6 million |
Revenue fell 11.1% and net income fell 27.4%. Management attributed the earnings decline chiefly to Energy Services’ lower financial margin and the absence of FY2018’s $59.6 million Tax Act-related deferred-tax benefit. Operating cash flow declined by $208.9 million, reflecting lower Energy Services margin and higher working-capital requirements. Cash and cash equivalents were $2.7 million at year-end.
- Margins and segments: NJNG utility gross margin, a non-GAAP measure, increased to $340.4 million from $320.3 million. Segment net income was $78.1 million for Natural Gas Distribution, $77.5 million for Clean Energy Ventures, a $1.3 million loss for Energy Services, and $14.7 million for Midstream. Energy Services financial margin decreased to $28.8 million from $121.6 million.
- Debt and liquidity: Long-term debt was $1.537 billion, up from $1.181 billion; short-term debt was $25.5 million. Total assets were $4.373 billion and common equity was $1.552 billion. NJR and NJNG had $394.8 million and $249.3 million, respectively, available under their revolving credit facilities. Management said available borrowing capacity, equity proceeds, and operating cash flow should cover working capital, capital spending, and dividends for the next 12 months.
- Shareholder returns: Dividends declared were $1.19 per share, versus $1.11 in FY2018. No shares were repurchased during FY2019.
Material changes and unusual items
- Energy Services’ GAAP net result moved from $53.1 million income to a $1.3 million loss, as lower volumes, narrower pricing spreads, and less physical-market volatility reduced financial margin.
- Clean Energy Ventures earned $77.5 million, slightly above FY2018. It recorded $61.9 million of solar investment tax credits in FY2019; tax credits and tax accounting materially affect reported earnings.
- NJR completed the sale of its remaining wind assets in February 2019 for $208.6 million; net proceeds from business sales were $205.7 million. It also sold Dominion shares for approximately $34.5 million.
- FY2019 included a roughly $10 million income-tax benefit following a favorable IRS ruling on eligible historical solar-property costs.
- The company adopted ASC 606 in FY2019. The filing says adoption did not materially affect financial position, results, or cash flows; net presentation of sales taxes reduced reported operating revenue compared with prior presentation.
Outlook, commentary, and principal risks
- NJNG expects approximately 28,000–30,000 new customers over FY2020–FY2022, around 1.8% annual growth. The company projected NJNG capital expenditures of $445.3 million in FY2020 and $311.6 million in FY2021, and $125–$145 million of solar projects placed in service during FY2020.
- On November 13, 2019, after fiscal year-end, the BPU approved a $62.2 million NJNG base-rate increase, effective November 15, 2019, below the utility’s updated request of $134.3 million. NJNG had also sought approval for a five-year, approximately $507 million Infrastructure Investment Program.
- NJR acquired Leaf River Energy Center for $367.5 million on October 11, 2019, after year-end, and entered a $350 million bridge facility primarily to finance the acquisition. This acquisition is not included in FY2019 results.
- PennEast faces material permitting and legal uncertainty. A federal appeals court reversed a ruling on condemnation and access to certain New Jersey properties; NJDEP also deemed a wetlands permit application incomplete. NJR recorded no impairment, but disclosed that further adverse developments or delays could trigger one.
- Other key exposures include recovery of NJNG regulatory assets and environmental costs, including a $131.1 million recorded MGP remediation liability (estimated future expenditures range from $115.9 million to $186.2 million); dependence of solar returns on tax credits and SREC markets; weather and natural-gas price volatility; third-party pipeline and storage availability; counterparty credit, financing, pension, cyber, and environmental risks.
- The filing does not provide a consolidated earnings-per-share forecast. Forward-looking statements are subject to the risks described in the filing.
Important facts for investors to verify
- Whether Energy Services’ financial margin and cash generation recover from FY2019’s sharp decline.
- Final implementation and customer-rate effects of NJNG’s base-rate settlement and infrastructure investment plans.
- PennEast’s legal, permitting, construction-cost, and schedule developments, and the related impairment assumptions.
- Leaf River’s final acquisition adjustments, financing, integration, and subsequent contribution to results.
- Solar project completion and eligibility for tax credits, future SREC prices, and the sustainability of Clean Energy Ventures’ earnings.
- Updated MGP remediation estimates and continued regulatory recovery of remediation and other deferred costs.
Financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of September 30, 2019.