New Jersey Resources Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015, compared with the three months ended December 31, 2014. The company provides regulated natural gas distribution and operates wholesale energy services, clean energy, midstream, and home services businesses. Results are seasonal; management cautions that interim results are not indicative of full-year results.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Operating revenue | $444.3 million | $824.1 million |
| Operating income | $59.5 million | $168.7 million |
| Net income | $48.6 million | $123.3 million |
| Diluted EPS | $0.56 | $1.44 |
| Net financial earnings (NFE, non-GAAP) | $49.6 million | $55.1 million |
| Operating cash flow | $(39.2) million | $40.8 million |
| Cash capital expenditures and other investing outflows | $(95.4) million | $(92.2) million |
| Dividends declared per share | $0.24 | $0.225 |
GAAP operating margin, calculated as operating income divided by revenue, was approximately 13.4%, versus 20.5%; net margin was approximately 10.9%, versus 15.0%. Revenue fell 46%, reflecting lower gas prices and volumes, particularly in Energy Services. The filing reports no consolidated cash-flow margin measure.
Material changes and segment performance
- GAAP net income declined $74.7 million, while NFE declined $5.5 million. The prior-year GAAP result included substantially larger unrealized derivative gains; NJR reported a $87.6 million year-over-year decrease in unrealized gains and related timing effects. NFE adjusts for certain hedge timing differences and is not a GAAP substitute.
- Energy Services net income fell to $9.1 million from $78.9 million; NFE fell to $10.0 million from $16.4 million. Management cited narrower price spreads, storage transaction timing, and warmer weather. Average gas prices declined about 43% and sales volumes about 20%.
- Natural Gas Distribution net income rose to $30.6 million from $28.2 million, as utility gross margin increased to $89.8 million from $87.2 million. The increase was partly offset by higher depreciation. Winter weather was 33.6% warmer than the 20-year average, versus 2% warmer in the prior-year quarter; the Conservation Incentive Program (CIP) helped mitigate usage-related effects.
- Clean Energy Ventures net income decreased to $8.2 million from $15.6 million, primarily due to lower recognized tax credits and higher depreciation and operating costs, partly offset by higher revenue and wind production. Midstream net income increased to $2.3 million from $2.1 million.
Financial position, debt and liquidity
- At December 31, 2015, total assets were $3.48 billion, compared with $3.28 billion at September 30, 2015. Cash was $1.7 million; current assets were $588.9 million and current liabilities $575.0 million, a current ratio of approximately 1.02.
- Balance-sheet long-term debt was $848.2 million and short-term debt $211.0 million; current maturities were a further $11.0 million. Total reported borrowings including current maturities were approximately $1.07 billion.
- NJR had $267.1 million available under its $425 million revolving facility; NJNG had $173.3 million available under its $250 million facility. The company said it expected available borrowing capacity and operating cash flow to cover working capital, capital expenditures, and dividends for the next 12 months, and reported compliance with debt covenants.
- Operating cash flow was negative, mainly due to working-capital changes, a $30 million discretionary pension contribution, and seasonal and commodity-related cash requirements. Financing provided $131.4 million, including increased short-term borrowing.
- Capital structure at quarter-end was 52% common equity, 38% long-term debt, and 10% short-term debt, versus 54%, 42%, and 4%, respectively, at September 30.
Outlook, commentary and risks
- Management expected NJNG customer growth of approximately 1.6% annually over the next two years and forecast 16,000–18,000 new customers in FY2016–FY2017. It filed a $147.6 million base-rate increase request with the BPU in November 2015; this was a request, not an approved rate increase.
- NJNG planned capital expenditures of $291.1 million in FY2016 and $230.5 million in FY2017. NJRCEV estimated FY2016 solar spending of $75–$95 million and wind spending of $80–$100 million; expected FY2016 PennEast contributions were $40–$50 million.
- NJNG expected approximately $76 million in customer bill credits from November 2015 through February 2016, an estimated 17% reduction in the average residential heating bill. $19.6 million had been issued by December 31, 2015. The BPU approved the proposed Southern Reliability Link route and project, subject to specified conditions, on January 27, 2016.
- Federal legislation extended the 30% solar investment tax credit for qualifying projects under construction by the end of 2019 and extended production tax credits for wind, with phase-down provisions. Project timing and eligibility for tax incentives remain important to earnings.
- Environmental remediation at five former manufactured gas plant sites was estimated at $150.9–$242.1 million; the recorded liability and corresponding regulatory asset were $180.4 million. Recovery depends on regulatory support, and actual costs may differ from estimates.
- Key disclosed risks include weather and natural-gas price volatility, derivative and counterparty exposure, working-capital and margin requirements, regulatory cost recovery, project permitting and construction, tax-credit eligibility, and access to capital. Management said there were no material changes to previously disclosed risk factors and no new reportable legal proceedings in the quarter.
Investor verification priorities
- Check subsequent results for Energy Services earnings and derivative timing effects; compare GAAP income with NFE and its reconciliation.
- Monitor the BPU decision on NJNG’s $147.6 million rate petition and the timing and recovery of infrastructure investments.
- Track operating cash conversion, short-term borrowing, and remaining credit-facility availability as seasonal and project funding needs evolve.
- Verify spending, completion dates, and tax-credit qualification for solar and wind projects, the Southern Reliability Link, and PennEast.
- Assess whether the $180.4 million MGP remediation accrual remains adequate and recoverable, and monitor counterparty collateral and credit exposures.