New Jersey Resources(NJR) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements Net income for the nine months ended June 30, 2021, decreased to $119.0 million due to an equity investment impairment, while total assets and operating cash flow increased Condensed Consolidated Statements of Operations (Unaudited) | (Thousands, except per share data) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total operating revenues | $1,624,085 | $1,553,624 | | Operating income | $285,232 | $186,254 | | Net income | $119,023 | $130,300 | | Diluted earnings per common share | $1.23 | $1.38 | Condensed Consolidated Balance Sheets (Unaudited) | (Thousands) | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Total assets | $5,408,618 | $5,316,477 | | Property, plant and equipment, net | $4,030,467 | $3,722,769 | | Total liabilities | $1,504,930 | $1,413,115 | | Long-term debt | $2,221,622 | $2,259,466 | | Common stock equity | $1,682,066 | $1,643,896 | Condensed Consolidated Statements of Cash Flows (Unaudited) | (Thousands) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Cash flows from operating activities | $341,796 | $182,783 | | Cash flows used in investing activities | $(429,870) | $(890,966) | | Cash flows (used in) from financing activities | $(25,339) | $749,365 | Note 1. Nature of the Business NJR operates through four primary segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, and Storage and Transportation, serving diverse energy needs - NJNG, the Natural Gas Distribution segment, serves approximately 562,700 customers in several New Jersey counties and is regulated by the BPU[32] - The Clean Energy Ventures segment consists of capital investments in commercial and residential solar projects[33] - The Storage and Transportation segment invests in energy ventures, including a 50% interest in Steckman Ridge, a 20% interest in PennEast, and wholly-owned assets Leaf River and Adelphia Gateway[34] Note 2. Summary of Significant Accounting Policies The company retrospectively adopted the deferral method for Investment Tax Credits (ITCs) and new guidance on credit losses, with no material impact on retained earnings - Effective October 1, 2020, the company changed its accounting method for ITCs at Clean Energy Ventures from the flow-through method to the deferral method, which is considered preferable under ASC 740. This change was applied retrospectively[71] Impact of ITC Accounting Change on 9-Months Ended June 30, 2020 | (Thousands, except per share data) | As Previously Reported | Effect of Change | As Adjusted | | :--- | :--- | :--- | :--- | | Operating income | $176,521 | $9,733 | $186,254 | | Net income | $150,647 | $(20,347) | $130,300 | | Diluted EPS | $1.59 | $(0.21) | $1.38 | - The company adopted ASU No. 2016-13 (Credit Losses) on October 1, 2020, using the modified retrospective method. The adoption did not result in a material cumulative effect adjustment to retained earnings[77][78] - In February 2021, severe winter weather led Energy Services to evaluate counterparty credit risk, resulting in a $5.2 million reserve for expected credit losses recorded at March 31, 2021[55][56] Note 3. Revenue Total operating revenues for the nine months ended June 30, 2021, increased to $1.624 billion, primarily driven by the Energy Services segment Disaggregated Revenues by Segment (Nine Months Ended June 30) | (Thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Natural Gas Distribution | $633,522 | $645,375 | | Clean Energy Ventures | $26,227 | $25,603 | | Energy Services | $889,631 | $816,003 | | Storage and Transportation | $36,703 | $29,949 | | Home Services and Other | $38,002 | $36,694 | | Total operating revenues | $1,624,085 | $1,553,624 | Note 4. Regulation NJNG's operations are subject to BPU regulation, with $570.0 million in regulatory assets, and recent activities include a base rate case filing and approval of a new SAVEGREEN program - On March 30, 2021, NJNG filed a base rate case with the BPU requesting a revenue increase of $165.7 million, later updated to $163.9 million, primarily for rate recovery for the SRL and other infrastructure investments[109] - On March 3, 2021, the BPU approved a three-year SAVEGREEN program with approximately $126.1 million in direct investment and $109.4 million in financing options, effective July 1, 2021[109] Regulatory Assets and Liabilities Summary (June 30, 2021) | (Thousands) | Amount | | :--- | :--- | | Total current regulatory assets | $34,761 | | Total noncurrent regulatory assets | $535,274 | | Total current regulatory liabilities | $14,037 | | Total noncurrent regulatory liabilities | $192,999 | Note 5. Derivative Instruments The company uses derivatives to manage commodity price risk, with Energy Services recognizing fair value changes in earnings and NJNG deferring them as regulatory assets/liabilities Fair Value of Derivatives (June 30, 2021) | (Thousands) | Assets | Liabilities | | :--- | :--- | :--- | | Derivatives not designated as hedging instruments | | | | Natural Gas Distribution | $93 | $2,029 | | Energy Services | $20,481 | $56,673 | | Total fair value of derivatives | $20,574 | $58,702 | - Energy Services chooses not to designate its commodity derivatives as accounting hedges, so changes in fair value are recorded in operating revenues or natural gas purchases, creating earnings volatility[112] - For NJNG, changes in the fair value of its financial commodity derivatives are recorded as regulatory assets or liabilities, deferring the impact on earnings[116] - As of June 30, 2021, the company's gross credit exposure from wholesale operations was $201.8 million, with $135.2 million related to investment-grade counterparties[138][139] Note 7. Investments in Equity Investees The company recognized a $92.0 million impairment charge on its PennEast pipeline equity investment due to ongoing regulatory and legal challenges, reducing its carrying value to $5.5 million - The company determined its equity investment in PennEast was other-than-temporarily impaired as of June 30, 2021, due to ongoing regulatory and legal challenges[165] - An other-than-temporary impairment charge of $92.0 million ($72.7 million, net of tax) was recognized, recorded in 'equity in (losses) earnings from affiliates' on the income statement[166] Investment in PennEast | (Thousands) | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | PennEast Investment Value | $5,479 | $95,997 | - On June 29, 2021, the Supreme Court ruled in favor of PennEast, reversing a Third Circuit decision regarding the use of eminent domain on state-owned lands[164] Note 9. Debt NJR and NJNG utilize credit facilities and commercial paper, with NJR having $124.8 million outstanding and NJNG $51.5 million, while Clean Energy Ventures uses sale-leaseback financing Credit Facilities Summary (June 30, 2021) | (Thousands) | Facility Size | Outstanding | Available | | :--- | :--- | :--- | :--- | | NJR | $425,000 | $124,800 | $289,612 | | NJNG | $250,000 | $51,500 (CP) | $197,769 | - Clean Energy Ventures received proceeds of $17.7 million and $42.9 million for the nine months ended June 30, 2021 and 2020, respectively, from sale-leaseback financing of commercial solar projects[180] Note 11. Income Taxes The effective tax rate for the nine months ended June 30, 2021, was 24.0%, impacted by the PennEast impairment and the release of a $4.9 million tax reserve - The actual effective tax rate was 24.0% for the nine months ended June 30, 2021, compared to 16.6% in the prior year period[193] - Discrete tax items for the nine months ended June 30, 2021 totaled approximately $11.8 million, primarily related to the impairment of the PennEast investment[193] - A reserve for uncertain tax benefits of $4.9 million was released during fiscal 2021 after a federal tax audit was completed and the related positions were considered effectively settled[188][189] - As of June 30, 2021, the company has a valuation allowance of $25.0 million, primarily related to state net operating losses and potential capital losses from the PennEast impairment[200] Note 13. Commitments and Contingent Liabilities The company has significant future commitments for natural gas purchases and pipeline fees, with a Manufactured Gas Plant (MGP) remediation liability of approximately $136.9 million Commitments as of June 30, 2021 | (Thousands) | 2021 (Remainder) | 2022 | 2023 | 2024 | 2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Energy Services | $214,837 | $60,013 | $35,818 | $30,384 | $26,732 | $41,898 | | NJNG | $181,273 | $169,758 | $158,638 | $166,170 | $154,541 | $1,432,389 | - The estimated liability for Manufactured Gas Plant (MGP) remediation was $136.9 million as of June 30, 2021, down from $150.6 million at September 30, 2020[220] Note 14. Common Stock Equity The company cash-settled its remaining forward sale agreements for approximately $2.8 million in payouts, in lieu of issuing 1,212,120 common shares - On March 3, 2021, the company cash settled a portion of its forward sale agreement for a payout of approximately $388,000 instead of issuing 727,272 shares[228] - On May 26, 2021, the company cash settled the remainder of the forward sale agreements for a payout of approximately $2.4 million instead of issuing 484,848 shares[228] Note 15. Reporting Segment and Other Operations Data Natural Gas Distribution was the most profitable segment with $131.6 million net income, while Storage and Transportation recorded a $69.5 million net loss due to the PennEast impairment Net Income (Loss) by Segment (Nine Months Ended June 30, 2021) | (Thousands) | Net Income (Loss) | | :--- | :--- | | Natural Gas Distribution | $131,589 | | Clean Energy Ventures | $(24,072) | | Energy Services | $83,688 | | Storage and Transportation | $(69,460) | | Home Services and Other | $301 | Reconciliation of Net Income to Net Financial Earnings (NFE) (Nine Months Ended June 30) | (Thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net income | $119,023 | $130,300 | | Unrealized (gain) loss on derivatives, net of tax | $10,387 | $(16,638) | | Effects of economic hedging, net of tax | $(9,343) | $7,985 | | Impairment of equity method investment, net of tax | $80,066 | $— | | NFE tax adjustment | $980 | $257 | | Net financial earnings | $201,113 | $121,904 | Management's Discussion and Analysis of Financial Condition and Results of Operations A $92.0 million PennEast impairment drove a consolidated net loss, partially offset by strong Energy Services performance, while Net Financial Earnings (NFE) increased to $201.1 million for the nine-month period - The net loss for the third quarter was primarily driven by the impairment of the equity method investment in PennEast[268] - The decrease in nine-month net income was also driven by the PennEast impairment, but was partially offset by increased earnings at Energy Services due to strong market demand from extreme cold weather in February 2021[268] Net Financial Earnings (NFE) Reconciliation (Nine Months Ended June 30) | (Thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net income | $119,023 | $130,300 | | Add: Unrealized loss on derivatives & hedging effects | $1,044 | $(11,353) | | Add: Impairment of equity method investment | $92,000 | $— | | Tax Effects & NFE Adjustment | $(10,956) | $2,957 | | Net financial earnings | $201,113 | $121,904 | Natural Gas Distribution Segment Analysis NJNG's net income decreased to $131.6 million for the nine-month period due to higher O&M expenses, despite increased utility gross margin and ongoing infrastructure investments - Net income decreased primarily due to higher O&M expenses, which rose by $12.3 million for the quarter and $32.9 million for the nine months ended June 30, 2021, driven by increased compensation, IT, and bad debt expenses[337][344] - The Southern Reliability Link (SRL) project is estimated to cost between $290 million and $310 million and is expected to be placed in service in August 2021, with rate recovery being sought in the current base rate case[293] Utility Gross Margin (Non-GAAP) | (Thousands) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Operating revenues | $633,522 | $645,375 | | Less: Natural gas purchases | $221,872 | $258,194 | | Less: Regulatory rider expense | $34,570 | $32,536 | | Utility gross margin | $377,080 | $354,645 | - NJNG added 5,448 new customers in the first nine months of fiscal 2021 and expects to add 28,000 to 30,000 new customers between fiscal 2021 and 2023[295][296] Clean Energy Ventures Segment Analysis The Clean Energy Ventures segment's net loss increased to $24.1 million for the nine-month period due to higher O&M and interest expenses, despite placing 8.4 MW of new solar projects in service - Net loss for the nine months ended June 30, 2021 increased by $1.4 million year-over-year, primarily due to a $4.6 million increase in O&M expense[363][367] - Depreciation expense decreased by $4.4 million for the nine-month period due to a change in the estimated useful lives of commercial solar assets, effective July 1, 2020[364] - The 26% federal Investment Tax Credit (ITC) was extended through the end of 2022, declining to 22% in 2023 and 10% thereafter[351] Solar Projects Placed in Service (Nine Months Ended June 30) | | 2021 | 2020 | | :--- | :--- | :--- | | Projects | 262 | 377 | | MW | 8.4 | 59.1 | | Costs (Thousands) | $17,005 | $118,289 | Energy Services Segment Analysis The Energy Services segment achieved a significant net income of $83.7 million for the nine-month period, driven by natural gas price volatility during extreme weather in February 2021 - Net income for the nine months ended June 30, 2021, increased by $84.9 million year-over-year, primarily due to increased operating income from natural gas price volatility during February 2021[380][381] Financial Margin (Non-GAAP) | (Thousands) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Operating revenues | $893,640 | $817,659 | | Less: Natural gas purchases | $741,128 | $803,697 | | Add: Unrealized derivative (gains)/losses | $13,351 | $(21,306) | | Add: Hedging effects | $(12,255) | $10,474 | | Financial margin | $153,608 | $3,130 | - O&M expense for the nine-month period increased by $27.8 million, driven by higher compensation, charitable contributions, and bad debt expense[379] Storage and Transportation Segment Analysis The Storage and Transportation segment recorded a $69.5 million net loss for the nine-month period, primarily due to a $92.0 million impairment charge on the PennEast investment - The segment's results were dominated by a $92.0 million other-than-temporary impairment charge on the PennEast equity investment, recognized on June 30, 2021[404][405] - Equity in earnings of affiliates decreased by $92.2 million for the quarter and $93.2 million for the nine months, reflecting the PennEast impairment[411] Net Financial Earnings (NFE) Reconciliation (Non-GAAP) | (Thousands) | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net (loss) income | $(69,460) | $10,877 | | Add: Impairment of equity method investment | $92,000 | $— | | Tax effect | $(11,934) | $— | | Net financial earnings | $10,606 | $10,877 | - Construction on the southern zone of the Adelphia Gateway pipeline has commenced following FERC's Notice to Proceed[395] Liquidity and Capital Resources The company maintains a strong capital structure with 41% common equity, 54% long-term debt, and $341.8 million in operating cash flow for the nine-month period Consolidated Capital Structure | | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Common stock equity | 41% | 43% | | Long-term debt | 54% | 53% | | Short-term debt | 5% | 4% | - Cash flows from operating activities increased to $341.8 million for the nine months ended June 30, 2021, from $182.8 million in the prior year, primarily due to increased earnings at Energy Services[475] - The company cash-settled its remaining forward sale agreements, making cash payouts totaling approximately $2.8 million in lieu of issuing 1,212,120 common shares[431] - NJNG's credit ratings remain investment grade: A1 (Stable) from Moody's and A+ (Stable) from Fitch for its senior secured debt[482] Quantitative and Qualitative Disclosures About Market Risk The company manages commodity market risk from natural gas price fluctuations using derivatives, with a 10% price change impacting fair value by $6.1 million, and manages $201.8 million in wholesale credit exposure Derivative Fair Value Sensitivity to Natural Gas Price Changes | Percent Change in NYMEX Prices | Estimated Change in Derivative Fair Value (Thousands) | | :--- | :--- | | +10% | $(6,092) | | -10% | $6,092 | Wholesale Credit Exposure (June 30, 2021) | (Thousands) | Gross Credit Exposure | Net Credit Exposure | | :--- | :--- | :--- | | Energy Services, CEV, S&T | $190,807 | $152,124 | | NJNG | $10,994 | $4,493 | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[499] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2021[500] PART II. OTHER INFORMATION Legal Proceedings No new reportable legal proceedings or material developments in previously reported proceedings occurred during the quarter ended June 30, 2021 - No new legal proceedings became reportable during the quarter ended June 30, 2021, and there were no material developments in previously disclosed legal proceedings[503] Risk Factors There have been no material changes in the company's risk factors from those previously disclosed in its 2020 Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in the 2020 Annual Report on Form 10-K[504] Unregistered Sale of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the quarter, with approximately 2.4 million shares remaining available under the repurchase plan Share Repurchase Activity (Quarter Ended June 30, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Number of Shares That May Yet Be Purchased | | :--- | :--- | :--- | :--- | | 04/01/21 - 06/30/21 | — | $— | 2,431,053 | Exhibits This section lists exhibits filed with the Form 10-Q, including a separation agreement, CEO/CFO certifications, and the Interactive Data File (iXBRL) - Exhibits filed include CEO/CFO certifications (302 and 906), a separation agreement, and the iXBRL data file[508]