NEW JERSEY RESOURCES CORP - Quarter Report: 2019 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-08359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter) | ||||||||
New Jersey | 22-2376465 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
1415 Wyckoff Road | (732) | 938‑1480 | ||||||
Wall | New Jersey | 07719 | (Registrant's telephone number, including area code) | |||||
(Address of principal executive offices) | ||||||||
Securities registered pursuant to Section 12 (b) of the Act: | ||||||||
Title of each class | Trading symbol(s) | Name of each exchange on which registered) | ||||||
Common Stock - $2.50 Par Value | NJR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: ☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes: ☐ No: ☒
The number of shares outstanding of $2.50 par value Common Stock as of February 4, 2020 was 95,570,817.
New Jersey Resources Corporation
TABLE OF CONTENTS
Page | |||
PART I. FINANCIAL INFORMATION | |||
ITEM 1. | |||
ITEM 2. | |||
ITEM 3. | |||
ITEM 4. | |||
PART II. OTHER INFORMATION | |||
ITEM 1. | |||
ITEM 1A. | |||
ITEM 2. | |||
ITEM 6. | |||
New Jersey Resources Corporation
GLOSSARY OF KEY TERMS
Adelphia | Adelphia Gateway, LLC |
AFUDC | Allowance for Funds Used During Construction |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Bcf | Billion Cubic Feet |
BGSS | Basic Gas Supply Service |
BPU | New Jersey Board of Public Utilities |
Bridge Facility | The $350 million term loan credit agreement expiring in October 2020 |
CIP | Conservation Incentive Program |
CME | Chicago Mercantile Exchange |
CR&R | Commercial Realty & Resources Corp. |
DRP | NJR Direct Stock Purchase and Dividend Reinvestment Plan |
Dths | Dekatherms |
EE | Energy Efficiency |
Energy Services | Energy Services segment |
EPS | Earnings Per Share |
FASB | Financial Accounting Standards Board |
FCM | Futures Commission Merchant |
FERC | Federal Energy Regulatory Commission |
Financial margin | A non-GAAP financial measure, which represents revenues earned from the sale of natural gas less costs of natural gas sold including any transportation and storage costs, and excludes any accounting impact from the change in the fair value of certain derivative instruments |
Fitch | Fitch Ratings Company |
FMB | First Mortgage Bond |
GAAP | Generally Accepted Accounting Principles of the United States |
Home Services and Other | Home Services and Other Operations |
ICE | Intercontinental Exchange |
IEC | Interstate Energy Company, LLC |
IIP | Infrastructure Investment Program |
IRS | Internal Revenue Service |
ISDA | The International Swaps and Derivatives Association |
ITC | Federal Investment Tax Credit |
Leaf River | Leaf River Energy Center LLC |
LIBOR | London Inter-Bank Offered Rate |
MGP | Manufactured Gas Plant |
Moody's | Moody's Investors Service, Inc. |
Mortgage Indenture | The Amended and Restated Indenture of Mortgage, Deed of Trust and Security Agreement between NJNG and U.S. Bank National Association dated as of September 1, 2014 |
MW | Megawatts |
MWh | Megawatt Hour |
NAESB | The North American Energy Standards Board |
Natural Gas Act | The Natural Gas Act of 1938, as amended; the federal law regulating interstate natural gas pipeline and storage companies, among other things, codified beginning at 15 U.S.C. Section 717. |
NFE | Net Financial Earnings |
NJ RISE | New Jersey Reinvestment in System Enhancement |
NJCEP | New Jersey's Clean Energy Program |
1
New Jersey Resources Corporation
GLOSSARY OF KEY TERMS (cont.) | |
NJDEP | New Jersey Department of Environmental Protection |
NJNG | New Jersey Natural Gas Company |
NJNG Credit Facility | NJNG's $250 million unsecured committed credit facility expiring in December 2023 |
NJR Credit Facility | NJR's $425 million unsecured committed credit facility expiring in December 2023 |
NJR or The Company | New Jersey Resources Corporation |
NJRHS | NJR Home Services Company |
Non-GAAP | Not in accordance with Generally Accepted Accounting Principles of the United States |
NPNS | Normal Purchase/Normal Sale |
NYMEX | New York Mercantile Exchange |
O&M | Operation and Maintenance |
OPEB | Other Postemployment Benefit Plans |
PennEast | PennEast Pipeline Company, LLC |
PPA | Power Purchase Agreement |
PTC | Federal Production Tax Credit |
RAC | Remediation Adjustment Clause |
REC | Renewable Energy Certificate |
S&P | Standard & Poor's Financial Services, LLC |
SAFE | Safety Acceleration and Facility Enhancement |
SAVEGREEN | The SAVEGREEN Project® |
SBC | Societal Benefits Charge |
SEC | U.S. Securities and Exchange Commission |
SREC | Solar Renewable Energy Certificate |
SRL | Southern Reliability Link |
Steckman Ridge | Collectively, Steckman Ridge GP, LLC and Steckman Ridge, LP |
Talen | Talen Energy Marketing, LLC |
TETCO | Texas Eastern Transmission |
The Exchange Act | The Securities Exchange Act of 1934, as amended |
The Tax Act | An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as The Tax Cuts and Jobs Act of 2017 |
Third Circuit | The United States Court of Appeals for the Third Circuit |
Trustee | U.S. Bank National Association |
U.S. | The United States of America |
USF | Universal Service Fund |
2
New Jersey Resources Corporation
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, including, without limitation, statements as to management expectations, assumptions and beliefs presented in Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk,” Part II, Item 1. “Legal Proceedings” and in the notes to the financial statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements can also be identified by the use of forward-looking terminology such as “anticipate,” “estimate,” “may,” “could,” “might,” “intend,” “expect,” “believe,” “will” “plan,” or “should,” or comparable terminology and are made based upon management's current expectations, assumptions and beliefs as of this date concerning future developments and their potential effect on us. There can be no assurance that future developments will be in accordance with management's expectations, assumptions or beliefs, or that the effect of future developments on us will be those anticipated by management.
We caution readers that the expectations, assumptions and beliefs that form the basis for forward-looking statements regarding customer growth, customer usage, qualifications for ITCs and SRECs, future rate case proceedings, completion of infrastructure projects, financial condition, results of operations, cash flows, capital requirements, future capital expenditures, market risk, effective tax rate and other matters for fiscal 2020 and thereafter include many factors that are beyond our ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes in the debt and equity capital markets. The factors that could cause actual results to differ materially from our expectations, assumptions and beliefs include, but are not limited to, those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as well as the following:
• | our ability to obtain governmental and regulatory approvals, land-use rights, electric grid connection (in the case of clean energy projects) and/or financing for the construction, development and operation of our unregulated energy investments, pipeline transportation systems and NJNG and Midstream infrastructure projects, including PennEast and Adelphia, in a timely manner; |
• | risks associated with our investments in clean energy projects, including the availability of regulatory incentives and federal tax credits, the availability of viable projects, our eligibility for ITCs, the future market for SRECs and electricity prices, and operational risks related to projects in service; |
• | risks associated with acquisitions and the related integration of acquired assets with our current operations, including the acquisition of Leaf River and Adelphia; |
• | our ability to comply with current and future regulatory requirements; |
• | volatility of natural gas and other commodity prices and their impact on NJNG customer usage, NJNG’s BGSS incentive programs, our Energy Services segment operations and our risk management efforts; |
• | the performance of our subsidiaries; |
• | access to adequate supplies of natural gas and dependence on third-party storage and transportation facilities for natural gas supply; |
• | the level and rate at which NJNG’s costs and expenses are incurred and the extent to which they are approved for recovery from customers through the regulatory process, including through future base rate case filings; |
• | the impact of a disallowance of recovery of environmental-related expenditures and other regulatory changes; |
• | the regulatory and pricing policies of federal and state regulatory agencies; |
• | operating risks incidental to handling, storing, transporting and providing customers with natural gas; |
• | demographic changes in our service territory and their effect on our customer growth; |
• | timing of qualifying for ITCs due to delays or failures to complete planned solar projects and the resulting impact on our effective tax rate and earnings; |
• | changes in rating agency requirements and/or credit ratings and their effect on availability and cost of capital to the Company; |
• | the impact of volatility in the equity and credit markets on our access to capital; |
• | our ability to comply with debt covenants; |
• | the results of legal or administrative proceedings with respect to claims, rates, environmental issues, gas cost prudence reviews and other matters; |
• | risks related to cyberattacks or failure of information technology systems; |
• | the impact to the asset values and resulting higher costs and funding obligations of our pension and postemployment benefit plans as a result of potential downturns in the financial markets, lower discount rates, revised actuarial assumptions or impacts associated with the Patient Protection and the Affordable Care Act; |
• | commercial and wholesale credit risks, including the availability of creditworthy customers and counterparties, and liquidity in the wholesale energy trading market; |
• | accounting effects and other risks associated with hedging activities and use of derivatives contracts; |
• | our ability to optimize our physical assets; |
• | weather and economic conditions; |
• | the costs of compliance with present and future environmental laws, potential climate change-related legislation or any legislation resulting from the 2019 New Jersey Energy Master Plan; |
• | uncertainties related to litigation, regulatory, administrative or environmental proceedings; |
• | changes to tax laws and regulations; |
• | any potential need to record a valuation allowance for our deferred tax assets; |
• | the impact of natural disasters, terrorist activities and other extreme events on our operations and customers; |
• | risks related to our employee workforce and succession planning; |
• | risks associated with the management of our joint ventures and partnerships; and |
• | risks associated with keeping pace with technological change. |
While we periodically reassess material trends and uncertainties affecting our results of operations and financial condition in connection with the preparation of management's discussion and analysis of results of operations and financial condition contained in our Quarterly and Annual Reports on Form 10-Q and Form 10-K, respectively, we do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.
3
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | |||||||
December 31, | |||||||
(Thousands, except per share data) | 2019 | 2018 | |||||
OPERATING REVENUES | |||||||
Utility | $ | 219,623 | $ | 199,965 | |||
Nonutility | 395,413 | 611,802 | |||||
Total operating revenues | 615,036 | 811,767 | |||||
OPERATING EXPENSES | |||||||
Gas purchases: | |||||||
Utility | 91,814 | 87,649 | |||||
Nonutility | 317,356 | 535,383 | |||||
Related parties | 1,524 | 2,185 | |||||
Operation and maintenance | 63,345 | 63,343 | |||||
Regulatory rider expenses | 11,742 | 12,632 | |||||
Depreciation and amortization | 27,758 | 21,832 | |||||
Total operating expenses | 513,539 | 723,024 | |||||
OPERATING INCOME | 101,497 | 88,743 | |||||
Other income, net | 286 | 869 | |||||
Interest expense, net of capitalized interest | 16,070 | 13,486 | |||||
INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES | 85,713 | 76,126 | |||||
Income tax benefit | (259 | ) | (6,961 | ) | |||
Equity in earnings of affiliates | 3,389 | 3,161 | |||||
NET INCOME | $ | 89,361 | $ | 86,248 | |||
EARNINGS PER COMMON SHARE | |||||||
Basic | $0.97 | $0.97 | |||||
Diluted | $0.97 | $0.97 | |||||
WEIGHTED AVERAGE SHARES OUTSTANDING | |||||||
Basic | 91,911 | 88,547 | |||||
Diluted | 92,320 | 88,946 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | |||||||
December 31, | |||||||
(Thousands) | 2019 | 2018 | |||||
Net income | $ | 89,361 | $ | 86,248 | |||
Other comprehensive income, net of tax | |||||||
Adjustment to postemployment benefit obligation, net of tax of $(217) and $(96), respectively | 759 | 234 | |||||
Other comprehensive income | $ | 759 | $ | 234 | |||
Comprehensive income | $ | 90,120 | $ | 86,482 |
See Notes to Unaudited Condensed Consolidated Financial Statements
4
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | |||||||
December 31, | |||||||
(Thousands) | 2019 | 2018 | |||||
CASH FLOWS USED IN OPERATING ACTIVITIES | |||||||
Net income | $ | 89,361 | $ | 86,248 | |||
Adjustments to reconcile net income to cash flows from operating activities | |||||||
Unrealized gain on derivative instruments | (41,766 | ) | (10,932 | ) | |||
Realized and unrealized gains on investments in equity securities | — | (257 | ) | ||||
Depreciation and amortization | 27,758 | 21,832 | |||||
Amortization of acquired wholesale energy contracts | 134 | 370 | |||||
Allowance for equity used during construction | (2,732 | ) | (1,751 | ) | |||
Allowance for doubtful accounts | 430 | 643 | |||||
Non cash lease expense | 861 | — | |||||
Deferred income taxes | 3,246 | (8,733 | ) | ||||
Manufactured gas plant remediation costs | (2,974 | ) | (2,593 | ) | |||
Equity in earnings, net of distributions received from equity investees | (1,332 | ) | (830 | ) | |||
Cost of removal - asset retirement obligations | (61 | ) | (65 | ) | |||
Contributions to postemployment benefit plans | (2,256 | ) | (1,666 | ) | |||
Tax benefit from stock-based compensation | 798 | 1,279 | |||||
Changes in: | |||||||
Components of working capital | (117,241 | ) | (206,728 | ) | |||
Other noncurrent assets | 1,312 | 9,710 | |||||
Other noncurrent liabilities | 1,398 | 8,718 | |||||
Cash flows used in operating activities | (43,064 | ) | (104,755 | ) | |||
CASH FLOWS USED IN INVESTING ACTIVITIES | |||||||
Expenditures for: | |||||||
Utility plant | (69,861 | ) | (51,359 | ) | |||
Solar equipment | (45,699 | ) | (32,126 | ) | |||
Midstream and other | (2,687 | ) | (2,420 | ) | |||
Cost of removal | (7,936 | ) | (8,396 | ) | |||
Acquisition of assets, net of cash acquired of $5.1 million | (368,126 | ) | — | ||||
Distribution from equity investees in excess of equity in earnings | 643 | 619 | |||||
Investments in equity investees | (509 | ) | — | ||||
Cash flows used in investing activities | (494,175 | ) | (93,682 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from term loan | 350,000 | — | |||||
Payments of term loan | (212,900 | ) | — | ||||
Payments of long-term debt | (3,853 | ) | (4,723 | ) | |||
Proceeds from short-term debt, net | 228,159 | 219,750 | |||||
Proceeds from sale-leaseback transaction | 4,000 | 9,895 | |||||
Payments of common stock dividends | (26,974 | ) | (25,812 | ) | |||
Proceeds from issuance of common stock - public equity offering | 212,900 | — | |||||
Proceeds from waiver discount issuance of common stock | — | 7,964 | |||||
Proceeds from issuance of common stock - DRP | 3,572 | 3,749 | |||||
Tax withholding payments related to net settled stock compensation | (3,543 | ) | (6,087 | ) | |||
Cash flows from financing activities | 551,361 | 204,736 | |||||
Change in cash, cash equivalents and restricted cash | 14,122 | 6,299 | |||||
Cash, cash equivalents and restricted cash at beginning of period | 4,063 | 1,710 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 18,185 | $ | 8,009 | |||
CHANGES IN COMPONENTS OF WORKING CAPITAL | |||||||
Receivables | $ | (164,622 | ) | $ | (161,039 | ) | |
Inventories | (17,055 | ) | (58,061 | ) | |||
Recovery of gas costs | 7,951 | (1,142 | ) | ||||
Gas purchases payable | 44,086 | 58,663 | |||||
Prepaid expenses | (12,482 | ) | 4,048 | ||||
Prepaid and accrued taxes | 15,390 | 17,027 | |||||
Accounts payable and other | (27,080 | ) | (47,498 | ) | |||
Restricted broker margin accounts | 34,976 | (9,963 | ) | ||||
Customers' credit balances and deposits | 2,457 | 2,304 | |||||
Other current assets | (862 | ) | (11,067 | ) | |||
Total | $ | (117,241 | ) | $ | (206,728 | ) | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION | |||||||
Cash paid for: | |||||||
Interest (net of amounts capitalized) | $ | 14,938 | $ | 16,002 | |||
Income taxes | $ | — | $ | 130 | |||
Accrued capital expenditures | $ | 14,864 | $ | 19,791 |
See Notes to Unaudited Condensed Consolidated Financial Statements
5
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
PROPERTY, PLANT AND EQUIPMENT | ||||||
Utility plant, at cost | $ | 2,638,798 | $ | 2,625,730 | ||
Construction work in progress | 267,774 | 232,233 | ||||
Nonutility plant and equipment, at cost | 1,247,107 | 861,904 | ||||
Construction work in progress | 81,590 | 62,492 | ||||
Total property, plant and equipment | 4,235,269 | 3,782,359 | ||||
Accumulated depreciation and amortization, utility plant | (572,144 | ) | (585,160 | ) | ||
Accumulated depreciation and amortization, nonutility plant and equipment | (166,932 | ) | (156,033 | ) | ||
Property, plant and equipment, net | 3,496,193 | 3,041,166 | ||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | 15,666 | 2,676 | ||||
Customer accounts receivable | ||||||
Billed | 250,419 | 139,263 | ||||
Unbilled revenues | 63,656 | 6,510 | ||||
Allowance for doubtful accounts | (6,423 | ) | (6,148 | ) | ||
Regulatory assets | 24,246 | 32,871 | ||||
Gas in storage, at average cost | 186,895 | 169,803 | ||||
Materials and supplies, at average cost | 14,617 | 14,475 | ||||
Prepaid expenses | 20,815 | 8,333 | ||||
Prepaid and accrued taxes | 9,162 | 22,602 | ||||
Derivatives, at fair value | 48,552 | 25,103 | ||||
Restricted broker margin accounts | 43,112 | 73,723 | ||||
Other | 21,894 | 22,395 | ||||
Total current assets | 692,611 | 511,606 | ||||
NONCURRENT ASSETS | ||||||
Investments in equity method investees | 202,231 | 200,268 | ||||
Regulatory assets | 490,283 | 496,637 | ||||
Derivatives, at fair value | 5,594 | 7,426 | ||||
Intangible assets, net | 15,757 | 14,611 | ||||
Operating lease assets | 87,793 | — | ||||
Other noncurrent assets | 104,704 | 101,271 | ||||
Total noncurrent assets | 906,362 | 820,213 | ||||
Total assets | $ | 5,095,166 | $ | 4,372,985 |
See Notes to Unaudited Condensed Consolidated Financial Statements
6
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CAPITALIZATION AND LIABILITIES
(Thousands, except share data) | December 31, 2019 | September 30, 2019 | ||||
CAPITALIZATION | ||||||
Common stock, $2.50 par value; authorized 150,000,000 shares; outstanding December 31, 2019 — 95,508,010; September 30, 2019 — 89,998,788 | $ | 240,221 | $ | 226,649 | ||
Premium on common stock | 494,265 | 291,331 | ||||
Accumulated other comprehensive loss, net of tax | (31,028 | ) | (31,787 | ) | ||
Treasury stock at cost and other; shares December 31, 2019 — 580,603; September 30, 2019 —660,734 | (11,130 | ) | (10,436 | ) | ||
Retained earnings | 1,135,475 | 1,075,960 | ||||
Common stock equity | 1,827,803 | 1,551,717 | ||||
Long-term debt | 1,537,549 | 1,537,177 | ||||
Total capitalization | 3,365,352 | 3,088,894 | ||||
CURRENT LIABILITIES | ||||||
Current maturities of long-term debt | 21,797 | 21,419 | ||||
Short-term debt | 390,709 | 25,450 | ||||
Gas purchases payable | 181,356 | 137,271 | ||||
Gas purchases payable to related parties | 791 | 790 | ||||
Accounts payable and other | 91,580 | 129,724 | ||||
Dividends payable | 29,846 | 28,122 | ||||
Accrued taxes | 5,342 | 3,394 | ||||
New Jersey Clean Energy Program | 13,757 | 15,468 | ||||
Derivatives, at fair value | 36,987 | 57,623 | ||||
Operating lease liabilities | 3,805 | — | ||||
Customers' credit balances and deposits | 29,573 | 27,116 | ||||
Total current liabilities | 805,543 | 446,377 | ||||
NONCURRENT LIABILITIES | ||||||
Deferred income taxes | 194,284 | 190,663 | ||||
Deferred investment tax credits | 3,573 | 3,653 | ||||
Deferred gain | 1,358 | 1,554 | ||||
Derivatives, at fair value | 25,073 | 18,821 | ||||
Manufactured gas plant remediation | 129,241 | 131,080 | ||||
Postemployment employee benefit liability | 245,455 | 246,517 | ||||
Regulatory liabilities | 203,313 | 202,435 | ||||
Asset retirement obligation | 31,503 | 31,046 | ||||
Operating lease liabilities | 82,909 | — | ||||
Other | 7,562 | 11,945 | ||||
Total noncurrent liabilities | 924,271 | 837,714 | ||||
Commitments and contingent liabilities (Note 13) | ||||||
Total capitalization and liabilities | $ | 5,095,166 | $ | 4,372,985 |
See Notes to Unaudited Condensed Consolidated Financial Statements
7
New Jersey Resources Corporation
Part I
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY (Unaudited)
(Thousands) | Number of Shares | Common Stock | Premium on Common Stock | Accumulated Other Comprehensive (Loss) Income | Treasury Stock And Other | Retained Earnings | Total | |||||||||||||||
Balance at September 30, 2019 | 89,999 | $ | 226,649 | $ | 291,331 | $ | (31,787 | ) | $ | (10,436 | ) | $ | 1,075,960 | $ | 1,551,717 | |||||||
Net income | — | — | — | — | — | 89,361 | 89,361 | |||||||||||||||
Other comprehensive income | — | — | — | 759 | — | — | 759 | |||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Common stock offering | 5,333 | 13,333 | 199,567 | — | — | — | 212,900 | |||||||||||||||
Incentive compensation plan | 96 | 239 | 3,053 | — | — | — | 3,292 | |||||||||||||||
Dividend reinvestment plan (1) | 80 | — | 314 | — | 3,185 | — | 3,499 | |||||||||||||||
Cash dividend declared ($.3125 per share) | — | — | — | — | — | (29,846 | ) | (29,846 | ) | |||||||||||||
Treasury stock and other | — | — | — | — | (3,879 | ) | — | (3,879 | ) | |||||||||||||
Balance at December 31, 2019 | 95,508 | $ | 240,221 | $ | 494,265 | $ | (31,028 | ) | $ | (11,130 | ) | $ | 1,135,475 | $ | 1,827,803 |
Balance at September 30, 2018 | 88,293 | $ | 226,196 | $ | 274,748 | $ | (12,610 | ) | $ | (76,473 | ) | $ | 1,007,117 | $ | 1,418,978 | |||||||
Net income | — | — | — | — | — | 86,248 | 86,248 | |||||||||||||||
Other comprehensive loss | — | — | — | 234 | — | — | 234 | |||||||||||||||
Common stock issued: | ||||||||||||||||||||||
Incentive compensation plan | 137 | 343 | 1,791 | — | — | — | 2,134 | |||||||||||||||
Dividend reinvestment plan (1) | 82 | — | 454 | — | 3,238 | — | 3,692 | |||||||||||||||
Waiver discount | 168 | — | 1,293 | — | 6,671 | — | 7,964 | |||||||||||||||
Cash dividend declared ($.2925 per share) | — | — | — | — | — | (25,938 | ) | (25,938 | ) | |||||||||||||
Treasury stock and other | — | — | — | — | 1,504 | — | 1,504 | |||||||||||||||
Adoption of ASU 2016-01 | — | — | — | (3,446 | ) | — | 3,446 | — | ||||||||||||||
Adoption of ASU 2017-05 | — | — | — | — | — | 4,970 | 4,970 | |||||||||||||||
Adoption of ASU 2014-09/ASC 606 | — | — | — | — | — | (2,736 | ) | (2,736 | ) | |||||||||||||
Balance at December 31, 2018 | 88,680 | $ | 226,539 | $ | 278,286 | $ | (15,822 | ) | $ | (65,060 | ) | $ | 1,073,107 | $ | 1,497,050 |
(1) | Shares sold through the DRP are issued from treasury stock at average cost, which may differ from the actual market price paid. |
8
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
New Jersey Resources Corporation provides regulated gas distribution services and operates certain unregulated businesses primarily through the following:
New Jersey Natural Gas Company provides natural gas utility service to approximately 552,100 residential and commercial customers in central and northern New Jersey and is subject to rate regulation by the BPU. NJNG comprises the Natural Gas Distribution segment.
NJR Clean Energy Ventures Corporation, the Company's clean energy subsidiary, comprises the Clean Energy Ventures segment and consists of the Company's capital investments in commercial and residential solar projects located throughout New Jersey. Clean Energy Ventures finalized the sale of its remaining wind assets on February 7, 2019; see Note 17. Acquisitions and Dispositions for more details.
NJR Energy Services Company comprises the Energy Services segment. Energy Services maintains and transacts around a portfolio of natural gas storage and transportation capacity contracts and provides physical wholesale energy, retail energy and energy management services in the U.S. and Canada.
NJR Midstream Holdings Corporation, which comprises the Midstream segment, invests in energy-related ventures through its subsidiaries: NJR Steckman Ridge Storage Company, which holds the Company's 50 percent combined ownership interest in Steckman Ridge, located in Pennsylvania, and NJR Pipeline Company, which includes the wholly owned subsidiaries of Leaf River, which was acquired on October 11, 2019, Adelphia, which was acquired on January 13, 2020, and the Company's 20 percent ownership interest in PennEast. See Note 17. Acquisitions and Dispositions for more information regarding these acquisitions.
NJR Retail Holdings Corporation has two principal subsidiaries, NJR Home Services Company, which provides heating, central air conditioning, standby generators, solar and other indoor and outdoor comfort products to residential homes throughout New Jersey, and Commercial Realty & Resources Corp., which owns commercial real estate. NJR Home Services Company and Commercial Realty & Resources Corp. are included in Home Services and Other operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by NJR in accordance with the rules and regulations of the SEC and GAAP. The September 30, 2019 Balance Sheet data is derived from the audited financial statements of the Company. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in NJR's 2019 Annual Report on Form 10-K.
The Unaudited Condensed Consolidated Financial Statements include the accounts of NJR and its subsidiaries. In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary for a fair presentation of the results of the interim periods presented. These adjustments are of a normal and recurring nature. Because of the seasonal nature of NJR's utility and wholesale energy services operations, in addition to other factors, the financial results for the interim periods presented are not indicative of the results that are to be expected for the fiscal year ending September 30, 2020. Intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies during the reporting period. On a quarterly basis or more frequently whenever events or changes in circumstances indicate a need, the Company evaluates its estimates, including those related to the calculation of the fair value of derivative instruments, debt, equity method investments, unbilled revenues, allowance for doubtful accounts, provisions for depreciation and amortization, long-lived assets, regulatory assets and liabilities, income taxes, pensions and other postemployment benefits, contingencies related to environmental matters and litigation. ARO are evaluated as often as needed. The Company’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
The Company has legal, regulatory and environmental proceedings during the normal course of business that can result in loss contingencies. When evaluating the potential for a loss, the Company will establish a reserve if a loss is probable and can be reasonably estimated, in which case it is the Company’s policy to accrue the full amount of such estimates. Where the information is sufficient only to establish a range of probable liability, and no point within the range is more likely than any other, it is the Company’s policy to accrue the lower end of the range. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from estimates.
9
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisitions
The Company follows the guidance in ASC 805, Business Combinations, for determining the appropriate accounting treatment for acquisitions. ASU No. 2017-01, Clarifying the Definition of a Business, provides an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial screening test is not met, the set is considered a business based on whether there are inputs and substantive processes in place. Based on the results of this analysis and conclusion on an acquisition’s classification of a business combination or an asset acquisition, the accounting treatment is derived.
If the acquisition is deemed to be a business, the acquisition method of accounting is applied. Identifiable assets acquired and liabilities assumed at the acquisition date are recorded at fair value. If the transaction is deemed to be an asset purchase, the cost accumulation and allocation model is used whereby the assets and liabilities are recorded based on the purchase price and allocated to the individual assets and liabilities based on relative fair values.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed are based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates and the number of years on which to base the cash flow projections, as well as other assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates based on the risk inherent in the acquired assets, specific risks, industry beta and capital structure of guideline companies. The valuation of an acquired business is based on available information at the acquisition date and assumptions that are believed to be reasonable. However, a change in facts and circumstances as of the acquisition date can result in subsequent adjustments during the measurement period, but no later than one year from the acquisition date.
Revenues
Revenues from the sale of natural gas to NJNG customers are recognized in the period that gas is delivered and consumed by customers, including an estimate for unbilled revenue. NJNG records unbilled revenue for natural gas services. Natural gas sales to individual customers are based on meter readings, which are performed on a systematic basis throughout the month. At the end of each month, the amount of natural gas delivered to each customer after the last meter reading through the end of the respective accounting period is estimated, and recognizes unbilled revenues related to these amounts. The unbilled revenue estimates are based on estimated customer usage by customer type, weather effects, unaccounted-for gas and the most current tariff rates.
Clean Energy Ventures recognizes revenue when SRECs are transferred to counterparties. SRECs are physically delivered through the transfer of certificates as per contractual settlement schedules.
Revenues for Energy Services are recognized when the natural gas is physically delivered to the customer. In addition, changes in the fair value of derivatives that economically hedge the forecasted sales of the natural gas are recognized in operating revenues as they occur, as noted above. Energy Services also recognizes changes in the fair value of SREC derivative contracts as a component of operating revenues.
Midstream generates revenues from firm storage contracts, related usage fees and hub services for the use of storage space, injections and withdrawals from their natural gas storage facility. Demand fees are recognized as revenue over the term of the related storage agreement while the usage fees and hub services revenues are recognized as services are performed.
Revenues from all other activities are recorded in the period during which products or services are delivered and accepted by customers, or over the related contractual term. See Note 3. Revenue for further information.
Gas in Storage
The following table summarizes gas in storage, at average cost by segment as of:
December 31, 2019 | September 30, 2019 | |||||||||||
($ in thousands) | Gas in Storage | Bcf | Gas in Storage | Bcf | ||||||||
Energy Services | $ | 83,908 | 36.0 | $ | 52,390 | 25.6 | ||||||
Natural Gas Distribution | 102,987 | 23.9 | 117,413 | 27.0 | ||||||||
Total | $ | 186,895 | 59.9 | $ | 169,803 | 52.6 |
10
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and temporary investments with maturities of three months or less, and excludes restricted cash related to escrow balances for utility plant projects at NJNG and irrevocable letters of credit at Leaf River, which is recorded in other current and noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets, respectively.
ASU No. 2016-18, an amendment to ASC 230, Statement of Cash Flows, required that any amounts that are deemed to be restricted cash or restricted cash-equivalents be included in cash and cash-equivalent balances on the cash flow statement. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Unaudited Condensed Consolidated Balance Sheets to the total amounts in the Unaudited Condensed Consolidated Statements of Cash Flows as follows:
(Thousands) | December 31, 2019 | September 30, 2019 | December 31, 2018 | September 30, 2018 | ||||||||
Balance Sheet | ||||||||||||
Cash and cash equivalents | $ | 15,666 | $ | 2,676 | $ | 7,694 | $ | 1,458 | ||||
Restricted cash in other noncurrent assets | 2,519 | 1,387 | 315 | 252 | ||||||||
Statements of Cash Flow | ||||||||||||
Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 18,185 | $ | 4,063 | $ | 8,009 | $ | 1,710 |
Loans Receivable
NJNG currently provides loans, with terms ranging from two to 10 years, to customers that elect to purchase and install certain energy-efficient equipment in accordance with its BPU-approved SAVEGREEN program. The loans are recognized at net present value on the Unaudited Condensed Consolidated Balance Sheets. The Company recorded $12.6 million and $12.4 million in other current assets and $39.6 million and $38.8 million in other noncurrent assets as of December 31, 2019 and September 30, 2019, respectively, on the Unaudited Condensed Consolidated Balance Sheets, related to the loans. If NJNG determines a loan is impaired, the basis of the loan would be subject to regulatory review for recovery. As of December 31, 2019 and September 30, 2019, the Company has not recorded an allowance for doubtful accounts for SAVEGREEN loans.
Software Costs
The Company capitalizes certain costs, such as software design and configuration, coding, testing and installation, that are incurred to purchase or create and implement computer software for internal use. Capitalized costs include external costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project. Maintenance costs are expensed as incurred. Upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Amortization is recorded on the straight-line basis over the estimated useful lives. The Company capitalized $9.1 million in other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets and recorded $1.5 million in O&M on the Unaudited Condensed Consolidated Statements of Operations during the three months ended December 31, 2019.
Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive income (loss), net of related tax effects during the three months ended December 31, 2019 and 2018:
(Thousands) | Investments in Equity Securities | Postemployment Benefit Obligation | Total | ||||||||
Balance at September 30, 2019 | $ | — | $ | (31,787 | ) | $ | (31,787 | ) | |||
Other comprehensive loss, net of tax | |||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $0 and $(217) | — | 759 | (1) | 759 | |||||||
Balance at December 31, 2019 | $ | — | $ | (31,028 | ) | $ | (31,028 | ) | |||
Balance at September 30, 2018 | $ | 3,446 | $ | (16,056 | ) | $ | (12,610 | ) | |||
Other comprehensive income (loss), net of tax | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $0 and $(96) | — | 234 | (1) | 234 | |||||||
Reclassification to retained earnings | $ | (3,446 | ) | (2) | $ | — | $ | (3,446 | ) | ||
Balance at December 31, 2018 | $ | — | $ | (15,822 | ) | $ | (15,822 | ) |
(1) | Included in the computation of net periodic pension cost, a component of operations and maintenance expense on the Unaudited Condensed Consolidated Statements of Operations. |
(2) | Due to the adoption of ASU No. 2016-01, an amendment to ASC 825, Financial Instruments. |
11
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassification
Certain prior period amounts related to energy and other taxes on the Unaudited Condensed Consolidated Statements of Operations and prepaid expenses on the Unaudited Condensed Consolidated Balance Sheets and Unaudited Consolidated Condensed Statements of Cash Flows have been reclassified to conform to the current period presentation.
Recently Adopted Updates to the Accounting Standards Codification
Leases
In February 2016, the FASB issued ASU No. 2016-02, an amendment to ASC 842, Leases, which, along with other ASU's containing minor amendments and technical corrections, provides for a comprehensive overhaul of the lease accounting model and changes the definition of a lease within the accounting literature. Under the new standard, all leases with an original term greater than one year are recorded on the balance sheet. The related asset is amortized straight-line over the term of the lease. Additional disclosures are required to provide transparency as to the amount, timing and uncertainty of cash flows arising from leasing activities.
In January 2018, the FASB issued ASU No. 2018-01, a further amendment to ASC 842, Leases, which was introduced by ASU No. 2016-02, as discussed above. This update provides an optional practical expedient that allows companies to not evaluate existing or expired land easements that were not previously accounted for under Topic 840 as leases as of October 1, 2019. The Company adopted this practical expedient. In July 2018, the FASB issued ASU No. 2018-11, which provides an optional transition method to ASC 842 that allows the Company to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, if any. The Company elected this transition method and did not have any cumulative impact to the opening balance of retained earnings.
The Company’s other practical expedient elections include the package of practical expedients whereby the Company was not required to reassess all of its leases identified, lease classifications and initial direct costs associated with leases. The Company also elected to not separate non-lease components from lease components and elected to exclude short-term leases from the recognition requirements of ASC 842. The Company did not elect the portfolio approach for the application of the discount rate and therefore applies a discount rate individually to each lease in its population.
The Company adopted ASC 842 and all related amendments on October 1, 2019, using the modified retrospective transition method.
The Company’s lease agreements primarily consist of commercial solar land leases, storage and capacity leases, equipment and real property leases, including land and office facility leases and office equipment and the sale-leaseback of its natural gas meters. The total right-of-use assets recorded upon adoption were $67.1 million. Upon the acquisition of Leaf River, on October 11, 2019, the Company adopted ASC 842 for Leaf River which resulted in additional right-of-use asset and lease liability of $21.6 million.
Derivatives and Hedging
In August 2017, the FASB issued ASU No. 2017-12, an amendment to ASC 815, Derivatives and Hedging, which, along with other ASU's containing minor amendments and technical corrections, is intended to make targeted improvements to the accounting for hedging activities by better aligning an entity’s risk management activities and financial reporting for hedging relationships. These amendments modify the accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments are intended to simplify the application of the hedge accounting guidance and provide relief to companies by easing certain hedge documentation requirements. The Company adopted this guidance on October 1, 2019. As the Company does not currently apply hedge accounting to any of its risk management activities, the amendments did not have an impact on its financial position, results of operations or cash flows.
In October 2018, the FASB issued ASU No. 2018-16, an amendment to ASC 815, Derivatives and Hedging, which permits the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as an additional acceptable U.S. benchmark interest rate for hedge accounting purposes. The Company adopted this guidance on October 1, 2019. As the Company does not currently apply hedge accounting to any of its risk management activities, the amendments did not have an impact on its financial position, results of operations or cash flows.
12
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Compensation
In June 2018, the FASB issued ASU No. 2018-07, an amendment to ASC 718, Compensation - Stock Compensation, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The Company adopted this guidance on October 1, 2019. There was no impact to the Company's financial position, results of operations or cash flows.
Other Recent Updates to the Accounting Standards Codification
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, an amendment to ASC 326, Financial Instruments - Credit Losses, which changes the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model requires recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for the Company beginning October 1, 2020, with early adoption permitted. The Company is currently evaluating the amendment and all subsequent amendments related to this topic, but does not expect that the pending adoption of this ASU will have a material effect on its consolidated financial statements.
Fair Value
In August 2018, the FASB issued ASU No. 2018-13, an amendment to ASC 820, Fair Value Measurement, which removes, modifies and adds to certain disclosure requirements of fair value measurements. Disclosure requirements removed include the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. Modifications include considerations around the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse. The additions include the requirement to disclose changes in unrealized gains and losses for the period in other comprehensive income for recurring Level 3 fair value measurements held and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for the Company beginning October 1, 2020, with early adoption permitted. Upon adoption, the amendments will be applied on a prospective or retrospective basis depending on the specific amendments’ transition requirements. The Company is currently evaluating the impact of the adoption of this ASU but does not expect that its pending adoption will have a material effect on its consolidated financial statements.
Compensation - Retirement Benefits
In August 2018, the FASB issued ASU No. 2018-14, an amendment to ASC 715, Compensation - Retirement Benefits, which removes disclosures that no longer are considered cost-beneficial, clarifies the specific requirements of certain disclosures and adds new disclosure requirements identified as relevant. The guidance is effective for the Company beginning October 1, 2021, with early adoption permitted. Upon adoption, the amendments will be applied on a retrospective basis. The Company is continuing to evaluate the amendment to fully understand the impact on the Company's disclosures upon adoption.
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, an amendment to ASC 740, Income Taxes, which is intended to simplify the accounting for income taxes and changes the accounting for certain income tax transactions, among other minor improvements. The guidance is effective for the Company beginning October 1, 2021, with early adoption permitted. Upon adoption, the amendments will be applied on a prospective basis. The Company is currently evaluating the amendments to understand the impact on its financial position, results of operations, cash flows and disclosures upon adoption.
3. REVENUE
Revenue is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Revenue is measured based on consideration specified in a contract with a customer using the output method of progress. The Company elected to apply the invoice practical expedient for recognizing revenue, whereby the amounts invoiced to customers represent the value to the customer and the Company’s performance completion as of the invoice date. Therefore, the Company does not disclose related unsatisfied performance obligations. The Company also elected the practical expedient to exclude from the transaction price all sales taxes that are assessed by a governmental authority and therefore presents sales tax net in operating revenues on the Unaudited Condensed Consolidated Statements of Operations.
13
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Below is a listing of performance obligations that arise from contracts with customers, along with details on the satisfaction of each performance obligation, the significant payment terms and the nature of the goods and services being transferred, by reporting segment and other business operations:
Revenue Recognized Over Time: | ||
Segment | Performance Obligation | Description |
Natural Gas Distribution | Natural gas utility sales | NJNG's performance obligation is to provide natural gas to residential, commercial and industrial customers as demanded, based on regulated tariff rates, which are established by the BPU. Revenues from the sale of natural gas are recognized in the period that gas is delivered and consumed by customers, including an estimate for quantities consumed but not billed during the period. Payment is due each month for the previous month's deliveries. Natural gas sales to individual customers are based on meter readings, which are performed on a systematic basis throughout the billing period. The unbilled revenue estimates are based on estimated customer usage by customer type, weather effects and the most current tariff rates. NJNG is entitled to be compensated for performance completed until service is terminated. Customers may elect to purchase the natural gas commodity from NJNG or may contract separately to purchase natural gas directly from third-party suppliers. As NJNG is acting as an agent on behalf of the third party supplier, revenue is recorded for the delivery of natural gas to the customer. |
Clean Energy Ventures | Commercial solar and wind electricity | Clean Energy Ventures operates wholly-owned solar projects that recognize revenue as electricity is generated and transferred to the customer. The performance obligation is to provide electricity to the customer in accordance with contract terms or the interconnection agreement and is satisfied upon transfer of electricity generated. All wind assets were sold as of February 2019. Revenue is recognized as invoiced and the payment is due each month for the previous month's services. |
Clean Energy Ventures | Residential solar electricity | Clean Energy Ventures provides access to residential rooftop and ground-mount solar equipment to customers who then pay the Company a monthly fee. The performance obligation is to provide electricity to the customer based on generation from the underlying residential solar asset and is satisfied upon transfer of electricity generated. Revenue is derived from the contract terms and is recognized as invoiced, with the payment due each month for the previous month's services. |
Energy Services | Natural gas services | The performance obligation of Energy Services is to provide the customer transportation, storage and asset management services on an as-needed basis. Energy Services generates revenue through management fees, demand charges, reservation fees and transportation charges centered around the buying and selling of the natural gas commodity, representing one series of distinct performance obligations. Revenue is recognized based upon the underlying natural gas quantities physically delivered and the customer obtaining control. Energy Services invoices customers on a monthly basis in line with the terms of the contract and based on the services provided. Payment is due each month for the previous month's invoiced services. |
Midstream | Natural gas services | The performance obligation of Midstream is to provide the customer with storage and transportation services. Midstream generates revenues from firm storage contracts, related usage fees for the use of storage space, injection and withdrawal at the storage facility. Demand fees are recognized as revenue over the term of the related storage agreement. |
Home Services and Other | Service contracts | Home Services enters into service contracts with homeowners to provide maintenance and replacement services of applicable heating, cooling or ventilation equipment. All services provided relate to a distinct performance obligation which is to provide services for the specific equipment over the term of the contract. Revenue is recognized on a straight-line basis over the term of the contract and payment is due upon receipt of the invoice. |
14
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognized at a Point in Time: | ||
Midstream | Natural gas services | The performance obligation of Midstream is to provide the customer with storage and transportation services. Midstream generates revenues from hub services for the use of storage space, injection and withdrawal from the storage facility. Hub services include parks, loans and wheeling. Hub services revenues are recognized as services are performed. |
Home Services and Other | Installations | Home Services installs appliances, including but not limited to, furnaces, air conditioning units, boilers and generators to customers. The distinct performance obligation is the installation of the contracted appliance, which is satisfied at the point in time the item is installed. The transaction price for each installation differs accordingly. Revenue is recognition at a point in time upon completion of the installation, which is when the customer is billed. |
Disaggregated revenues from contracts with customers by product line and by reporting segment and other business operations during the three months ended December 31, 2019, is as follows:
(Thousands) | Natural Gas Distribution | Clean Energy Ventures | Energy Services | Midstream | Home Services and Other | Total | ||||||||
2019 | ||||||||||||||
Natural gas utility sales | $ | 219,894 | — | — | — | — | $ | 219,894 | ||||||
Natural gas services | — | — | 7,321 | 9,072 | — | 16,393 | ||||||||
Service contracts | — | — | — | — | 8,038 | 8,038 | ||||||||
Installations and maintenance | — | — | — | — | 4,869 | 4,869 | ||||||||
Electricity sales | — | 4,018 | — | — | — | 4,018 | ||||||||
Eliminations(1) | — | — | — | (667 | ) | (415 | ) | (1,082 | ) | |||||
Revenues from contracts with customers | 219,894 | 4,018 | 7,321 | 8,405 | 12,492 | 252,130 | ||||||||
Alternative revenue programs | (1,943 | ) | — | — | — | — | (1,943 | ) | ||||||
Derivative Instruments | 1,672 | 2,194 | 363,094 | — | — | 366,960 | ||||||||
Eliminations(1) | — | — | (2,111 | ) | — | — | (2,111 | ) | ||||||
Revenues out of scope | (271 | ) | 2,194 | 360,983 | — | — | 362,906 | |||||||
Total operating revenues | $ | 219,623 | 6,212 | 368,304 | 8,405 | 12,492 | $ | 615,036 | ||||||
2018 | ||||||||||||||
Natural gas utility sales | $ | 194,983 | — | — | — | — | $ | 194,983 | ||||||
Natural gas services | — | — | 10,080 | — | — | 10,080 | ||||||||
Service contracts | — | — | — | — | 7,796 | 7,796 | ||||||||
Installations and maintenance | — | — | — | — | 4,694 | 4,694 | ||||||||
Electricity sales | — | 7,141 | — | — | — | 7,141 | ||||||||
Eliminations(1) | — | — | — | — | (545 | ) | (545 | ) | ||||||
Revenues from contracts with customers | 194,983 | 7,141 | 10,080 | — | 11,945 | 224,149 | ||||||||
Alternative revenue programs | (867 | ) | — | — | — | — | (867 | ) | ||||||
Derivative Instruments | 5,849 | 7,756 | 577,187 | — | — | 590,792 | ||||||||
Eliminations(1) | — | — | (2,307 | ) | — | — | (2,307 | ) | ||||||
Revenues out of scope | 4,982 | 7,756 | 574,880 | — | — | 587,618 | ||||||||
Total operating revenues | $ | 199,965 | 14,897 | 584,960 | — | 11,945 | $ | 811,767 |
(1) | Consists of transactions between subsidiaries that are eliminated in consolidation. |
15
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Disaggregated revenues from contracts with customers by customer type and by reporting segment and other business operations during the three months ended December 31, 2019, is as follows:
(Thousands) | Natural Gas Distribution | Clean Energy Ventures | Energy Services | Midstream | Home Services and Other | Total | ||||||||
2019 | ||||||||||||||
Residential | $ | 153,222 | 2,460 | — | — | 12,279 | $ | 167,961 | ||||||
Commercial and industrial | 45,422 | 1,558 | 7,321 | 8,405 | 213 | 62,919 | ||||||||
Firm transportation | 19,589 | — | — | — | — | 19,589 | ||||||||
Interruptible and off-tariff | 1,661 | — | — | — | — | 1,661 | ||||||||
Revenues out of scope | (271 | ) | 2,194 | 360,983 | — | — | 362,906 | |||||||
Total operating revenues | $ | 219,623 | 6,212 | 368,304 | 8,405 | 12,492 | $ | 615,036 | ||||||
2018 | ||||||||||||||
Residential | $ | 133,690 | 2,132 | — | — | 11,717 | $ | 147,539 | ||||||
Commercial and industrial | 40,728 | 5,009 | 10,080 | — | 228 | 56,045 | ||||||||
Firm transportation | 18,934 | — | — | — | — | 18,934 | ||||||||
Interruptible and off-tariff | 1,631 | — | — | — | — | 1,631 | ||||||||
Revenues out of scope | 4,982 | 7,756 | 574,880 | — | — | 587,618 | ||||||||
Total operating revenues | $ | 199,965 | 14,897 | 584,960 | — | 11,945 | $ | 811,767 |
Customer Accounts Receivable/Credit Balances and Deposits
The timing of revenue recognition, customer billings and cash collections resulting in accounts receivables, billed and unbilled, and customers’ credit balances and deposits on the Unaudited Condensed Consolidated Balance Sheets during the three months ended December 31, 2019, are as follows:
Customer Accounts Receivable | Customers' Credit | ||||||||
(Thousands) | Billed | Unbilled | Balances and Deposits | ||||||
Balance as of October 1, 2019 | $ | 139,263 | $ | 6,510 | $ | 27,116 | |||
Increase | 111,156 | 57,146 | 2,457 | ||||||
Balance as of December 31, 2019 | $ | 250,419 | $ | 63,656 | $ | 29,573 |
The following table provides information about receivables and revenue earned on contracts in progress in excess of billings, which are included within accounts receivable, billed and unbilled, and customers’ credit balances and deposits, respectively, on the Unaudited Condensed Consolidated Balance Sheets as of December 31:
(Thousands) | Natural Gas Distribution | Clean Energy Ventures | Energy Services | Midstream | Home Services and Other | Eliminations | Total | |||||||||
2019 | ||||||||||||||||
Customer accounts receivable | ||||||||||||||||
Billed | $ | 78,365 | 3,059 | 164,688 | 2,727 | 2,355 | (775 | ) | $ | 250,419 | ||||||
Unbilled | 63,656 | — | — | — | — | — | 63,656 | |||||||||
Customers' credit balances and deposits | (29,573 | ) | — | — | — | — | — | (29,573 | ) | |||||||
Total | $ | 112,448 | 3,059 | 164,688 | 2,727 | 2,355 | (775 | ) | $ | 284,502 |
16
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. REGULATION
NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility capital investments based on the BPU's approval. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers as regulatory assets and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities in accordance with accounting guidance applicable to regulated operations.
NJNG's recovery of costs is facilitated through its base rates, BGSS and other regulatory tariff riders. NJNG is required to make annual filings to the BPU for review of its BGSS, CIP and various other programs and related rates. Annual rate changes are typically requested to be effective at the beginning of the following fiscal year. All rate and program changes are subject to proper notification and BPU review and approval. In addition, NJNG is permitted to implement certain BGSS rate changes on a provisional basis with proper notification to the BPU.
Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
Regulatory assets-current | ||||||
New Jersey Clean Energy Program | $ | 13,757 | $ | 15,468 | ||
Underrecovered gas costs | 1,481 | 9,506 | ||||
Conservation Incentive Program | 1,427 | 3,371 | ||||
Derivatives at fair value, net | 5,562 | 4,526 | ||||
Other | 2,019 | — | ||||
Total current regulatory assets | $ | 24,246 | $ | 32,871 | ||
Regulatory assets-noncurrent | ||||||
Environmental remediation costs | ||||||
Expended, net of recoveries | $ | 38,170 | $ | 38,351 | ||
Liability for future expenditures | 129,241 | 131,080 | ||||
Deferred income taxes | 19,714 | 19,631 | ||||
Derivatives at fair value, net | — | 486 | ||||
SAVEGREEN | 11,918 | 10,201 | ||||
Postemployment and other benefit costs | 208,371 | 212,461 | ||||
Deferred storm damage costs | 8,144 | 8,687 | ||||
Cost of removal | 64,777 | 65,660 | ||||
Other noncurrent regulatory assets | 9,948 | 10,080 | ||||
Total noncurrent regulatory assets | $ | 490,283 | $ | 496,637 | ||
Regulatory liabilities-noncurrent | ||||||
Tax Act impact (1) | $ | 199,169 | $ | 200,417 | ||
New Jersey Clean Energy Program | 3,598 | 197 | ||||
Other noncurrent regulatory liabilities | 546 | 1,821 | ||||
Total noncurrent regulatory liabilities | $ | 203,313 | $ | 202,435 |
(1) | Reflects the re-measurement and subsequent amortization of NJNG's net deferred tax liabilities as a result of the change in federal tax rates enacted in the Tax Act. |
Regulatory filings and/or actions that occurred during the current fiscal year include the following:
• | On October 25, 2019, the BPU approved NJNG’s annual filing to increase its EE recovery rate, which resulted in an annual recovery of approximately $11.3 million, effective November 1, 2019. |
• | On November 13, 2019, the BPU issued an order adopting a stipulation of settlement approving a $62.2 million increase to base rates, effective on November 15, 2019. The increase includes an overall rate of return on rate base of 6.95 percent, return on common equity of 9.6 percent, a common equity ratio of 54 percent and a depreciation rate of 2.78 percent. |
17
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DERIVATIVE INSTRUMENTS
The Company is subject primarily to commodity price risk due to fluctuations in the market price of natural gas, SRECs and electricity. To manage this risk, the Company enters into a variety of derivative instruments including, but not limited to, futures contracts, physical forward contracts, financial options and swaps to economically hedge the commodity price risk associated with its existing and anticipated commitments to purchase and sell natural gas, SRECs and electricity. In addition, the Company is exposed to foreign currency and interest rate risk and may utilize foreign currency derivatives to hedge Canadian dollar denominated gas purchases and/or sales and interest rate derivatives to reduce exposure to fluctuations in interest rates. All of these types of contracts are accounted for as derivatives. Accordingly, all of the financial and certain of the Company's physical derivative instruments are recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets. For a more detailed discussion of the Company's fair value measurement policies and level disclosures associated with NJR's derivative instruments, see Note 6. Fair Value.
Energy Services
Energy Services chooses not to designate its financial commodity and physical forward commodity derivatives as accounting hedges or to elect NPNS. The changes in the fair value of these derivatives are recorded as a component of gas purchases or operating revenues, as appropriate for Energy Services, on the Unaudited Condensed Consolidated Statements of Operations as unrealized gains or losses. For Energy Services at settlement, realized gains and losses on all financial derivative instruments are recognized as a component of gas purchases and realized gains and losses on all physical derivatives follow the presentation of the related unrealized gains and losses as a component of either gas purchases or operating revenues.
Energy Services also enters into natural gas transactions in Canada and, consequently, is exposed to fluctuations in the value of Canadian currency relative to the U.S. dollar. Energy Services may utilize foreign currency derivatives to lock in the exchange rates associated with natural gas transactions denominated in Canadian currency. The derivatives may include currency forwards, futures, or swaps and are accounted for as derivatives. These derivatives are typically used to hedge demand fee payments on pipeline capacity, storage and gas purchase agreements.
As a result of Energy Services entering into transactions to borrow natural gas, commonly referred to as “park and loans,” an embedded derivative is recognized relating to differences between the fair value of the amount borrowed and the fair value of the amount that will ultimately be repaid, based on changes in the forward price for natural gas prices at the borrowed location over the contract term. This embedded derivative is accounted for as a forward sale in the month in which the repayment of the borrowed gas is expected to occur, and is considered a derivative transaction that is recorded at fair value on the Unaudited Condensed Consolidated Balance Sheets, with changes in value recognized in current period earnings.
Expected production of SRECs is hedged through the use of forward and futures contracts. All contracts require the Company to physically deliver SRECs through the transfer of certificates as per contractual settlement schedules. Energy Services recognizes changes in the fair value of these derivatives as a component of operating revenues. Upon settlement of the contract, the related revenue is recognized when the SREC is transferred to the counterparty.
Natural Gas Distribution
Changes in fair value of NJNG's financial commodity derivatives are recorded as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets. The Company elects NPNS accounting treatment on all physical commodity contracts that NJNG entered into on or before December 31, 2015, and accounts for these contracts on an accrual basis. Accordingly, physical natural gas purchases are recognized in regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets when the contract settles and the natural gas is delivered. The average cost of natural gas is charged to expense in the current period earnings based on the BGSS factor times the therm sales. Effective for contracts executed on or after January 1, 2016, NJNG no longer elects NPNS accounting treatment on all physical forward commodity contracts. However, since NPNS is a contract-by-contract election, where it makes sense to do so, NJNG can and may elect certain contracts to be normal. Because NJNG recovers these amounts through future BGSS rates as increases or decreases to the cost of natural gas in NJNG’s tariff for gas service, the changes in fair value of these contracts are deferred as a component of regulatory assets or liabilities on the Unaudited Condensed Consolidated Balance Sheets.
18
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Clean Energy Ventures
The Company elects NPNS accounting treatment on PPA contracts that Clean Energy Ventures enters into that meet the definition of a derivative and accounts for the contract on an accrual basis. Accordingly, electricity sales are recognized in revenues throughout the term of the PPA as electricity is delivered. NPNS is a contract-by-contract election and where it makes sense to do so, the Company can and may elect certain contracts to be normal.
Home Services and Other
In January 2018, NJR entered into a variable-for-fixed interest rate swap on its existing $100 million variable rate term loan, which fixed the variable rate at 2.84 percent. The swap terminated on August 16, 2019, which coincided with the maturity of the debt. The change in the fair value of the interest rate swap was recorded as a component of interest expense on the Unaudited Condensed Consolidated Statements of Operations.
Fair Value of Derivatives
The following table reflects the fair value of NJR's derivative assets and liabilities recognized on the Unaudited Condensed Consolidated Balance Sheets as of:
Fair Value | |||||||||||||||||
December 31, 2019 | September 30, 2019 | ||||||||||||||||
(Thousands) | Balance Sheet Location | Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | ||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||
Natural Gas Distribution: | |||||||||||||||||
Physical commodity contracts | Derivatives - current | $ | 26 | $ | 162 | $ | 67 | $ | 245 | ||||||||
Financial commodity contracts | Derivatives - current | — | 363 | 382 | 570 | ||||||||||||
Energy Services: | |||||||||||||||||
Physical commodity contracts | Derivatives - current | 12,706 | 22,259 | 6,847 | 27,540 | ||||||||||||
Derivatives - noncurrent | 2,453 | 15,369 | 1,710 | 12,641 | |||||||||||||
Financial commodity contracts | Derivatives - current | 35,813 | 14,100 | 17,806 | 29,057 | ||||||||||||
Derivatives - noncurrent | 3,133 | 9,683 | 5,716 | 6,105 | |||||||||||||
Foreign currency contracts | Derivatives - current | 7 | 103 | 1 | 211 | ||||||||||||
Derivatives - noncurrent | 8 | 21 | — | 75 | |||||||||||||
Total fair value of derivatives | $ | 54,146 | $ | 62,060 | $ | 32,529 | $ | 76,444 |
Offsetting of Derivatives
The Company transacts under master netting arrangements or equivalent agreements that allow it to offset derivative assets and liabilities with the same counterparty. However, the Company’s policy is to present its derivative assets and liabilities on a gross basis at the contract level unit of account on the Unaudited Condensed Consolidated Balance Sheets.
19
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the reported gross amounts, the amounts that the Company has the right to offset but elects not to, financial collateral, as well as the net amounts the Company could present on the Unaudited Condensed Consolidated Balance Sheets but elects not to.
(Thousands) | Amounts Presented on Balance Sheets (1) | Offsetting Derivative Instruments (2) | Financial Collateral Received/Pledged (3) | Net Amounts (4) | ||||||||||||
As of December 31, 2019: | ||||||||||||||||
Derivative assets: | ||||||||||||||||
Energy Services | ||||||||||||||||
Physical commodity contracts | $ | 15,159 | $ | (3,569 | ) | $ | (200 | ) | $ | 11,390 | ||||||
Financial commodity contracts | 38,946 | (21,988 | ) | — | 16,958 | |||||||||||
Foreign currency contracts | 15 | (15 | ) | — | — | |||||||||||
Total Energy Services | $ | 54,120 | $ | (25,572 | ) | $ | (200 | ) | $ | 28,348 | ||||||
Natural Gas Distribution | ||||||||||||||||
Physical commodity contracts | $ | 26 | $ | (2 | ) | $ | — | $ | 24 | |||||||
Total Natural Gas Distribution | $ | 26 | $ | (2 | ) | $ | — | $ | 24 | |||||||
Derivative liabilities: | ||||||||||||||||
Energy Services | ||||||||||||||||
Physical commodity contracts | $ | 37,628 | $ | (3,569 | ) | $ | — | $ | 34,059 | |||||||
Financial commodity contracts | 23,783 | (21,988 | ) | (1,671 | ) | 124 | ||||||||||
Foreign currency contracts | 124 | (15 | ) | — | 109 | |||||||||||
Total Energy Services | $ | 61,535 | $ | (25,572 | ) | $ | (1,671 | ) | $ | 34,292 | ||||||
Natural Gas Distribution | ||||||||||||||||
Physical commodity contracts | $ | 162 | $ | (2 | ) | $ | — | $ | 160 | |||||||
Financial commodity contracts | 363 | — | (363 | ) | — | |||||||||||
Total Natural Gas Distribution | $ | 525 | $ | (2 | ) | $ | (363 | ) | $ | 160 | ||||||
As of September 30, 2019: | ||||||||||||||||
Derivative assets: | ||||||||||||||||
Energy Services | ||||||||||||||||
Physical commodity contracts | $ | 8,557 | $ | (2,906 | ) | $ | (200 | ) | $ | 5,451 | ||||||
Financial commodity contracts | 23,522 | (19,646 | ) | — | 3,876 | |||||||||||
Foreign currency contracts | 1 | (1 | ) | — | — | |||||||||||
Total Energy Services | $ | 32,080 | $ | (22,553 | ) | $ | (200 | ) | $ | 9,327 | ||||||
Natural Gas Distribution | ||||||||||||||||
Physical commodity contracts | $ | 67 | $ | (9 | ) | $ | — | $ | 58 | |||||||
Financial commodity contracts | 382 | (382 | ) | — | — | |||||||||||
Total Natural Gas Distribution | $ | 449 | $ | (391 | ) | $ | — | $ | 58 | |||||||
Derivative liabilities: | ||||||||||||||||
Energy Services | ||||||||||||||||
Physical commodity contracts | $ | 40,181 | $ | (2,906 | ) | $ | — | $ | 37,275 | |||||||
Financial commodity contracts | 35,162 | (19,646 | ) | (15,516 | ) | — | ||||||||||
Foreign currency contracts | 286 | (1 | ) | — | 285 | |||||||||||
Total Energy Services | $ | 75,629 | $ | (22,553 | ) | $ | (15,516 | ) | $ | 37,560 | ||||||
Natural Gas Distribution | ||||||||||||||||
Physical commodity contracts | $ | 245 | $ | (9 | ) | $ | — | $ | 236 | |||||||
Financial commodity contracts | 570 | (382 | ) | (188 | ) | — | ||||||||||
Total Natural Gas Distribution | $ | 815 | $ | (391 | ) | $ | (188 | ) | $ | 236 |
(1) | Derivative assets and liabilities are presented on a gross basis on the balance sheet as the Company does not elect balance sheet offsetting under ASC 210-20. |
(2) | Includes transactions with NAESB netting election, transactions held by FCMs with net margining and transactions with ISDA netting. |
(3) | Financial collateral includes cash balances at FCMs as well as cash received from or pledged to other counterparties. |
(4) | Net amounts represent presentation of derivative assets and liabilities if the Company were to elect balance sheet offsetting under ASC 210-20. |
20
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Energy Services utilizes financial derivatives to economically hedge the gross margin associated with the purchase of physical gas to be used for storage injection and its subsequent sale at a later date. The gains or (losses) on the financial transactions that are economic hedges of the cost of the purchased gas are recognized prior to the gains or (losses) on the physical transaction, which are recognized in earnings when the natural gas is delivered. Therefore, mismatches between the timing of the recognition of realized gains or (losses) on the financial derivative instruments and gains or (losses) associated with the actual sale of the natural gas that is being economically hedged along with fair value changes in derivative instruments, creates volatility in the results of Energy Services, although the Company's intended economic results relating to the entire transaction are unaffected.
The following table reflects the effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations as of:
(Thousands) | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives | ||||||
Three Months Ended | ||||||||
December 31, | ||||||||
Derivatives not designated as hedging instruments: | 2019 | 2018 | ||||||
Energy Services: | ||||||||
Physical commodity contracts | Operating revenues | $ | 9,836 | $ | (1,532 | ) | ||
Physical commodity contracts | Gas purchases | (1,410 | ) | (5,432 | ) | |||
Financial commodity contracts | Gas purchases | 46,093 | (2,956 | ) | ||||
Foreign currency contracts | Gas purchases | 115 | (346 | ) | ||||
Home Services and Other: | ||||||||
Interest rate contracts | Interest expense | — | (123 | ) | ||||
Total unrealized and realized gains (losses) | $ | 54,634 | $ | (10,389 | ) |
NJNG’s derivative contracts are part of the Company's risk management activities that relate to its natural gas purchases and BGSS incentive programs. These transactions are entered into pursuant to regulatory approval. At settlement, the resulting gains and/or losses are payable to or recoverable from utility customers and are deferred in regulatory assets or liabilities resulting in no impact to earnings. The following table reflects the (losses) gains associated with NJNG's derivative instruments as of:
Three Months Ended | |||||||
December 31, | |||||||
(Thousands) | 2019 | 2018 | |||||
Natural Gas Distribution: | |||||||
Physical commodity contracts | $ | 840 | $ | 2,977 | |||
Financial commodity contracts | (1,088 | ) | 4,396 | ||||
Total unrealized and realized (losses) gains | $ | (248 | ) | $ | 7,373 |
NJNG and Energy Services had the following outstanding long (short) derivatives as of:
Volume (Bcf) | |||||||
December 31, 2019 | September 30, 2019 | ||||||
Natural Gas Distribution | Futures | 27.6 | 27.6 | ||||
Physical | 4.9 | 11.6 | |||||
Energy Services | Futures | (34.6 | ) | (29.6 | ) | ||
Physical | 46.8 | 44.5 | |||||
Swaps | (3.8 | ) | (5.0 | ) |
Not included in the previous table are Energy Services' net notional amount of foreign currency transactions of approximately $6.8 million, and 886,000 SRECs at Energy Services that were open as of December 31, 2019.
21
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Broker Margin
Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily marked-to-market relative to maintenance margin requirements. The Company maintains separate broker margin accounts for the Natural Gas Distribution and Energy Services segments. The balances are as follows:
(Thousands) | Balance Sheet Location | December 31, 2019 | September 30, 2019 | ||||
Natural Gas Distribution | Restricted broker margin accounts | $ | 4,140 | $ | 1,982 | ||
Energy Services | Restricted broker margin accounts | $ | 38,972 | $ | 71,741 |
Wholesale Credit Risk
NJNG, Energy Services, Clean Energy Ventures and Midstream are exposed to credit risk as a result of their sales/wholesale marketing activities. As a result of services performed or sold, the inherent volatility in the prices of natural gas commodities, derivatives, SRECs, electricity and RECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty fails to perform the obligations under its contract (e.g., failed to deliver or pay for natural gas, SRECs, electricity, RECs or Midstream services), then the Company could sustain a loss.
NJR monitors and manages the credit risk of its wholesale operations through credit policies and procedures that management believes reduce overall credit risk. These policies include a review and evaluation of current and prospective counterparties' financial statements and/or credit ratings, daily monitoring of counterparties' credit limits and exposure, daily communication with commercial teams regarding credit status and the use of credit mitigation measures, such as collateral requirements and netting agreements. Examples of collateral include letters of credit and cash received for either prepayment or margin deposit. Collateral may be requested due to NJR's election not to extend credit or because exposure exceeds defined thresholds. Most of NJR's wholesale marketing contracts contain standard netting provisions. These contracts include those governed by ISDA and the NAESB. The netting provisions refer to payment netting, whereby receivables and payables with the same counterparty are offset and the resulting net amount is paid to the party to which it is due.
Internally-rated exposure applies to counterparties that are not rated by S&P or Moody's. In these cases, the counterparty's or guarantor's financial statements are reviewed, and similar methodologies and ratios used by S&P and/or Moody's are applied to arrive at a substitute rating. Gross credit exposure is defined as the unrealized fair value of physical and financial derivative commodity contracts, plus any outstanding wholesale receivable for the value of natural gas delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received.
The following is a summary of gross credit exposures grouped by investment and noninvestment grade counterparties, as of December 31, 2019. The amounts presented below have not been reduced by any collateral received or netting and exclude accounts receivable for NJNG retail natural gas sales and services and Clean Energy Ventures residential solar installations.
(Thousands) | Gross Credit Exposure | ||||
Investment grade | $ | 197,369 | |||
Noninvestment grade | 17,822 | ||||
Internally rated investment grade | 38,312 | ||||
Internally rated noninvestment grade | 35,331 | ||||
Total | $ | 288,834 |
Conversely, certain of NJNG's and Energy Services' derivative instruments are linked to agreements containing provisions that would require cash collateral payments from the Company if certain events occur. These provisions vary based upon the terms in individual counterparty agreements and can result in cash payments if NJNG's credit rating were to fall below its current level. Specifically, most, but not all, of these additional payments will be triggered if NJNG's debt is downgraded by the major credit agencies, regardless of investment grade status. In addition, some of these agreements include threshold amounts that would result in additional collateral payments if the values of derivative liabilities were to exceed the maximum values provided for in relevant counterparty agreements. Other provisions include payment features that are not specifically linked to ratings, but are based on certain financial metrics.
22
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Collateral amounts associated with any of these conditions are determined based on a sliding scale and are contingent upon the degree to which the Company's credit rating and/or financial metrics deteriorate, and the extent to which liability amounts exceed applicable threshold limits. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2019 and September 30, 2019, was $4,000 and $186,000, respectively, for which the Company had not posted collateral. If all thresholds related to the credit-risk-related contingent features underlying these agreements had been invoked on December 31, 2019, the Company would not have been required to post additional amounts to its counterparties. These amounts differ from the respective net derivative liabilities reflected on the Unaudited Condensed Consolidated Balance Sheets because the agreements also include clauses, commonly known as “Rights of Offset,” that would permit the Company to offset its derivative assets against its derivative liabilities for determining additional collateral to be posted, as previously discussed.
6. FAIR VALUE
Fair Value of Assets and Liabilities
The fair value of cash and cash equivalents, accounts receivable, current loan receivables, accounts payable, commercial paper and borrowings under revolving credit facilities are estimated to equal their carrying amounts due to the short maturity of those instruments. Non-current loan receivables are recorded based on what the Company expects to receive, which approximates fair value. The Company regularly evaluates the credit quality and collection profile of its customers to approximate fair value.
The estimated fair value of long-term debt, including current maturities, excluding capital leases, debt issuance costs and solar asset financing obligations, is as follows:
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
Carrying value (1) (2) (3) (4) | $ | 1,442,845 | $ | 1,442,845 | ||
Fair market value | $ | 1,548,234 | $ | 1,568,864 |
(1) | Excludes capital leases of $36.6 million and $35.4 million as of December 31, 2019 and September 30, 2019, respectively. |
(2) | Excludes solar asset financing obligations of $90.5 million and $91.4 million as of December 31, 2019 and September 30, 2019, respectively. |
(3) | Excludes NJNG's debt issuance costs of $9 million and $9 million as of December 31, 2019 and September 30, 2019, respectively. |
(4) | Excludes NJR's debt issuance costs of $1.6 million and $2 million as of December 31, 2019 and September 30, 2019, respectively. |
NJR utilizes a discounted cash flow method to determine the fair value of its debt. Inputs include observable municipal and corporate yields, as appropriate for the maturity of the specific issue and the Company's credit rating. As of December 31, 2019, NJR discloses its debt within Level 2 of the fair value hierarchy.
Fair Value Hierarchy
NJR applies fair value measurement guidance to its financial assets and liabilities, as appropriate, which include financial derivatives and physical commodity contracts qualifying as derivatives, investments in equity securities and other financial assets and liabilities. In addition, authoritative accounting literature prescribes the use of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the source of the data used to develop the price inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to inputs that are based on unobservable market data and include the following:
Level 1 | Unadjusted quoted prices for identical assets or liabilities in active markets. NJR's Level 1 assets and liabilities include exchange traded natural gas futures and options contracts, listed equities and money market funds. Exchange traded futures and options contracts include all energy contracts traded on the NYMEX, CME and ICE that NJR refers to internally as basis swaps, fixed swaps, futures and financial options that are cleared through a FCM. |
Level 2 | Other significant observable inputs such as interest rates or price data, including both commodity and basis pricing that is observed either directly or indirectly from publications or pricing services. NJR's Level 2 assets and liabilities include over-the-counter physical forward commodity contracts and swap contracts, SREC forward sales or derivatives that are initially valued using observable quotes and are subsequently adjusted to include time value, credit risk or estimated transport pricing components for which no basis price is available. Level 2 financial derivatives consist of transactions with non-FCM counterparties (basis swaps, fixed swaps and/or options). NJNG's treasury lock is also considered Level 2 as valuation is based on quoted market interest and swap rates as inputs to the valuation model. Inputs are verifiable and do not require significant management judgment. For some physical commodity contracts the Company utilizes transportation tariff rates that are publicly available and that it considers to be observable inputs |
23
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that are equivalent to market data received from an independent source. There are no significant judgments or adjustments applied to the transportation tariff inputs and no market perspective is required. Even if the transportation tariff input were considered to be a “model,” it would still be considered to be a Level 2 input as the data is:
• | widely accepted and public; |
• | non-proprietary and sourced from an independent third party; and |
• | observable and published. |
These additional adjustments are generally not considered to be significant to the ultimate recognized values.
Level 3 | Inputs derived from a significant amount of unobservable market data. These include NJR's best estimate of fair value and are derived primarily through the use of internal valuation methodologies. |
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||
(Thousands) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||
As of December 31, 2019: | ||||||||||||||||||
Assets: | ||||||||||||||||||
Physical commodity contracts | $ | — | $ | 15,185 | $ | — | $ | 15,185 | ||||||||||
Financial commodity contracts | 35,592 | 3,354 | — | 38,946 | ||||||||||||||
Financial commodity contracts - foreign exchange | — | 15 | — | 15 | ||||||||||||||
Other (1) | 1,857 | — | — | 1,857 | ||||||||||||||
Total assets at fair value | $ | 37,449 | $ | 18,554 | $ | — | $ | 56,003 | ||||||||||
Liabilities: | ||||||||||||||||||
Physical commodity contracts | $ | — | $ | 37,790 | $ | — | $ | 37,790 | ||||||||||
Financial commodity contracts | 24,032 | 114 | — | 24,146 | ||||||||||||||
Financial commodity contracts - foreign exchange | — | 124 | — | 124 | ||||||||||||||
Total liabilities at fair value | $ | 24,032 | $ | 38,028 | $ | — | $ | 62,060 | ||||||||||
As of September 30, 2019: | ||||||||||||||||||
Assets: | ||||||||||||||||||
Physical commodity contracts | $ | — | $ | 8,624 | $ | — | $ | 8,624 | ||||||||||
Financial commodity contracts | 20,028 | 3,876 | — | 23,904 | ||||||||||||||
Financial commodity contracts - foreign exchange | — | 1 | — | 1 | ||||||||||||||
Other (1) | 1,706 | — | — | 1,706 | ||||||||||||||
Total assets at fair value | $ | 21,734 | $ | 12,501 | $ | — | $ | 34,235 | ||||||||||
Liabilities: | ||||||||||||||||||
Physical commodity contracts | $ | — | $ | 40,426 | $ | — | $ | 40,426 | ||||||||||
Financial commodity contracts | 35,732 | — | — | 35,732 | ||||||||||||||
Financial commodity contracts - foreign exchange | — | 286 | — | 286 | ||||||||||||||
Total liabilities at fair value | $ | 35,732 | $ | 40,712 | $ | — | $ | 76,444 |
(1) | Includes money market funds. |
24
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENTS IN EQUITY INVESTEES
NJR's investments in equity method investees include the following as of:
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
Steckman Ridge (1) | $ | 113,750 | $ | 114,428 | ||
PennEast | 88,481 | 85,840 | ||||
Total | $ | 202,231 | $ | 200,268 |
(1) | Includes loans with a total outstanding principal balance of $70.4 million for both December 31, 2019 and September 30, 2019. The loans accrue interest at a variable rate that resets quarterly and are due October 1, 2023. |
NJNG and Energy Services have entered into storage and park and loan agreements with Steckman Ridge. In addition, NJNG and Energy Services are each parties to a precedent capacity agreement with PennEast. See Note 16. Related Party Transactions for more information on these intercompany transactions.
The Company, through its subsidiary NJR Pipeline Company, is a 20 percent investor in PennEast, a partnership whose purpose is to construct and operate a 120-mile natural gas pipeline that will extend from northeast Pennsylvania to western New Jersey. PennEast received a Certificate of Public Convenience and Necessity for the project from FERC on January 19, 2018.
On September 10, 2019, the United States Court of Appeals for the Third Circuit issued an order overturning the United States District Court for the District of New Jersey’s order granting PennEast condemnation and immediate access in accordance with the Natural Gas Act to certain properties in which the State of New Jersey holds an interest. A Petition for Rehearing was denied by the Third Circuit on November 5, 2019.
On October 8, 2019, the NJDEP issued a letter indicating that it deemed PennEast’s freshwater wetlands permit application to be administratively incomplete and closed the matter without prejudice. On October 11, 2019, PennEast submitted a letter to the NJDEP objecting to its position that the application is administratively incomplete. PennEast's objections were rejected by the NJDEP on November 18, 2019.
On October 4, 2019, PennEast filed a petition for Declaratory Order with FERC requesting an interpretation of the eminent domain authority of a FERC certificate holder under the Natural Gas Act. The Declaratory Order was granted on January 30, 2020.
On January 30, 2020, PennEast filed an amendment with FERC to construct the PennEast pipeline in two phases. Phase one consists of construction of a 68-mile pipeline in Pennsylvania from the eastern Marcellus Shale region in Luzerne County that would terminate in Northampton County. Phase two includes construction of the remaining original certificated route in Pennsylvania and New Jersey. Construction is expected to begin following approval by FERC of the phased approach and receipt of any remaining governmental and regulatory permits.
PennEast was granted a 30-day extension to file a Petition for a Writ of Certiorari with the Supreme Court of the United States to review the September 10, 2019 Third Circuit decision and now expects to file a Petition of Certiorari before the March 4, 2020 deadline.
At December 31, 2019, the Company evaluated its investment in PennEast for impairment and determined an impairment charge was not necessary. It is reasonably possible that future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, could result in an impairment of our equity method investment. Also, the use of alternate judgments and assumptions could result in a different calculation of fair value, which could ultimately result in the recognition of an impairment charge in the Unaudited Condensed Consolidated Financial Statements.
25
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. EARNINGS PER SHARE
The following table presents the calculation of the Company's basic and diluted earnings per share for:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands, except per share amounts) | 2019 | 2018 | ||||
Net income, as reported | $ | 89,361 | $ | 86,248 | ||
Basic earnings per share | ||||||
Weighted average shares of common stock outstanding-basic | 91,911 | 88,547 | ||||
Basic earnings per common share | $0.97 | $0.97 | ||||
Diluted earnings per share | ||||||
Weighted average shares of common stock outstanding-basic | 91,911 | 88,547 | ||||
Incremental shares: | ||||||
Equity forward sale agreement (1) | 106 | — | ||||
Other (2) | 303 | 399 | ||||
Weighted average shares of common stock outstanding-diluted | 92,320 | 88,946 | ||||
Diluted earnings per common share (3) | $0.97 | $0.97 |
(1) | See Note 14. Common Stock Equity for details regarding the forward sale agreement. |
(2) | Consist primarily of unvested stock awards and performance shares. |
(3) | There were no anti-dilutive shares excluded from the calculation of diluted earnings per share during the three months ended December 31, 2019 and 2018. |
9. DEBT
NJR and NJNG finance working capital requirements and capital expenditures through various short-term debt and long-term financing arrangements, including a commercial paper program and committed unsecured credit facilities.
Credit Facilities
On December 13, 2019, NJR entered into a four-month, $150 million revolving line of credit facility, which expires on April 13, 2020. The revolving line of credit facility may be prepaid at any time without premium or penalty other than normal break funding costs, proceeds will be used for working capital or other general business purposes of NJR.
A summary of NJR's credit facility and NJNG's commercial paper program and credit facility are as follows:
(Thousands) | December 31, 2019 | September 30, 2019 | Expiration Dates | ||||||
NJR | |||||||||
Bank revolving credit facilities (1) | $ | 425,000 | $ | 425,000 | December 2023 | ||||
Notes outstanding at end of period | $ | 119,800 | $ | 25,450 | |||||
Weighted average interest rate at end of period | 2.08 | % | 3.04 | % | |||||
Amount available at end of period (2) | $ | 300,450 | $ | 394,800 | |||||
Bank revolving credit facilities (1) | $ | 150,000 | $ | — | April 2020 | ||||
Notes outstanding at end of period | $ | 85,000 | $ | — | |||||
Weighted average interest rate at end of period | 2.49 | % | — | % | |||||
Amount available at end of period (2) | $ | 65,000 | $ | — | |||||
NJNG | |||||||||
Bank revolving credit facilities (1) | $ | 250,000 | $ | 250,000 | December 2023 | ||||
Commercial paper outstanding at end of period | $ | 49,600 | $ | — | |||||
Weighted average interest rate at end of period | 1.83 | % | — | % | |||||
Amount available at end of period (3) | $ | 199,669 | $ | 249,269 |
(1) | Committed credit facilities, which require commitment fees on the unused amounts. |
(2) | Letters of credit outstanding total $4.8 million for both December 31, 2019 and September 30, 2019, which reduces amount available by the same amount. |
(3) | Letters of credit outstanding total $731,000 for both December 31, 2019 and September 30, 2019, which reduces the amount available by the same amount. |
Amounts available under credit facilities are reduced by bank or commercial paper borrowings, as applicable, and any outstanding letters of credit. Neither NJNG nor the results of its operations are obligated or pledged to support the NJR credit or debt shelf facilities.
26
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 9, 2019, NJR entered into a $350 million Bridge Facility, which was used primarily to finance the Leaf River acquisition. The Bridge Facility accrues interest at the LIBOR rate for a 1-month interest period plus 0.875 percent during the first 180 days, and 1.075 percent after 180 days. Loans under the Bridge Facility are required to be prepaid to the extent of new cash proceeds received upon the issuance of equity of NJR, the incurrence of indebtedness by NJR or its subsidiaries, the disposition of assets by NJR or its subsidiaries or upon other specified events, in each case subject to certain exceptions set forth in the Bridge Facility. As of December 31, 2019, there were $137.1 million in borrowings remaining against the facility. The net proceeds from the December 2019 equity issuance were used to pay down the Bridge Facility.
Long-term Debt
NJNG
NJNG received $4 million and $9.9 million in December 2019 and 2018, respectively, in connection with the sale-leaseback of its natural gas meters. NJNG records a capital lease obligation that is paid over the term of the lease and has the option to purchase the meters back at fair value upon expiration of the lease. NJNG exercised early purchase options with respect to certain outstanding meter leases by making final principal payments of $1.2 million and $1.1 million during the three months ended December 31, 2019 and 2018, respectively.
10. EMPLOYEE BENEFIT PLANS
Pension and Other Postemployment Benefit Plans
The components of the net periodic cost for pension benefits, including the Company's Pension Equalization Plan, and OPEB costs (principally health care and life insurance) for employees and covered dependents were as follows:
Pension | OPEB | |||||||||||
Three Months Ended | Three Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
(Thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||
Service cost | $ | 2,056 | $ | 1,845 | $ | 1,355 | $ | 1,101 | ||||
Interest cost | 2,647 | 3,043 | 2,004 | 2,081 | ||||||||
Expected return on plan assets | (5,057 | ) | (4,763 | ) | (1,560 | ) | (1,379 | ) | ||||
Recognized actuarial loss | 2,746 | 1,441 | 2,791 | 1,617 | ||||||||
Prior service cost amortization | 25 | 25 | (49 | ) | (91 | ) | ||||||
Net periodic benefit cost | $ | 2,417 | $ | 1,591 | $ | 4,541 | $ | 3,329 |
The Company does not expect to be required to make additional contributions to fund the pension plans during fiscal 2020 or 2021 based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets and changes in the demographics of eligible employees and covered dependents. In addition, as in the past, the Company may elect to make contributions in excess of the minimum required amount to the plans. There were no discretionary contributions made during the three months ended December 31, 2019 and 2018.
There are no federal requirements to pre-fund OPEB benefits. However, the Company is required to fund certain amounts due to regulatory agreements with the BPU and estimates that it will contribute between $5 million and $10 million over each of the next five years. Additional contributions may be required based on market conditions and changes to assumptions.
11. INCOME TAXES
ASC Topic 740, Income Taxes requires the use of an estimated annual effective tax rate for purposes of determining the income tax provision during interim reporting periods. In calculating its estimated annual effective tax rate, NJR considers forecasted annual pre-tax income and estimated permanent book versus tax differences, as well as tax credits associated with solar. For investment tax credits, the estimate is based on solar projects that are probable of being completed and placed in service during the current fiscal year based on the best information available at each reporting period. Adjustments to the effective tax rate and management's estimates will occur as information and assumptions change.
Changes in tax laws or tax rates are recognized in the financial reporting period that includes the enactment date, the date in which the act is signed into law.
27
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2019, the Company received a favorable ruling from the IRS regarding a change to its tax method of accounting for the capitalization of certain costs associated with self-constructed property placed in service during fiscal years prior to September 30, 2016. The self-constructed property to which these costs relate is considered qualified energy property as defined under the Internal Revenue Code. As such, the Company is eligible to claim a 30 percent ITC on the increase in the depreciable cost basis of the property through the filing of an amended tax return in the year of change. As a result of the favorable IRS ruling, in June 2019, the Company recorded a benefit from income taxes of approximately $10 million from the additional ITC recognized, net of deferred taxes.
NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. A tax benefit claimed, or expected to be claimed, on a tax return may be recognized if it is more likely than not that the position will be upheld upon examination by the applicable taxing authority. Interest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense and accrued interest, and penalties are recognized within other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets.
As of December 31, 2019, the Company had a reserve of $4.9 million for a portion of tax benefits that are uncertain at this time, which is included in accrued taxes on the Unaudited Condensed Consolidated Balance Sheets. The tax benefits relate to fiscal tax years open to examination by the IRS and may be subject to subsequent adjustment. As of December 31, 2018, there were no reserves associated with uncertain tax positions.
Effective Tax Rate
The forecasted effective tax rates were 0.6 percent and (7.2) percent, for the three months ended December 31, 2019 and 2018, respectively. The increase in the effective tax rate, when compared with the prior fiscal year, is due primarily to an increase in forecasted pre-tax income and a decrease in forecasted tax credits for the fiscal year ending September 30, 2020. Forecasted tax credits, net of deferred income taxes, were $39.7 million and $47.7 million for fiscal 2020 and 2019, respectively.
To the extent there are discrete tax items that are not included in the forecasted effective tax rate, the actual effective tax rate will differ from the estimated annual effective tax rate. During the three months ended December 31, 2019 and 2018, discrete items totaled $798,000 and $1.3 million, respectively, in excess tax benefits associated with the vesting of share-based awards. NJR’s actual effective tax rate was (0.3) percent and (8.8) percent during the three months ended December 31, 2019 and 2018, respectively.
Other Tax Items
As of December 31, 2019 and September 30, 2019, the Company had ITC carryforwards of approximately $158.7 million and $154.2 million, respectively, which each have a life of 20 years. When the Company carries back the federal net operating losses noted below, it expects to recapture investment tax credits totaling $24.1 million. These recaptured tax credits are in addition to the $158.7 million noted above and will be carried forward to offset future taxable income. The Company expects to utilize this entire carryforward, which would begin to expire in fiscal 2034.
The Company had federal income tax net operating losses of approximately $134 million for both December 31, 2019 and September 30, 2019. Federal net operating losses incurred before the implementation of the Tax Act can generally be carried back two years and forward 20 years and will begin to expire in fiscal 2036, with the remainder expiring by 2038. The Company expects to exercise its ability to carryback federal net operating losses to offset taxable income in prior periods.
For the net operating losses it expects to carryback, the Company estimated the portion considered refundable and recorded receivables of approximately $22.8 million for both December 31, 2019 and September 30, 2019, as a component of other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets. Upon filing amended federal income tax returns to carryback its remaining federal net operating losses totaling $24.1 million, the Company will reduce its taxable income in those periods and recapture federal investment tax credits of the same amount that were previously utilized to offset taxable income.
The Company had state income tax net operating losses of approximately $340.2 million for both December 31, 2019 and September 30, 2019. These state net operating losses have varying carry-forward periods dictated by the state in which they were incurred. These state carry forward periods range from seven to 20 years and would begin to expire in fiscal 2021, with the majority expiring after 2035. The Company expects to utilize this entire carryforward, other than as described below.
28
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2019, Clean Energy Ventures finalized the sale of its remaining wind assets. As a result of the sale, it is more likely than not that certain state net operating loss carryforwards will not be realizable prior to their expiration. The Company had a valuation allowance of $4 million for both December 31, 2019 and September 30, 2019, related to state net operating loss carryforwards in Montana, Iowa and Kansas. The remaining state income tax net operating losses are expected to be utilized prior to expiration.
The Consolidated Appropriations Act extended the 30 percent ITC for solar property that is under construction on or before December 31, 2019. The credit will decline to 26 percent for property under construction during 2020 and to 22 percent for property under construction during 2021. For any property that is under construction before 2022, but not placed in service before 2024, the ITC will be reduced to 10 percent. Projects placed in service after December 31, 2019, may also qualify for a 30 percent federal ITC if five percent or more of the total costs of a solar property are incurred before the end of the applicable year and there are continuous efforts to advance towards completion of the project, based on the IRS guidance around ITC safe harbor determination. The Company has taken steps to preserve the current ITC rates for solar projects that are completed after the scheduled reduction in rates, in accordance with IRS guidance.
As of December 31, 2019, the IRS has an open examination of the Company's federal income tax return for fiscal 2016, which commenced in March 2019. All periods subsequent to those ended September 30, 2014, are statutorily open for both state and federal examinations.
12. LEASES
Lessee Accounting
The Company determines if an arrangement is a lease at inception based on whether the Company has the right to control the use of an identified asset, the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset and accounts for leases in accordance with ASC 842, Leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, including payments at commencement that depend on an index or rate. Most leases in which the Company is the lessee do not have a readily determinable implicit rate, so an incremental borrowing rate, based on the information available at the lease commencement date, is utilized to determine the present value of lease payments. When a secured borrowing rate is not readily available, unsecured borrowing rates are adjusted for the effects of collateral to determine the incremental borrowing rate. The Company uses the implicit rate for agreements in which it is a lessor. The Company has not entered into any material agreements in which it is a lessor. Lease expense and lease income are recognized on a straight-line basis over the lease term for operating leases. For more information on the adoption of ASC 842, Leases, see Note 2. Summary of Significant Accounting Policies.
The Company’s lease agreements primarily consist of commercial solar land leases, storage and capacity leases, equipment and real property, including land and office facilities, office equipment and the sale-leaseback of its natural gas meters.
Certain leases contain escalation provisions for inflation metrics. The storage leases contain a variable payment component that relates to the change in the inflation metrics that are not known past the current payment period. These variable components of these lease payments are excluded from the lease payments that are used to determine the related right-of-use lease asset and liability. These variable portion of these leases are recognized as leasing expenses when they are incurred. The capacity lease payments are fully variable and based on the amount of gas stored in the storage caverns.
Generally, the Company’s solar land leases terms are between 15 and 25 years and include options to extend the terms for multiple additional 5 to 10 year terms each. The Company’s office leases vary in duration, ranging from 1 to 25 years and may or may not include extension options. The majority of the Company’s meter leases are for terms of 7 years with purchase options available prior to the end of the 7 year term. Equipment leases include general office equipment that also vary in duration, most are for a term of 5 years. The Company's storage and capacity leases have assumed terms of 50 years to coincide with the expected useful lives of the cavern assets which the leases are associated with. The Company's lease terms may include options to extend or terminate a lease and they are included in the lease liability calculation when it is reasonably certain that those options will be exercised. The Company has elected an accounting policy that exempts leases with an original term of one year or less from the recognition requirements of ASC 842, Leases.
The Company has lease agreements with lease and non-lease components and has elected the practical expedient to combine lease and non-lease components for certain classes of leases, such as office buildings, solar land leases and office equipment. Variable payments are not significant to the Company. The Company’s lease agreements do not contain any material residual value guarantees, material restrictions or material covenants. There are no material lease transactions with related parties.
29
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the Company's lease costs included in the Unaudited Condensed Consolidated Statements of Operations:
Three Months Ended | ||||
December 31, | ||||
(Thousands) | Income Statement Location | 2019 | ||
Finance lease cost | ||||
Amortization of right-of-use assets | Depreciation and amortization | $ | 1,161 | |
Interest on lease liabilities | Interest expense, net of capitalized interest | 247 | ||
Total finance lease cost | 1,408 | |||
Operating lease cost | Operation and maintenance, net of capitalized costs | $ | 1,392 | |
Short-term lease cost | Operation and maintenance | 454 | ||
Variable lease cost | Operation and maintenance | 707 | ||
Total lease cost | $ | 3,961 |
The following table presents supplemental cash flow information related to leases:
Three Months Ended | |||
December 31, | |||
(Thousands) | 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities | |||
Operating cash flows from operating leases | $ | 1,562 | |
Operating cash flows from finance leases | $ | 443 | |
Financing cash flows from finance leases | $ | 2,623 |
Assets obtained in exchange for operating and finance lease liabilities during the three months ended December 31, 2019, was $21.6 million and $4 million, respectively.
The following table presents the balance and classifications of our right of use assets and lease liabilities included in the Unaudited Condensed Consolidated Balance Sheets:
(Thousands) | Balance Sheet Location | December 31, 2019 | ||
Assets | ||||
Noncurrent | ||||
Operating lease assets | Operating lease assets | $ | 87,793 | |
Finance lease assets | Utility plant | 29,220 | ||
Total lease assets | $ | 117,013 | ||
Liabilities | ||||
Current | ||||
Operating lease liabilities | Operating lease liabilities | $ | 3,805 | |
Finance lease liabilities | Current maturities of long-term debt | 10,714 | ||
Noncurrent | ||||
Operating lease liabilities | Operating lease liabilities | 82,909 | ||
Finance lease liabilities | Long-term debt | 25,846 | ||
Total lease liabilities | $ | 123,274 |
As of December 31, 2019, the weighted average remaining lease term for the operating and finance leases is 28.1 and 4.5 years, respectively. The weighted average discount rate used in the valuation of the operating and finance lease liabilities and right-of-use assets over the remaining lease term is 3.10 percent and 4.02 percent, respectively.
30
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2019, the Company has entered into four leases, which have not yet commenced, that would entitle the Company to significant rights or create additional obligations. The leases are expected to commence when construction of the assets are completed during fiscal 2020. Total estimated payments over the life of these leases are approximately $27.8 million. There are options to extend the term of these leases for two additional five-year periods. One of the leases has variable payment terms based upon the capacity of the solar facility and it is therefore excluded from the total estimated payments.
The following table presents the Company's maturities of lease liabilities as of December 31, 2019:
(Thousands) | Operating Leases | Finance Leases | ||||
Remainder of fiscal 2020 | $ | 4,429 | $ | 9,111 | ||
2021 | 5,672 | 9,347 | ||||
2022 | 5,591 | 6,004 | ||||
2023 | 5,564 | 4,622 | ||||
2024 | 5,178 | 5,279 | ||||
Thereafter | 107,798 | 5,720 | ||||
Total future minimum lease payments | 134,232 | 40,083 | ||||
Less: Interest component | (47,518 | ) | (3,523 | ) | ||
Total lease liability | $ | 86,714 | $ | 36,560 |
The following table reflects the Company's future minimum lease payments due under non-cancelable operating leases for continuing operations as of September 30, 2019, under ASC 840 and is being presented for comparative purposes. These commitments relate principally to commercial solar land leases, equipment and real property leases, including land and office facility leases, gas meters and office equipment.
(Thousands) | Operating Leases | Capital Leases | ||||
2020 | $ | 4,411 | $ | 11,707 | ||
2021 | $ | 4,698 | $ | 6,603 | ||
2022 | $ | 4,609 | $ | 7,494 | ||
2023 | $ | 4,579 | $ | 3,995 | ||
2024 | $ | 4,199 | $ | 4,652 | ||
Thereafter | $ | 54,405 | $ | 4,173 |
13. COMMITMENTS AND CONTINGENT LIABILITIES
Cash Commitments
NJNG has entered into long-term contracts, expiring at various dates through September 2036, for the supply, storage and transportation of natural gas. These contracts include annual fixed charges of approximately $101 million at current contract rates and volumes for the remainder of the fiscal year, which are recoverable through BGSS.
For the purpose of securing storage and pipeline capacity, the Energy Services segment enters into storage and pipeline capacity contracts, which require the payment of certain demand charges by Energy Services to maintain the ability to access such natural gas storage or pipeline capacity, during a fixed time period, which generally ranges from one to 10 years. Demand charges are established by interstate storage and pipeline operators and are regulated by FERC. These demand charges represent commitments to pay storage providers or pipeline companies for the right to store and/or transport natural gas utilizing their respective assets.
31
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commitments as of December 31, 2019, for natural gas purchases and future demand fees for the next five fiscal year periods are as follows:
(Thousands) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||
Energy Services: | ||||||||||||||||||
Natural gas purchases | $ | 227,340 | $ | 25,248 | $ | — | $ | — | $ | — | $ | — | ||||||
Storage demand fees | 18,767 | 15,205 | 11,378 | 6,805 | 1,650 | 935 | ||||||||||||
Pipeline demand fees | 61,173 | 62,606 | 47,548 | 23,849 | 16,106 | 47,384 | ||||||||||||
Sub-total Energy Services | $ | 307,280 | $ | 103,059 | $ | 58,926 | $ | 30,654 | $ | 17,756 | $ | 48,319 | ||||||
NJNG: | ||||||||||||||||||
Natural gas purchases | $ | 10,606 | $ | 30,615 | $ | 30,402 | $ | 30,862 | $ | 31,845 | $ | 32,248 | ||||||
Storage demand fees | 29,014 | 33,751 | 25,406 | 18,744 | 12,176 | 10,209 | ||||||||||||
Pipeline demand fees | 71,963 | 76,665 | 100,399 | 95,172 | 71,591 | 589,768 | ||||||||||||
Sub-total NJNG | $ | 111,583 | $ | 141,031 | $ | 156,207 | $ | 144,778 | $ | 115,612 | $ | 632,225 | ||||||
Total | $ | 418,863 | $ | 244,090 | $ | 215,133 | $ | 175,432 | $ | 133,368 | $ | 680,544 |
Legal Proceedings
Manufactured Gas Plant Remediation
NJNG is responsible for the remedial cleanup of certain former MGP sites, dating back to gas operations in the late 1800s and early 1900s, which contain contaminated residues from former gas manufacturing operations. NJNG is currently involved in administrative proceedings with the NJDEP, and participating in various studies and investigations by outside consultants, to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted, under NJDEP regulations.
NJNG periodically, and at least annually, performs an environmental review of former MGP sites located in Atlantic Highlands, Berkeley, Long Branch, Manchester, Toms River, and Freehold, New Jersey, collectively, the "former MGP sites", including a review of potential liability for investigation and remedial action. NJNG estimated at the time of the most recent review that total future expenditures at the former MGP sites for which it is responsible, including potential liabilities for further and continued natural resource damages, may be brought by the NJDEP for alleged injury to groundwater or other natural resources concerning these sites. As we have not yet completed the remedial investigation of the site, the total amount of potential costs of all remedial actions at the MGP site in Freehold, New Jersey, cannot be reasonably estimated at this time.
The estimated total future expenditures will range from approximately $115.9 million to $186.2 million. NJNG’s estimate of these liabilities is based upon known facts, existing technology and enacted laws and regulations in place when the review was completed. Where it is probable that costs will be incurred, and the information is sufficient to establish a range of possible liability, NJNG accrues the most likely amount in the range. If no point within the range is more likely than the other, it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG recorded an MGP remediation liability and a corresponding regulatory asset on the Unaudited Condensed Consolidated Balance Sheets of $129.2 million as of December 31, 2019 and $131.1 million as of September 30, 2019, based on the most likely amount. The remediation liability at December 31, 2019 includes adjustments for actual expenditures during fiscal 2020.
On September 27, 2019, NJNG filed its annual SBC application requesting to recover remediation expenses including an increase in the RAC of approximately $1.4 million annually, to be effective April 1, 2020. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and insurance recoveries, if any.
In June 2019, NJNG initiated a preliminary assessment of a site in Aberdeen, New Jersey to determine prior ownership and if there were former MGP operations active at the location. The costs associated with preliminary assessment activities are considered immaterial and are included as a component of NJNG’s annual SBC application to recover remediation expenses. NJNG will continue to gather information to further refine and enhance its estimate of potential costs for this site as it becomes available.
32
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NJNG recovers its remediation expenditures, including carrying costs, over rolling seven-year periods pursuant to a RAC approved by the BPU. On March 29, 2019, the BPU approved NJNG's annual SBC filing requesting an increase in the RAC, which increased the annual recovery from $7.1 million to $8.5 million, effective April 1, 2019. As of December 31, 2019, $38.2 million of previously incurred remediation costs, net of recoveries from customers and insurance proceeds, are included in regulatory assets on the Unaudited Condensed Consolidated Balance Sheets. NJNG will continue to seek recovery of MGP-related costs through the RAC. If any future regulatory position indicates that the recovery of such costs is not probable, the related non-recoverable costs would be charged to income in the period of such determination.
General
The Company is involved, and from time to time in the future may be involved, in a number of pending and threatened judicial, regulatory and arbitration proceedings relating to matters that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of litigation matters, particularly when such matters are in their early stages or where the claimants seek indeterminate damages, the Company cannot state with confidence what the eventual outcome of the pending litigation will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter will be, if any. In accordance with applicable accounting guidance, NJR establishes accruals for litigation for those matters that present loss contingencies as to which it is both probable that a loss will be incurred and the amount of such loss can be reasonably estimated. NJR also discloses contingent matters for which there is a reasonable possibility of a loss. Based upon currently available information, NJR believes that the results of litigation that is currently pending, taken together, will not have a materially adverse effect on the Company’s financial condition, results of operations or cash flows. The actual results of resolving the pending litigation matters may be substantially higher than the amounts accrued.
The foregoing statements about NJR’s litigation are based upon the Company’s judgments, assumptions and estimates and are necessarily subjective and uncertain. The Company has a number of threatened and pending litigation matters at various stages.
14. COMMON STOCK EQUITY
On December 4, 2019, the Company completed an equity offering of 6,545,454 common shares, consisting of 5,333,334 common shares issued directly by the Company and 1,212,120 common shares issuable pursuant to forward sales agreements with investment banks. The issuance of 5,333,334 resulted in proceeds of approximately $212.9 million, net of issuance costs, and was reflected in shareholders' equity and as a financing activity on the statement of cash flows.
Under the forward sale agreements, a total of 1,212,120 common shares were borrowed from third parties and sold to the underwriters. Each forward sale agreement allows the Company, at its election and prior to September 30, 2020, to physically settle the forward sale agreement by issuing common shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement, which was initially $40.0125 per share, or, alternatively, to settle the forward sale agreement in whole or in part through the delivery or receipt of shares or cash. The forward sale price is subject to adjustment daily based on a floating interest rate factor and will decrease in respect of certain fixed amounts specified in the agreement, such as anticipated dividends.
The Company's current intent is to physically settle the forward sale agreements by issuing common shares. As of December 31, 2019, if the Company elected to net settle the forward sale agreement, the Company would have been required to pay $5 million under a cash settlement or would have been required to deliver 112,805 common shares under a net share settlement.
Issuances of shares under the forward sale agreements are classified as equity transactions. Accordingly, no amounts relating to the forward sale agreements have or will be recorded in the financial statements until settlements take place. Prior to any settlements, the only impact to the financial statements is the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method until settlement of the forward sale agreements. Under this method, the number of the Company common shares used in calculating diluted EPS is deemed to be increased by the excess, if any, of the number of shares that would be issued upon physical settlement of the forward sale agreements less the number of shares that would be purchased by the Company in the market (based on the average market price during the same reporting period) using the proceeds receivable upon settlement (based on the adjusted forward sale price at the end of that reporting period). Share dilution occurs when the average market price of the Company's common shares is higher than the adjusted forward sale price. See Note 8. Earnings Per Share for the impact of the forward sale agreements on the calculation of diluted earnings per share.
33
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. REPORTING SEGMENT AND OTHER OPERATIONS DATA
The Company organizes its businesses based on a combination of factors, including its products and its regulatory environment. As a result, the Company manages its businesses through the following reporting segments and other operations: the Natural Gas Distribution segment consists of regulated energy and off-system, capacity and storage management operations; the Clean Energy Ventures segment consists of capital investments in clean energy projects; the Energy Services segment consists of unregulated wholesale and retail energy operations; the Midstream segment consists of the Company’s investments in natural gas transportation and storage facilities; the Home Services and Other operations consist of heating, cooling and water appliance sales, installations and services, other investments and general corporate activities.
Information related to the Company's various reporting segments and other operations is detailed below:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues | ||||||
Natural Gas Distribution | ||||||
External customers | $ | 219,623 | $ | 199,965 | ||
Clean Energy Ventures | ||||||
External customers | 6,212 | 14,897 | ||||
Energy Services | ||||||
External customers (1) | 368,304 | 584,960 | ||||
Intercompany | 2,111 | 2,307 | ||||
Midstream | ||||||
External customers | 8,405 | — | ||||
Intercompany | 667 | — | ||||
Subtotal | 605,322 | 802,129 | ||||
Home Services and Other | ||||||
External customers | 12,492 | 11,945 | ||||
Intercompany | 415 | 545 | ||||
Eliminations | (3,193 | ) | (2,852 | ) | ||
Total | $ | 615,036 | $ | 811,767 | ||
Depreciation and amortization | ||||||
Natural Gas Distribution | $ | 16,817 | $ | 13,896 | ||
Clean Energy Ventures | 9,437 | 7,923 | ||||
Energy Services (2) | 29 | 27 | ||||
Midstream | 1,681 | 1 | ||||
Subtotal | 27,964 | 21,847 | ||||
Home Services and Other | 246 | 221 | ||||
Eliminations | (452 | ) | (236 | ) | ||
Total | $ | 27,758 | $ | 21,832 | ||
Interest income (3) | ||||||
Natural Gas Distribution | $ | 107 | $ | 199 | ||
Energy Services | 37 | — | ||||
Midstream | 697 | 1,056 | ||||
Subtotal | 841 | 1,255 | ||||
Home Services and Other | 491 | 436 | ||||
Eliminations | (1,146 | ) | (1,492 | ) | ||
Total | $ | 186 | $ | 199 |
(1) | Includes sales to Canada for the Energy Services segment, which are immaterial. |
(2) | The amortization of acquired wholesale energy contracts is excluded above and is included in gas purchases - nonutility on the Unaudited Condensed Consolidated Statements of Operations. |
(3) | Included in other income, net on the Unaudited Condensed Consolidated Statements of Operations. |
34
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Interest expense, net of capitalized interest | ||||||
Natural Gas Distribution | $ | 7,832 | $ | 6,103 | ||
Clean Energy Ventures | 4,492 | 5,428 | ||||
Energy Services | 1,226 | 1,887 | ||||
Midstream | 2,822 | 543 | ||||
Subtotal | 16,372 | 13,961 | ||||
Home Services and Other | 272 | 392 | ||||
Eliminations | (574 | ) | (867 | ) | ||
Total | $ | 16,070 | $ | 13,486 | ||
Income tax provision (benefit) | ||||||
Natural Gas Distribution | $ | 8,635 | $ | 5,830 | ||
Clean Energy Ventures | (20,564 | ) | (23,204 | ) | ||
Energy Services | 10,752 | 9,644 | ||||
Midstream | 702 | 962 | ||||
Subtotal | (475 | ) | (6,768 | ) | ||
Home Services and Other | 219 | (192 | ) | |||
Eliminations | (3 | ) | (1 | ) | ||
Total | $ | (259 | ) | $ | (6,961 | ) |
Equity in earnings of affiliates | ||||||
Midstream | $ | 3,664 | $ | 3,801 | ||
Eliminations | (275 | ) | (640 | ) | ||
Total | $ | 3,389 | $ | 3,161 | ||
Net financial earnings (loss) | ||||||
Natural Gas Distribution | $ | 43,856 | $ | 31,713 | ||
Clean Energy Ventures | (4,916 | ) | 10,205 | |||
Energy Services | (2,911 | ) | 8,370 | |||
Midstream | 3,004 | 3,651 | ||||
Subtotal | 39,033 | 53,939 | ||||
Home Services and Other | 1,109 | 76 | ||||
Eliminations | 263 | 78 | ||||
Total | $ | 40,405 | $ | 54,093 | ||
Capital expenditures | ||||||
Natural Gas Distribution | $ | 77,797 | $ | 59,755 | ||
Clean Energy Ventures | 45,699 | 32,126 | ||||
Midstream | 2,561 | 1,689 | ||||
Subtotal | 126,057 | 93,570 | ||||
Home Services and Other | 126 | 731 | ||||
Total | $ | 126,183 | $ | 94,301 | ||
Investments in equity investees | ||||||
Midstream | $ | 509 | $ | — | ||
Total | $ | 509 | $ | — |
35
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Chief Executive Officer, who uses NFE as a measure of profit or loss in measuring the results of the Company's segments and operations, is the chief operating decision maker of the Company. A reconciliation of consolidated NFE to consolidated net income is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Net financial earnings | $ | 40,405 | $ | 54,093 | ||
Less: | ||||||
Unrealized gain on derivative instruments and related transactions | (41,766 | ) | (10,932 | ) | ||
Tax effect | 9,931 | 2,583 | ||||
Effects of economic hedging related to natural gas inventory | (8,887 | ) | (21,611 | ) | ||
Tax effect | 2,112 | 5,136 | ||||
NFE tax adjustment | (10,346 | ) | (7,331 | ) | ||
Net income | $ | 89,361 | $ | 86,248 |
The Company uses derivative instruments as economic hedges of purchases and sales of physical gas inventory. For GAAP purposes, these derivatives are recorded at fair value and related changes in fair value are included in reported earnings. Revenues and cost of gas related to physical gas flow is recognized when the gas is delivered to customers. Consequently, there is a mismatch in the timing of earnings recognition between the economic hedges and physical gas flows. Timing differences occur in two ways:
• | unrealized gains and losses on derivatives are recognized in reported earnings in periods prior to physical gas inventory flows; and |
• | unrealized gains and losses of prior periods are reclassified as realized gains and losses when derivatives are settled in the same period as physical gas inventory movements occur. |
NFE is a measure of the earnings based on eliminating these timing differences, to effectively match the earnings effects of the economic hedges with the physical sale of gas, SRECs and foreign currency contracts. Consequently, to reconcile between net income and NFE, current period unrealized gains and losses on the derivatives are excluded from NFE as a reconciling item. Additionally, realized derivative gains and losses are also included in current period net income. However, NFE includes only realized gains and losses related to natural gas sold out of inventory, effectively matching the full earnings effects of the derivatives with realized margins on physical gas flows. Included in the tax effects are current and deferred income tax expense corresponding with the NFE. NJR also calculates a quarterly tax adjustment based on an estimated annual effective tax rate for NFE purposes.
The Company's assets for the various business segments and business operations are detailed below:
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
Assets at end of period: | ||||||
Natural Gas Distribution | $ | 3,190,229 | $ | 3,064,309 | ||
Clean Energy Ventures | 944,740 | 864,323 | ||||
Energy Services | 381,367 | 290,847 | ||||
Midstream | 651,306 | 240,955 | ||||
Subtotal | 5,167,642 | 4,460,434 | ||||
Home Services and Other | 110,562 | 104,411 | ||||
Intercompany assets (1) | (183,038 | ) | (191,860 | ) | ||
Total | $ | 5,095,166 | $ | 4,372,985 |
(1) | Consists of transactions between subsidiaries that are eliminated and reclassified in consolidation. |
36
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. RELATED PARTY TRANSACTIONS
NJNG has an agreement with Steckman Ridge for 3 Bcf of firm storage capacity, which expires on March 31, 2025. Under the terms of the agreement, NJNG incurs demand fees at market rates of approximately $9.3 million annually, a portion of which is eliminated in consolidation. These fees are recoverable through NJNG's BGSS mechanism and are included as a component of regulatory assets.
Energy Services may periodically enter into storage or park and loan agreements with its affiliated FERC-jurisdictional natural gas storage facility, Steckman Ridge. As of December 31, 2019, Energy Services has entered into transactions with Steckman Ridge for varying terms, all of which expire by October 31, 2020.
Demand fees, net of eliminations, associated with Steckman Ridge were as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Natural Gas Distribution | $ | 1,494 | $ | 1,473 | ||
Energy Services | 30 | 712 | ||||
Total | $ | 1,524 | $ | 2,185 |
The following table summarizes demand fees payable to Steckman Ridge as of:
(Thousands) | December 31, 2019 | September 30, 2019 | ||||
Natural Gas Distribution | $ | 775 | $ | 775 | ||
Energy Services | 16 | 15 | ||||
Total | $ | 791 | $ | 790 |
NJNG and Energy Services have entered into various asset management agreements, the effects of which are eliminated in consolidation. Under the terms of these agreements, NJNG releases certain transportation and storage contracts to Energy Services. As of December 31, 2019, NJNG and Energy Services had four asset management agreements with expiration dates ranging from October 31, 2019 through October 31, 2021.
NJNG has entered into a 15-year transportation precedent agreement for committed capacity of 180,000 Dths per day and NJRES has entered into a 5-year, 50,000 Dths per day transportation precedent agreement with PennEast, both to commence when PennEast is placed in service.
Energy Services has a 5-year agreement for 3 Bcf of firm storage capacity with Leaf River, which is eliminated in consolidation.
17. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Leaf River
On October 11, 2019, NJR Pipeline Company, an indirect wholly owned subsidiary of NJR, acquired 100 percent of the issued and outstanding limited liability company interests of Leaf River Energy Center LLC for $367.5 million. The purchase price was subject to certain contractual conditions, including customary purchase price adjustments related to the amount of net working capital and transaction expenses. Leaf River owns and operates a 32.2 million Dth salt dome natural gas storage facility, located in southeastern Mississippi.
The Company evaluated the acquisition under the guidance of ASU 2017-01, Clarifying the Definition of a Business and concluded that the acquisition did not meet the definition of a business. As a result, the purchase was accounted for as an asset acquisition as almost all of the fair value relates to the storage assets acquired.
37
New Jersey Resources Corporation
Part I
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the consideration transferred and preliminary purchase price allocation based upon the relative fair value of the assets acquired and liabilities to be assumed:
(Thousands) | Estimated Fair Value | ||
Purchase price | $ | 367,500 | |
Net working capital adjustment | 4,111 | ||
Transaction costs | 1,664 | ||
Total consideration transferred | $ | 373,275 | |
Identifiable assets acquired | |||
Property, plant and equipment | $ | 365,715 | |
Base gas | 3,445 | ||
Other assets, net | 4 | ||
Net working capital | 4,111 | ||
Net assets acquired | $ | 373,275 |
The total consideration transferred is comprised of the purchase price to the seller and the transaction costs incurred during the acquisition. The Company utilized a discounted cash flow valuation technique to measure the fair value of the property, plant, and equipment based upon the present value of their future economic benefits reflecting current market expectations. Base gas is valued based upon the estimated replacement costs associated with the respective assets.
Base gas is needed to maintain the necessary pressure to allow efficient operation of the storage facility. The base gas is determined to be recoverable and is considered a component of the facility and presented as a component in property, plant and equipment. This gas is not depreciated, as it is expected to be recovered and sold.
Property, plant and equipment consist primarily of surface equipment and pipelines necessary to operate the facility. Depreciation is computed on a straight-line basis over the estimated useful life of the assets, ranging from five to 50 years, based on various classes of depreciable property.
Asset retirement obligations are initially recognized when the legal obligation to retire an asset has been incurred and a reasonable estimate of fair value can be made. The Company records any asset retirement obligations in the period in which information permitting a reasonable estimate of such obligation becomes available. The Company is unable to predict when, or if, the storage facilities and related pipelines would become completely obsolete and require decommissioning. As such, upon acquisition and as of December 31, 2019, there were no liabilities recorded for asset retirement obligations, as both the timing and future estimates of decommissioning the storage facilities and related pipelines were indeterminable.
The assumptions used in the discounted cash flow valuation are not observable in active markets and thus represent non-recurring Level 3 fair value measurements.
Adelphia
In October 2017, Adelphia, an indirect wholly owned subsidiary of NJR, entered into a Purchase and Sale Agreement with Talen pursuant to which Adelphia acquired all of Talen’s membership interests in IEC for a base purchase price of $166 million. As additional consideration, Adelphia will pay Talen specified amounts of up to $23 million contingent upon the achievement of certain regulatory approvals and binding natural gas capacity commitments. In November 2017, the Company made an initial payment of $10 million towards the base purchase price, which is included in other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets. On December 19, 2019, FERC issued Adelphia Gateway’s Certificate of Public Convenience and Necessity. The transaction closed on January 13, 2020.
IEC owned an existing 84-mile pipeline in southeastern Pennsylvania. Adelphia acquired IEC and, with it, IEC’s existing pipeline, related assets and rights of way. Adelphia has also agreed to provide firm natural gas transportation service for ten years following the closing to two power generators owned by affiliates of Talen that are currently served by IEC.
Dispositions
On February 7, 2019, Clean Energy Ventures finalized the sale of its remaining wind assets to a subsidiary of Skyline Renewables LLC for a total purchase price of $208.6 million. The transaction generated a pre-tax gain of $645,000, which was recognized as a component of O&M expense on the Unaudited Condensed Consolidated Statements of Operations.
38
New Jersey Resources Corporation
Part II
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Critical Accounting Policies
A summary of our critical accounting policies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2019. Our critical accounting policies have not changed from those reported in the 2019 Annual Report on Form 10-K.
Recently Issued Accounting Standards
Refer to Note 2. Summary of Significant Accounting Policies for discussion of recently issued accounting standards.
Management's Overview
Consolidated
NJR is an energy services holding company providing retail natural gas service in New Jersey and wholesale natural gas and related energy services to customers in the United States and Canada. In addition, we invest in clean energy projects, midstream assets and provide various repair, sales and installations services. A more detailed description of our organizational structure can be found in Item 1. Business of our 2019 Annual Report on Form 10-K.
Reporting Segments
We have four primary reporting segments as presented in the chart below:
![segmentorgchartfy2020a01.jpg](https://www.sec.gov/Archives/edgar/data/0000356309/000035630920000033/segmentorgchartfy2020a01.jpg)
In addition to our four reporting segments above, we have non-utility operations that either provide corporate support services or do not meet the criteria to be treated as a separate reporting segment. These operations, which comprise Home Services and Other, include: appliance repair services, sales and installations at NJRHS; and commercial real estate holdings at CR&R.
39
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating Results
Net income (loss) by reporting segment and operations are as follows:
Three Months Ended | |||||||||||
December 31, | |||||||||||
(Thousands) | 2019 | 2018 | |||||||||
Net income (loss) | |||||||||||
Natural Gas Distribution | $ | 43,856 | 49 | % | $ | 31,713 | 37 | % | |||
Clean Energy Ventures | 5,430 | 6 | 17,536 | 20 | |||||||
Energy Services | 36,025 | 40 | 33,374 | 39 | |||||||
Midstream | 3,004 | 4 | 3,651 | 4 | |||||||
Home Services and Other | 1,109 | 1 | (25 | ) | — | ||||||
Eliminations (1) | (63 | ) | — | (1 | ) | — | |||||
Total | $ | 89,361 | 100 | % | $ | 86,248 | 100 | % |
(1) | Consists of transactions between subsidiaries that are eliminated in consolidation. |
The increase in net income during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, was driven primarily by increased earnings at our Natural Gas Distribution segment due to higher base rates resulting from the base rate case in November 2019, partially offset by decreased earnings at Clean Energy Ventures resulting from the timing of SREC transfers and the absence of wind asset revenue, which was sold in February 2019. The primary drivers of the changes noted above are described in more detail in the individual segment discussions.
Assets by reporting segment and operations are as follows:
(Thousands) | December 31, 2019 | September 30, 2019 | |||||||||
Assets | |||||||||||
Natural Gas Distribution | $ | 3,190,229 | 63 | % | $ | 3,064,309 | 70 | % | |||
Clean Energy Ventures | 944,740 | 19 | 864,323 | 20 | |||||||
Energy Services | 381,367 | 7 | 290,847 | 7 | |||||||
Midstream | 651,306 | 13 | 240,955 | 5 | |||||||
Home Services and Other | 110,562 | 2 | 104,411 | 2 | |||||||
Intercompany assets (1) | (183,038 | ) | (4 | ) | (191,860 | ) | (4 | ) | |||
Total | $ | 5,095,166 | 100 | % | $ | 4,372,985 | 100 | % |
(1) | Consists of transactions between subsidiaries that are eliminated in consolidation. |
The increase in assets was due primarily to the acquisition of Leaf River at our Midstream segment, the recognition of a right-of-use asset upon adoption of ASC 842, Leases on October 1, 2019, increases in utility plant at our Natural Gas Distribution segment, solar assets at Clean Energy Ventures and increased accounts receivable at both our Natural Gas Distribution and Energy Services segments.
Non-GAAP Financial Measures
Our management uses NFE, a non-GAAP financial measure, when evaluating our operating results. Energy Services economically hedges its natural gas inventory with financial derivative instruments. NFE is a measure of the earnings based on eliminating timing differences surrounding the recognition of certain gains or losses, to effectively match the earnings effects of the economic hedges with the physical sale of gas and, therefore, eliminates the impact of volatility to GAAP earnings associated with the derivative instruments. There is a related tax effect on current and deferred income tax expense corresponding with this non-GAAP measure. Also included in the prior year tax effect are the impacts of the Tax Act and resulting revaluation of the deferred income taxes that arose from derivative and hedging activity as measured under NFE. The revaluation caused the effective tax rate on reconciling items to differ from the statutory rate in effect. To the extent we utilize forwards, futures, or other derivatives to hedge forecasted SREC production, unrealized gains and losses are also eliminated for NFE purposes.
GAAP requires us, during the interim periods, to estimate our annual effective tax rate and use this rate to calculate the year-to-date tax provision. We also determine an annual estimated effective tax rate for NFE purposes and calculate a quarterly tax
40
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
adjustment based on the differences between our forecasted net income and our forecasted NFE for the fiscal year. Since the annual estimated effective tax rate is based on certain forecasted assumptions, including estimates surrounding completion of Clean Energy Ventures projects, the rate and resulting NFE are subject to change. No adjustment is needed during the fourth quarter, since the actual effective tax rate is calculated at year end.
Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for or a replacement of, the comparable GAAP measure and should be read in conjunction with those GAAP results. Below is a reconciliation of consolidated net income, the most directly comparable GAAP measure, to NFE:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands, except per share data) | 2019 | 2018 | ||||
Net income | $ | 89,361 | $ | 86,248 | ||
Add: | ||||||
Unrealized gain on derivative instruments and related transactions | (41,766 | ) | (10,932 | ) | ||
Tax effect | 9,931 | 2,583 | ||||
Effects of economic hedging related to natural gas inventory (1) | (8,887 | ) | (21,611 | ) | ||
Tax effect | 2,112 | 5,136 | ||||
NFE tax adjustment | (10,346 | ) | (7,331 | ) | ||
Net financial earnings | $ | 40,405 | $ | 54,093 | ||
Basic earnings per share | $ | 0.97 | $ | 0.97 | ||
Add: | ||||||
Unrealized gain on derivative instruments and related transactions | (0.45 | ) | (0.12 | ) | ||
Tax effect | 0.11 | 0.03 | ||||
Effects of economic hedging related to natural gas inventory (1) | (0.10 | ) | (0.25 | ) | ||
Tax effect | 0.02 | 0.06 | ||||
NFE tax adjustment | (0.11 | ) | (0.08 | ) | ||
Basic NFE per share | $ | 0.44 | $ | 0.61 |
(1) | Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period. |
NFE by reporting segment and other operations, discussed in more detail within the operating results sections of each segment, is summarized as follows:
Three Months Ended | |||||||||||
December 31, | |||||||||||
(Thousands) | 2019 | 2018 | |||||||||
Net financial earnings | |||||||||||
Natural Gas Distribution | $ | 43,856 | 108 | % | $ | 31,713 | 59 | % | |||
Clean Energy Ventures | (4,916 | ) | (12 | ) | 10,205 | 19 | |||||
Energy Services | (2,911 | ) | (7 | ) | 8,370 | 15 | |||||
Midstream | 3,004 | 7 | 3,651 | 7 | |||||||
Home Services and Other | 1,109 | 3 | 76 | — | |||||||
Eliminations (1) | 263 | 1 | 78 | — | |||||||
Total | $ | 40,405 | 100 | % | $ | 54,093 | 100 | % |
(1) | Consists of transactions between subsidiaries that are eliminated in consolidation. |
The decrease in NFE during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, was due primarily to decreased earnings at Clean Energy Ventures resulting from the timing of SREC transfers, absence of wind asset revenue, which was sold in February 2019 and decreased income tax benefit, lower financial margin generated at Energy Services resulting from narrower pricing spreads and decreased volumes in the wholesale gas markets, partially offset by increased base rates at our Natural Gas Distribution segment.
Natural Gas Distribution Segment
Overview
Our Natural Gas Distribution segment is comprised of NJNG, a natural gas utility that provides regulated retail natural gas service in central and northern New Jersey to approximately 552,100 residential and commercial customers in its service territory and also participates in the off-system sales and capacity release markets. The business is subject to various risks, which can
41
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
negatively impact customer growth, operating and financing costs, fluctuations in commodity prices and customer conservation efforts. These risks include, but are not limited to, adverse economic conditions, customer usage, certain regulatory actions, environmental remediation and severe weather conditions. It is often difficult to predict the impact of events or trends associated with these risks.
In addition, NJNG’s business is seasonal by nature, as weather conditions directly influence the volume of natural gas delivered to customers on an annual basis. Specifically, customer demand substantially increases during the winter months when natural gas is used for heating purposes. As a result, NJNG receives most of its natural gas distribution revenues during the first and second fiscal quarters and is subject to variations in earnings and working capital during the year.
As a regulated company, NJNG is required to recognize the impact of regulatory decisions on its financial statements. See Note 4. Regulation in the accompanying Unaudited Condensed Consolidated Financial Statements for a more detailed discussion on regulatory actions, including filings related to programs and associated expenditures, as well as rate requests related to recovery of capital investments and operating costs.
NJNG’s operations are managed with the goal of providing safe and reliable service, growing its customer base, diversifying its utility gross margin, promoting clean energy programs and mitigating the risks discussed above.
Base Rate Case
On November 13, 2019, the BPU issued an order adopting a stipulation of settlement approving a $62.2 million increase to base rates, effective on November 15, 2019. The increase includes an overall rate of return on rate base of 6.95 percent, return on common equity of 9.6 percent, a common equity ratio of 54 percent and a depreciation rate of 2.78 percent.
Infrastructure projects
NJNG has significant annual capital expenditures associated with the management of its natural gas distribution and transmission system, including new utility plant associated with customer growth and its associated pipeline integrity management and infrastructure programs.
Below is a summary of NJNG’s capital expenditures, including accruals, for the three months ended December 31, 2019, and estimates of expected investments for fiscal 2020 and 2021:
![chart-c58d4c6d656750ee8db.jpg](https://www.sec.gov/Archives/edgar/data/0000356309/000035630920000033/chart-c58d4c6d656750ee8db.jpg)
Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory oversight, environmental regulations, unforeseen events and the ability to access capital.
42
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Infrastructure Investment Program
On February 28, 2019, NJNG filed a petition with the BPU seeking authority to implement a five-year Infrastructure Investment Program. The IIP consists of two components: transmission and distribution investments and information technology replacement and enhancements. The total expected investment for the IIP is approximately $507 million. All approved investments are expected to be recovered through annual filings to adjust base rates.
SAFE II and NJ RISE
NJNG continues to implement BPU-approved infrastructure projects that are designed to enhance the reliability and integrity of NJNG's gas distribution system.
The BPU approved the 5-year SAFE II program and the associated rate mechanism, to replace the remaining unprotected steel mains and services from NJNG’s natural gas distribution system at an estimated cost of approximately $200 million, excluding AFUDC. With the extension of SAFE II, $157.5 million was approved for accelerated cost recovery methodology. The remaining $42.5 million in capital expenditures must be requested for recovery in future base rate cases, of which $23.4 million was approved in NJNG’s most recent base rate case.
The BPU approved NJNG's NJ RISE capital infrastructure program, which consists of six capital investment projects estimated to cost $102.5 million, excluding AFUDC, for gas distribution storm hardening and mitigation projects, along with associated depreciation expense. These system enhancements are intended to minimize service impacts during extreme weather events to customers in the most storm-prone areas of NJNG’s service territory. Recovery of NJ RISE investments is included in NJNG’s base rates.
In September 2018, the BPU approved NJNG’s annual petition requesting a base rate increase of $6.8 million for the recovery of SAFE II and NJ RISE capital investment costs related to the twelve months ended June 30, 2018, effective October 1, 2018. In September 2019, the BPU approved NJNG’s annual petition requesting a base rate increase of $7.8 million, effective October 1, 2019.
Southern Reliability Link
The SRL is an approximately 30-mile, 30-inch transmission main designed to support improved system reliability and integrity in the southern portion of NJNG’s service territory. All approvals required for the completion of the project have been received and construction began in December 2018. The cost to construct SRL is estimated to be between $250 million and $270 million upon completion. Costs associated with SRL will be requested for recovery in a future base rate case.
Customer Growth
In conducting NJNG's business, management focuses on factors it believes may have significant influence on its future financial results. NJNG's policy is to work with all stakeholders, including customers, regulators and policymakers, to achieve favorable results. These factors include the rate of NJNG's customer growth in its service territory, which can be influenced by political and regulatory policies, the delivered cost of natural gas compared with competing fuels, interest rates and general economic and business conditions. NJNG's total customers include the following:
December 31, 2019 | December 31, 2018 | |||
Firm customers | ||||
Residential | 489,491 | 478,983 | ||
Commercial, industrial & other | 30,422 | 29,640 | ||
Residential transport | 22,917 | 25,559 | ||
Commercial transport | 9,242 | 9,540 | ||
Total firm customers | 552,072 | 543,722 | ||
Other | 49 | 39 | ||
Total customers | 552,121 | 543,761 |
During the three months ended December 31, 2019 and 2018, respectively, NJNG added 2,282 and 2,934 new customers and converted 3 and 53 existing customers to natural gas heat and other services. NJNG expects these new customer additions, and those customers who added additional natural gas services to their premises to contribute approximately $1.4 million annually to utility gross margin.
43
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
NJNG expects to add approximately 28,000 to 30,000 new customers during the three-year period of fiscal 2020 to 2022. Based on information from municipalities and developers, as well as external industry analysts and management's experience, NJNG estimates that approximately 65 percent of the growth will come from new construction markets and 35 percent from customer conversions to natural gas from other fuel sources. This new customer and conversion growth would increase utility gross margin under NJNG's base rates by approximately $5.5 million annually, as calculated under NJNG's CIP tariff. See the Natural Gas Distribution Segment Operating Results section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations that follows for a definition and further discussion of utility gross margin.
Energy Efficiency Programs
SAVEGREEN conducts home energy audits and provides various grants, incentives and financing alternatives, which are designed to encourage the installation of high-efficiency heating and cooling equipment and other energy-efficiency upgrades. Depending on the specific incentive or approval, NJNG recovers costs associated with the programs over a two to 10-year period through a tariff rider mechanism.
In December 2018, the BPU approved a decrease in NJNG's EE recovery rate reflecting actual costs incurred through September 30, 2018, which resulted in an annual recovery of approximately $8.8 million, effective January 1, 2019. On October 25, 2019, the BPU approved NJNG’s annual filing to increase its EE recovery rate, which resulted in an annual recovery of approximately $11.3 million, effective November 1, 2019.
Since inception, $169.4 million in grants, rebates and loans has been provided to customers. The recovery includes a weighted average cost of capital that ranges from 6.69 percent to 7.76 percent, with a return on equity of 9.75 percent to 10.3 percent.
Conservation Incentive Program/BGSS
The CIP facilitates normalizing NJNG’s utility gross margin for variances not only due to weather but also for other factors affecting customer usage, such as conservation and energy efficiency. Recovery of utility gross margin for the non-weather variance through the CIP is limited to the amount of certain gas supply cost savings achieved and is subject to a variable margin revenue test. Additionally, recovery of the CIP utility gross margin is subject to an annual earnings test. An annual review of the CIP must be filed by June 1, coincident with NJNG’s annual BGSS filing, during which NJNG can request rate changes to the CIP. In May 2014, the BPU approved the continuation of the CIP program with no expiration date.
NJNG's total utility firm gross margin includes the following adjustments related to the CIP mechanism:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Weather (1) | $ | (2,219 | ) | $ | (1,468 | ) |
Usage | 1,043 | (1,940 | ) | |||
Total | $ | (1,176 | ) | $ | (3,408 | ) |
(1) | Compared with the 20-year average, weather was 2.5 percent and 4.7 percent colder-than-normal during the three months ended December 31, 2019 and 2018, respectively. |
Recovery of natural gas costs
NJNG’s cost of natural gas is passed through to our customers, without markup, by applying NJNG’s authorized BGSS rate to actual therms delivered. There is no utility gross margin associated with BGSS costs; therefore, changes in such costs do not impact NJNG’s earnings. NJNG monitors its actual gas costs in comparison to its BGSS rates to manage its cash flows associated with its allowed recovery of natural gas costs, which is facilitated through BPU-approved deferred accounting and the BGSS pricing mechanism. Accordingly, NJNG occasionally adjusts its periodic BGSS rates or can issue credits or refunds, as appropriate, for its residential and small commercial customers when the commodity cost varies from the existing BGSS rate. BGSS rates for its large commercial customers are adjusted monthly based on NYMEX prices.
In April 2019, the BPU approved NJNG’s annual petition to maintain its BGSS rate for residential and small commercial customers and increase its balancing charge rate, resulting in a $10.3 million increase to the annual revenues credited to BGSS, as well as changes to the CIP rate, which resulted in a $30.9 million annual recovery decrease, effective October 1, 2018. The balancing charge rate includes the cost of balancing natural gas deliveries with customer usage for sales and transportation customers and balancing charge revenues are credited to BGSS.
44
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
In September 2019, the BPU approved, on a provisional basis, a decrease to NJNG’s BGSS rate for residential and small commercial customers and an increase to its balancing charge rate, resulting in a $2 million decrease to the annual revenues credited to BGSS, as well as changes to the CIP rates, resulting in a $10.6 million annual recovery increase, effective October 1, 2019.
BGSS Incentive Programs
NJNG is eligible to receive financial incentives for reducing BGSS costs through a series of utility gross margin-sharing programs that include off-system sales, capacity release and storage incentive programs. These programs are designed to encourage better utilization and hedging of NJNG’s natural gas supply, transportation and storage assets. Depending on the program, NJNG shares 80 or 85 percent of utility gross margin generated by these programs with firm customers. Utility gross margin from incentive programs was $2.7 million and $2 million during the three months ended December 31, 2019 and 2018, respectively.
Hedging
In order to provide relative price stability to its natural gas supply portfolio, NJNG employs a hedging strategy with the goal of having at least 75 percent of the Company's projected winter periodic BGSS gas sales volumes hedged by each November 1 and at least 25 percent of the projected periodic BGSS gas sales hedged for the following April through March period. This is accomplished with the use of various financial instruments including futures, swaps and options used in conjunction with commodity and/or weather-related hedging activity.
Commodity prices
Our Natural Gas Distribution segment is affected by the price of natural gas, which can have a significant impact on our cash flows, short-term financing costs, the price of natural gas charged to our customers through the BGSS clause, our ability to collect accounts receivable, which impacts our bad debt expense, and our ability to maintain a competitive advantage over other energy sources.
Natural gas commodity prices are shown in the graph below, which illustrates the daily natural gas prices(1) in the Northeast market region, also known as TETCO M-3.
![chart-0ccdd1b577a1503ea1c.jpg](https://www.sec.gov/Archives/edgar/data/0000356309/000035630920000033/chart-0ccdd1b577a1503ea1c.jpg)
(1) Data source from Platts, a division of McGraw Hill Financial.
The maximum price per MMBtu was $5.59 and $5.67 and the minimum price was $0.68 and $1.25 for the three months ended December 31, 2019 and 2018, respectively. A more detailed discussion of the impacts of the price of natural gas on operating revenues, gas purchases and cash flows can be found in the Results of Operations and Cash Flow sections of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
45
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Societal Benefits Charge
USF
NJNG’s qualifying customers are eligible for the USF program, which is administered by the New Jersey Department of Community Affairs, to help make energy bills more affordable. In September 2018, the BPU approved NJNG’s annual USF compliance filing to increase the statewide USF rate, which will result in a $1 million annual increase, effective October 1, 2018. On June 24, 2019, NJNG filed its annual USF compliance filing proposing an increase to the statewide USF rate, which resulted in the annual recovery increasing by $1.2 million, effective October 1, 2019.
Environmental Remediation
NJNG is responsible for the environmental remediation of former MGP sites, which contain contaminated residues from former gas manufacturing operations that ceased operating at these sites by the mid-1950s and, in some cases, had been discontinued many years earlier. Actual MGP remediation costs may vary from management’s estimates due to the developing nature of remediation requirements, regulatory decisions by the NJDEP and related litigation. NJNG reviews these costs at the end of each fiscal year and adjusts its liability and corresponding regulatory asset as necessary to reflect its expected future remediation obligation. Accordingly, NJNG recognized a regulatory asset and an obligation of $129.2 million as of December 31, 2019, a decrease of $1.9 million, compared with September 30, 2019. On September 27, 2019, NJNG filed its annual SBC application requesting to recover remediation expenses, including an increase in the RAC, of approximately $1.4 million annually and an increase to the NJCEP factor, which will result in an annual increase of approximately $3.3 million, to be effective April 1, 2020.
In June 2019, NJNG initiated a preliminary assessment of a site in Aberdeen, New Jersey to determine prior ownership and if there were former MGP operations active at the location. The costs associated with preliminary assessment activities are considered immaterial and are included as a component of NJNG’s annual SBC application to recover remediation expenses. We will continue to gather information to further refine and enhance its estimate of potential costs for this site as it becomes available. See Note 13. Commitments and Contingent Liabilities for a more detailed description.
Other regulatory filings and a more detailed discussion of the filings in this section can be found in Note 4. Regulation in the accompanying Unaudited Condensed Consolidated Financial Statements.
Operating Results
NJNG's operating results are as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues | $ | 219,623 | $ | 199,965 | ||
Operating expenses | ||||||
Gas purchases (1) | 95,822 | 92,178 | ||||
Operation and maintenance (2) | 36,185 | 38,227 | ||||
Regulatory rider expense | 11,742 | 12,632 | ||||
Depreciation and amortization | 16,817 | 13,896 | ||||
Total operating expenses | 160,566 | 156,933 | ||||
Operating income | 59,057 | 43,032 | ||||
Other income, net | 1,266 | 614 | ||||
Interest expense, net of capitalized interest | 7,832 | 6,103 | ||||
Income tax provision | 8,635 | 5,830 | ||||
Net income | $ | 43,856 | $ | 31,713 |
(1) | Includes related party transactions of approximately $4 million and $4.5 million for the three months ended December 31, 2019 and 2018, respectively, the majority of which is eliminated in consolidation. |
(2) | Includes energy and other taxes due to change in presentation in the Unaudited Condensed Consolidated Statements of Operations. |
46
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating Revenues and Gas Purchases
During the three months ended December 31, 2019, compared with the three months ended December 31, 2018, operating revenues increased by 9.8 percent and gas purchases increased 4 percent.
The factors contributing to the increases in operating revenues and gas purchases are as follows:
Three Months Ended | ||||||
December 31, | ||||||
2019 v. 2018 | ||||||
(Thousands) | Operating revenues | Gas purchases | ||||
Base rate impact | $ | 13,345 | $ | — | ||
Average BGSS rates | 2,720 | 2,720 | ||||
SAFE II/NJ RISE | 2,305 | — | ||||
CIP adjustments | 2,232 | — | ||||
BGSS incentives | 1,311 | 537 | ||||
Firm sales | (1,578 | ) | 387 | |||
Other (1) | (677 | ) | — | |||
Total increase | $ | 19,658 | $ | 3,644 |
(1) | Other includes changes in rider rates, including those related to EE, NJCEP and other programs. |
Non-GAAP Financial Measures
Management uses utility gross margin, a non-GAAP financial measure, when evaluating the operating results of NJNG. NJNG's utility gross margin is defined as natural gas revenues less natural gas purchases, sales tax, and regulatory rider expenses, and may not be comparable to the definition of gross margin used by others in the natural gas distribution business and other industries. Management believes that utility gross margin provides a meaningful basis for evaluating utility operations since natural gas costs, sales tax and regulatory rider expenses are included in operating revenue and passed through to customers and, therefore, have no effect on utility gross margin. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure.
Utility Gross Margin
A reconciliation of operating revenues, the closest GAAP financial measure to NJNG's utility gross margin, is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues | $ | 219,623 | $ | 199,965 | ||
Less: | ||||||
Gas purchases | 95,822 | 92,178 | ||||
Regulatory rider expense | 11,742 | 12,632 | ||||
Utility gross margin | $ | 112,059 | $ | 95,155 |
Utility gross margin consists of three components:
• | utility firm gross margin generated from only the delivery component of either a sales tariff or a transportation tariff from residential and commercial customers who receive natural gas service from NJNG; |
• | BGSS incentive programs, where revenues generated or savings achieved from BPU-approved off-system sales, capacity release or storage incentive programs are shared between customers and NJNG; and |
• | utility gross margin generated from off-tariff customers, as well as interruptible customers. |
47
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following provides more information on the components of utility gross margin and associated throughput (Bcf) of natural gas delivered to customers:
Three Months Ended | |||||||||||
December 31, | |||||||||||
2019 | 2018 | ||||||||||
($ in thousands) | Margin | Bcf | Margin | Bcf | |||||||
Utility gross margin/throughput | |||||||||||
Residential | $ | 77,082 | 14.6 | $ | 64,139 | 14.5 | |||||
Commercial, industrial and other | 15,187 | 2.8 | 13,346 | 2.8 | |||||||
Firm transportation | 15,659 | 4.3 | 14,396 | 4.4 | |||||||
Total utility firm gross margin/throughput | 107,928 | 21.7 | 91,881 | 21.7 | |||||||
BGSS incentive programs | 2,729 | 27.9 | 1,955 | 27.4 | |||||||
Interruptible/off-tariff agreements | 1,402 | 9.0 | 1,319 | 5.0 | |||||||
Total utility gross margin/throughput | $ | 112,059 | 58.6 | $ | 95,155 | 54.1 |
Utility Firm Gross Margin
Utility firm gross margin increased $16 million during the three months ended December 31, 2019, respectively, compared with the three months ended December 31, 2018, due primarily to the increase in base rates, along with increased rates related to SAFE II and higher margins in BGSS incentive program, discussed below.
BGSS Incentive Programs
The factors contributing to the change in utility gross margin generated by BGSS incentive programs are as follows:
Three Months Ended | |||||
December 31, | |||||
(Thousands) | 2019 v. 2018 | ||||
Storage | $ | 747 | |||
Off-system sales | 236 | ||||
Capacity release | (209 | ) | |||
Total increase | $ | 774 |
The increase during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, was due primarily to an increase in the storage incentive program related to timing of storage injections and improved margins in off-system sales due primarily to increased volume, partially offset by a decrease in capacity release volume.
Operation and Maintenance Expense
O&M expense decreased $2 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to decreased compensation and benefit costs along with lower consulting expenses, partially offset by increased shared corporate costs.
Depreciation Expense
Depreciation expense increased $2.9 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, as a result of additional utility plant being placed into service, as well as an increase in the
overall depreciation rate from 2.4 percent to 2.78 percent resulting from the settlement of the base rate case.
48
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Interest Expense
Interest expense increased $1.7 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased outstanding long-term debt.
Income Tax Provision
Income tax provision increased $2.8 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased operating income.
Net Income
Net income increased $12.1 million during three months ended December 31, 2019, compared with the three months ended December 31, 2018 due primarily to the increase in operating revenue, partially offset by the increases in depreciation, income tax expense and interest expense, as previously discussed.
Clean Energy Ventures Segment
Overview
Our Clean Energy Ventures segment actively pursues opportunities in the renewable energy markets. Clean Energy Ventures enters into various agreements to install solar net-metered systems for residential and commercial customers, as well as large commercial grid-connected projects. In addition, Clean Energy Ventures enters into various long-term agreements, including PPAs, to supply energy from commercial solar projects.
The primary contributors toward the value of qualifying clean energy projects are tax incentives and SRECs. Changes in the federal statutes related to the ITC or in the marketplace and/or relevant state legislation and regulatory policies affecting the market for solar renewable energy credits, could significantly affect future results.
Solar
Solar projects placed in service and related expenditures are as follows:
Three Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
($ in Thousands) | 2019 | 2018 | ||||||||||||||
Placed in service | Projects | MW | Costs | Projects | MW | Costs | ||||||||||
Grid-connected | 1 | 2.9 | $ | 11,707 | 1 | 10.0 | $ | 19,640 | ||||||||
Net-metered: | ||||||||||||||||
Commercial | — | — | — | 1 | 9.2 | 27,557 | ||||||||||
Residential | 124 | 1.3 | 4,010 | 166 | 1.7 | 4,942 | ||||||||||
Total placed in service | 125 | 4.2 | $ | 15,717 | 168 | 20.9 | $ | 52,139 |
Since inception, Clean Energy Ventures has constructed a total of 295.6 MW of solar capacity and has an additional 45 MW under construction or planned for fiscal 2020. Projects that are placed in service through December 31, 2019, qualify for a 30-percent federal ITC. The credit will decline to 26 percent for property under construction during 2020, 22 percent for property under construction during 2021 and 10 percent for any property that is under construction before 2022. Projects placed in service after December 31, 2019, may also qualify for a 30 percent federal ITC if five percent or more of the total costs of a solar property are incurred before the end of the applicable year and there are continuous efforts to advance towards completion of the project, based on the IRS guidance around the ITC safe harbor determination. We have taken steps to preserve the current ITC rate for solar projects that are completed after the scheduled reduction in rates, in accordance with IRS guidance.
49
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Clean Energy Ventures may enter into transactions to sell certain of its commercial solar assets concurrent with agreements to lease the assets back over a period of six to 15 years. The Company will continue to operate the solar assets and are responsible for related expenses and entitled to retain the revenue generated from SRECs and energy sales. The ITCs and other tax benefits associated with these solar projects transfer to the buyer; however, the lease payments are structured so that Clean Energy Ventures is compensated for the transfer of the related tax incentives. Accordingly, for solar projects financed under sale leasebacks, Clean Energy Ventures recognizes the equivalent value of the ITC in other income on the Unaudited Condensed Consolidated Statements of Operations over the respective five-year ITC recapture periods, starting with the second year of the lease. Clean Energy Ventures did not enter into any sale-leaseback transactions for its commercial solar assets during the three months ended December 31, 2019 and 2018, and currently does not expect that it will enter into any such transactions through the end of the fiscal year.
As part of its solar investment portfolio, Clean Energy Ventures operates a residential solar program, The Sunlight Advantage®, that provides qualifying homeowners the opportunity to have a solar system installed at their home with no installation or maintenance expenses. Clean Energy Ventures owns, operates and maintains the system over the life of the contract in exchange for monthly payments.
Once a solar installation has received the proper certifications and commences operations, each MWh of electricity produced creates an SREC that represents the renewable energy attribute of the solar-electricity generated that can be sold to third parties, predominantly load-serving entities that are required to comply with the solar requirements under New Jersey's renewable portfolio standard.
SREC activity consisted of the following:
Three Months Ended | ||||
December 31, | ||||
2019 | 2018 | |||
Inventory balance as of October 1, | 53,395 | 105,192 | ||
SRECs generated | 81,489 | 53,899 | ||
SRECs delivered | (9,693 | ) | (37,820 | ) |
Inventory balance as of December 31, | 125,191 | 121,271 |
During the three months ended December 31, 2019, SRECs generated increased inventory by 51.2 percent, compared with the three months ended December 31, 2018, and the average SREC sales price was $226 and $169 during the three months ended December 31, 2019, and 2018, respectively.
Clean Energy Ventures hedges its expected SREC production through the use of forward sales contracts. The following table reflects the hedged percentage of our projected inventory related to its in-service commercial and residential assets:
Energy Year (1) | Percent of SRECs Hedged |
2020 | 96% |
2021 | 92% |
2022 | 59% |
2023 | 8% |
(1) | Energy years are compliance periods for New Jersey's renewable portfolio standard that run from June 1 to May 31. |
There are no direct costs associated with the production of SRECs by our solar assets. All related costs are included as a component of O&M expenses on the Unaudited Condensed Consolidated Statements of Operations, including such expenses as facility maintenance and various fees.
Onshore Wind
Clean Energy Ventures invested in small to mid-size onshore wind projects that fit its investment profile. In February 2019, Clean Energy Ventures finalized the sale of its remaining wind assets to a subsidiary of Skyline Renewables LLC for total proceeds of $208.6 million. The transaction generated a pre-tax gain of $645,000, which was recognized as a component of O&M expense on the Unaudited Condensed Consolidated Statements of Operations.
50
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating Results
Clean Energy Ventures’ financial results are summarized as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues | $ | 6,212 | $ | 14,897 | ||
Operating expenses | ||||||
Operation and maintenance (1) | 7,334 | 7,148 | ||||
Depreciation and amortization | 9,437 | 7,923 | ||||
Total operating expenses | 16,771 | 15,071 | ||||
Operating loss | (10,559 | ) | (174 | ) | ||
Other expense, net | (83 | ) | (66 | ) | ||
Interest expense, net | 4,492 | 5,428 | ||||
Income tax benefit | (20,564 | ) | (23,204 | ) | ||
Net income | $ | 5,430 | $ | 17,536 |
(1) | Includes energy and other taxes due to change in presentation in the Unaudited Condensed Consolidated Statements of Operations. |
Operating Revenues
Operating revenues decreased $8.7 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to the timing of SREC sales and decreased electricity sales as a result of the sale of the remaining wind assets in February 2019.
Operation and Maintenance Expense
O&M expense increased $186,000 during the three months ended December 31, 2019, compared with the three months ended December 31, 2018 due primarily to increased compensation costs, partially offset by lower maintenance expenses related to the sale of the remaining wind assets.
Depreciation Expense
Depreciation expense increased $1.5 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased solar capital additions placed in service.
Income Tax (Benefit)
Income tax benefit decreased $2.6 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to a decrease in estimated ITCs recognized, partially offset by an increase in operating loss.
Net Income
Net income decreased $12.1 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to the decreased operating revenue, as previously discussed.
51
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Non-GAAP Financial Measures
Management of the Company uses NFE, a non-GAAP financial measure, when evaluating the operating results of Clean Energy Ventures. GAAP requires us, during the interim periods, to estimate our annual effective tax rate and use this rate to calculate the year-to-date tax provision. We also determine an annual estimated effective tax rate for NFE purposes and calculate a quarterly tax adjustment based on the differences between our forecasted net income and our forecasted NFE for the fiscal year. This adjustment is applied to Clean Energy Ventures, as such adjustment is primarily related to tax credits generated by Clean Energy Ventures. No adjustment is needed during the fourth quarter, since the actual effective tax rate is calculated at year end. Accordingly, for NFE purposes, the annual estimated effective tax rate is (3) percent for fiscal 2020 and (13) percent for fiscal 2019.
Since the annual estimated effective tax rate is based on certain forecasted assumptions, including estimates surrounding completion of projects, the rate and resulting NFE are subject to change. The details of such tax adjustments can be found in the table below. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP, and should be considered in addition to, and not as a substitute for the comparable GAAP measure. A reconciliation of Clean Energy Ventures' net income, the most directly comparable GAAP financial measure to NFE is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Net income | $ | 5,430 | $ | 17,536 | ||
Add: | ||||||
Net income to NFE tax adjustment | (10,346 | ) | (7,331 | ) | ||
Net financial (loss) earnings | $ | (4,916 | ) | $ | 10,205 |
Energy Services Segment
Overview
Energy Services markets and sells natural gas to wholesale customers and manages natural gas storage and transportation assets throughout major market areas across North America. Energy Services maintains a strategic portfolio of natural gas storage and transportation contracts that it utilizes in conjunction with its market expertise to provide service and value to its customers. Availability of these storage and transportation contracts allows Energy Services to generate market opportunities by capturing price differentials over specific time horizons and between geographic market locations.
Energy Services also provides management of storage and transportation assets for natural gas producers and regulated utilities. These management transactions typically involve the release of producer/utility owned storage and/or transportation capacity in combination with either an obligation to purchase and/or deliver physical natural gas. In addition to the contractual purchase and/or sale of physical natural gas, Energy Services generates or pays fee-based margin in exchange for its active management and may provide the producer and/or utility with additional margin based on actual results.
In conjunction with the active management of these contracts, Energy Services generates financial margin by identifying market opportunities and simultaneously entering into natural gas purchase/sale, storage or transportation contracts and financial derivative contracts. In cases where storage is utilized to fulfill these contracts, these forecast sales and/or purchases are economically hedged through the use of financial derivative contracts. The financial derivative contracts consist primarily of exchange-traded futures, options and swap contracts, and are frequently used to lock in anticipated transactional cash flows and to help manage volatility in natural gas market prices. Generally, when its storage and transportation contracts are exposed to periods of increased market volatility, Energy Services is able to implement strategies that allow them to capture margin by improving the respective time or geographic spreads on a forward basis.
Energy Services accounts for its physical commodity contracts and its financial derivative instruments at fair value on the Unaudited Condensed Consolidated Balance Sheets. Changes in the fair value of physical commodity contracts and financial derivative instruments are included in earnings as a component of operating revenue or gas purchases on the Unaudited Condensed Consolidated Statements of Operations. Volatility in reported net income at Energy Services can occur over periods of time due to changes in the fair value of derivatives, as well as timing differences related to certain transactions. Unrealized gains and losses can fluctuate as a result of changes in the price of natural gas, SRECs and foreign currency from the original transaction price. Volatility in earnings can also occur as a result of timing differences between the settlement of financial derivatives and the sale of the underlying physical commodity. For example, when a financial instrument settles and the physical natural gas is injected
52
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
into inventory, the realized gains and losses associated with the financial instrument are recognized in earnings. However, the gains and losses associated with the physical natural gas are not recognized in earnings until the natural gas inventory is withdrawn from storage and sold, at which time Energy Services realizes the entire margin on the transaction.
Operating Results
Energy Services’ financial results are summarized as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues (1) | $ | 370,415 | $ | 587,267 | ||
Operating expenses | ||||||
Gas purchases (including demand charges (2)(3)) | 317,724 | 536,508 | ||||
Operation and maintenance (4) | 4,738 | 5,846 | ||||
Depreciation and amortization | 29 | 27 | ||||
Total operating expenses | 322,491 | 542,381 | ||||
Operating income | 47,924 | 44,886 | ||||
Other income, net | 79 | 19 | ||||
Interest expense, net | 1,226 | 1,887 | ||||
Income tax provision | 10,752 | 9,644 | ||||
Net income | $ | 36,025 | $ | 33,374 |
(1) | Includes related party transactions of approximately $2.1 million and $2.3 million for the three months ended December 31, 2019 and 2018, respectively, which are eliminated in consolidation. |
(2) | Costs associated with pipeline and storage capacity that are expensed over the term of the related contracts, which generally varies from less than one year to ten years. |
(3) | Includes related party transactions of approximately $46,000 and $1.1 million for the three months ended December 31, 2019 and 2018, respectively, a portion of which is eliminated in consolidation. |
(4) | Includes energy and other taxes due to change in presentation in the Unaudited Condensed Consolidated Statements of Operations. |
Energy Services' portfolio of financial derivative instruments are composed of:
Three Months Ended | ||||
December 31, | ||||
(in Bcf) | 2019 | 2018 | ||
Net short futures contracts | 38.4 | 5.9 |
Operating Revenues and Gas Purchases
Operating revenues decreased $216.9 million and gas purchases decreased $218.8 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, respectively, due primarily to narrower pricing spreads resulting in fewer market opportunities and lower volumes, partially offset by unrealized gains as a result of timing differences in the settlement of certain economic hedges.
Future results at Energy Services are contingent upon natural gas market price volatility driven by variations in both the supply and demand balances caused by weather and other factors. As a result, variations in weather patterns in the key market areas served may affect earnings during the fiscal year. Changes in market fundamentals such as an increase in supply and decrease in demand due to milder temperatures, and reduced volatility can negatively impact Energy Services' earnings. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Natural Gas Distribution Segment for TETCO M-3 Daily Prices, which illustrates the daily natural gas prices in the Northeast market region.
53
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operation and Maintenance Expense
O&M expense decreased $1.1 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to decreased compensation costs.
Income Tax Provision
Income tax provision increased $1.1 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased operating income.
Net Income
Net income increased $2.7 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to higher operating income related to the increase in unrealized gains and decreased O&M, partially offset by the related increase in income tax provision, as previously discussed.
Non-GAAP Financial Measures
Management uses financial margin and NFE, non-GAAP financial measures, when evaluating the operating results of Energy Services. Financial margin and NFE are based on removing timing differences associated with certain derivative instruments, as discussed above. There is a related tax effect on current and deferred income tax expense corresponding with NFE.
Management views these measures as representative of the overall expected economic result and uses these measures to compare Energy Services' results against established benchmarks and earnings targets as these measures eliminate the impact of volatility on GAAP earnings as a result of timing differences associated with the settlement of derivative instruments. To the extent that there are unanticipated impacts from changes in the market value related to the effectiveness of economic hedges, Energy Services' actual non-GAAP results can differ from the results anticipated at the outset of the transaction. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measure.
When Energy Services reconciles the most directly comparable GAAP measure to both financial margin and NFE, the current period unrealized gains and losses on derivatives are excluded as a reconciling item. Financial margin and NFE also exclude the effects of economic hedging of the value of our natural gas in storage and, therefore, only include realized gains and losses related to natural gas withdrawn from storage, effectively matching the full earnings effects of the derivatives with realized margins on the related physical gas flows.
Financial Margin
The following table is a computation of Energy Services' financial margin:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues (1) | $ | 370,415 | $ | 587,267 | ||
Less: Gas purchases | 317,724 | 536,508 | ||||
Add: | ||||||
Unrealized gain on derivative instruments and related transactions | (42,194 | ) | (11,177 | ) | ||
Effects of economic hedging related to natural gas inventory (2) | (8,887 | ) | (21,611 | ) | ||
Financial margin | $ | 1,610 | $ | 17,971 |
(1) | Includes unrealized losses related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $428,000 and $104,000 for the three months ended December 31, 2019 and 2018, respectively. |
(2) | Effects of hedging natural gas inventory transactions where the economic impact is realized in a future period. |
54
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
A reconciliation of operating income, the closest GAAP financial measure, to Energy Services' financial margin is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating income | $ | 47,924 | $ | 44,886 | ||
Add: | ||||||
Operation and maintenance | 4,738 | 5,846 | ||||
Depreciation and amortization | 29 | 27 | ||||
Subtotal | 52,691 | 50,759 | ||||
Add: | ||||||
Unrealized gain on derivative instruments and related transactions | (42,194 | ) | (11,177 | ) | ||
Effects of economic hedging related to natural gas inventory | (8,887 | ) | (21,611 | ) | ||
Financial margin | $ | 1,610 | $ | 17,971 |
Financial margin decreased $16.4 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to narrower pricing spreads and decreased volumes resulting in fewer market opportunities as compared to the prior period.
Net Financial Earnings
A reconciliation of Energy Services' net income, the most directly comparable GAAP financial measure, to NFE is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Net income | $ | 36,025 | $ | 33,374 | ||
Add: | ||||||
Unrealized gain on derivative instruments and related transactions | (42,194 | ) | (11,177 | ) | ||
Tax effect (1) | 10,033 | 2,648 | ||||
Effects of economic hedging related to natural gas inventory | (8,887 | ) | (21,611 | ) | ||
Tax effect | 2,112 | 5,136 | ||||
Net financial (loss) earnings | $ | (2,911 | ) | $ | 8,370 |
(1) | Includes taxes related to an intercompany transaction between NJNG and Energy Services that have been eliminated in consolidation of approximately $(102,000) and $(25,000) for the three months ended December 31, 2019 and 2018, respectively. |
NFE decreased $11.3 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to lower financial margin, as previously discussed.
Future results are subject to Energy Services' ability to expand its wholesale sales and service activities and are contingent upon many other factors, including an adequate number of appropriate and credit qualified counterparties in an active and liquid natural marketplace, volatility in the natural gas market due to weather or other fundamental market factors impacting supply and/or demand, transportation, storage and/or other market arbitrage opportunities, sufficient liquidity in the overall energy trading market, and continued access to liquidity in the capital markets.
Midstream Segment
Overview
Our Midstream segment invests in natural gas assets, such as natural gas transportation and storage facilities. We believe that acquiring, owning and developing these midstream assets, which operate under a tariff structure that has either regulated or market-based rates, can provide us a growth opportunity. To that end, we have a 50 percent ownership interest in Steckman Ridge, a storage facility that operates under market-based rates and a 20 percent ownership interest in PennEast, a natural gas pipeline. In addition, NJR Pipeline Company acquired 100 percent of Leaf River for $367.5 million, on October 11, 2019. Leaf River owns and operates a 32.2 million Dth salt dome natural gas storage facility.
55
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Through our subsidiary NJR Pipeline Company, we are a 20 percent investor in PennEast, a partnership whose purpose is to construct and operate a 120-mile natural gas pipeline that will extend from northeast Pennsylvania to western New Jersey. PennEast received a Certificate of Public Convenience and Necessity for the project from FERC on January 19, 2018.
On September 10, 2019, the United States Court of Appeals for the Third Circuit issued an order overturning the United States District Court for the District of New Jersey’s order granting PennEast condemnation and immediate access in accordance with the Natural Gas Act to certain properties in which the State of New Jersey holds an interest. A Petition for Rehearing was denied by the Third Circuit on November 5, 2019.
On October 8, 2019, the NJDEP issued a letter indicating that it deemed PennEast’s freshwater wetlands permit application to be administratively incomplete and closed the matter without prejudice. On October 11, 2019, PennEast submitted a letter to the NJDEP objecting to its position that the application is administratively incomplete. PennEast's objections were rejected by the NJDEP on November 18, 2019.
On October 4, 2019, PennEast filed a petition for Declaratory Order with FERC requesting an interpretation of the eminent domain authority of a FERC certificate holder under the Natural Gas Act. The Declaratory Order was granted on January 30, 2020.
On January 30, 2020, PennEast filed an amendment with FERC to construct the PennEast pipeline in two phases. Phase one consists of construction of a 68-mile pipeline in Pennsylvania from the eastern Marcellus Shale region in Luzerne County that would terminate in Northampton County. Phase two includes construction of the remaining original certificated route in Pennsylvania and New Jersey. Construction is expected to begin following approval by FERC of the phased approach and receipt of any remaining governmental and regulatory permits.
PennEast was granted a 30-day extension to file a Petition for a Writ of Certiorari with the Supreme Court of the United States to review the September 10, 2019 Third Circuit decision and now expects to file a Petition of Certiorari before the March 4, 2020 deadline.
We evaluated our investment in PennEast for impairment and determined an impairment charge was not necessary. It is reasonably possible that future unfavorable developments, such as a reduced likelihood of success from development options and legal outcomes, estimated increases in construction costs, increases in the discount rate, or further significant delays, could result in an impairment of our equity method investment. Also, the use of alternate judgments and assumptions could result in a different calculation of fair value, which could ultimately result in the recognition of an impairment charge in the Unaudited Condensed Consolidated Financial Statements.
As of December 31, 2019, our net investments in Steckman Ridge and PennEast were $113.8 million and $88.5 million, respectively.
Operating Results
The financial results of our Midstream segment are summarized as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues (1) | $ | 9,072 | $ | — | ||
Operating expenses | ||||||
Gas purchases | 346 | — | ||||
Operation and maintenance | 4,878 | 636 | ||||
Depreciation and amortization | 1,681 | 1 | ||||
Total operating expenses | 6,905 | 637 | ||||
Operating income | 2,167 | (637 | ) | |||
Other income, net | 697 | 1,992 | ||||
Interest expense, net | 2,822 | 543 | ||||
Income tax provision | 702 | 962 | ||||
Equity in earnings of affiliates | 3,664 | 3,801 | ||||
Net income | $ | 3,004 | $ | 3,651 |
(1) | Includes related party transactions of approximately $667,000 for the three months ended December 31, 2019, which are eliminated in consolidation. |
56
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating revenue increased $9.1 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to the acquisition of Leaf River and the revenues generated from October 11, 2019 through December 31, 2019.
Equity in earnings of affiliates remained consistent during the three months ended December 31, 2019, as compared with the three months ended December 31, 2018. The changes include decreases in storage revenue at Steckman Ridge, partially offset by an increase in AFUDC earned at PennEast.
O&M expense increased $4.2 million during the three months ended December 31, 2019, compared with the three months ended months ended December 31, 2018, due primarily to O&M expense at Leaf River during the three months ended December 31, 2019.
Other income decreased $1.3 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to a decrease in dividend income and unrealized gains related to equity method investments which were sold in March 2019.
Interest expense increased $2.3 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased debt related to the acquisition of Leaf River.
Net income decreased $647,000 during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased interest expense and decreased other income, as previously discussed, partially offset by an increase in operating income related to Leaf River.
Home Services and Other Operations
Overview
The financial results of Home Services and Other consist primarily of the operating results of NJRHS. NJRHS provides service, sales and installation of appliances to approximately 108,000 service contract customers and has been focused on growing its installation business and expanding its service contract customer base. Home Services and Other also includes organizational expenses incurred at NJR and rental income at CR&R.
Operating Results
The consolidated financial results of Home Services and Other are summarized as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Operating revenues | $ | 12,907 | $ | 12,490 | ||
Operation and maintenance (1) | $ | 10,533 | $ | 11,896 | ||
Income tax provision (benefit) | $ | 219 | $ | (192 | ) | |
Net income (loss) | $ | 1,109 | $ | (25 | ) |
(1) | Includes energy and other taxes due to change in presentation in the Unaudited Condensed Consolidated Statements of Operations. |
Operating revenue increased $417,000 during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to increased installation and contract revenue at NJRHS.
O&M decreased $1.4 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to decreased compensation costs.
Net income increased $1.1 million during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, due primarily to the increase in operating revenue and decreased O&M, as previously discussed.
57
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Non-GAAP Financial Measures
NFE is based on removing timing differences associated with NJR's variable-for-fixed interest rate swap. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP, and should be considered in addition to, and not as a substitute for the comparable GAAP measure. A reconciliation of Home Services and Other's net income, the most directly comparable GAAP financial measure, to NFE is as follows:
Three Months Ended | ||||||
December 31, | ||||||
(Thousands) | 2019 | 2018 | ||||
Net income (loss) | $ | 1,109 | $ | (25 | ) | |
Add: | ||||||
Unrealized loss on derivative instruments and related transactions | — | 141 | ||||
Tax effect | — | (40 | ) | |||
Net financial earnings | $ | 1,109 | $ | 76 |
Liquidity and Capital Resources
Our objective is to maintain an efficient consolidated capital structure that reflects the different characteristics of each business segment and business operations and provides adequate financial flexibility for accessing capital markets as required.
Our consolidated capital structure was as follows:
December 31, 2019 | September 30, 2019 | |||
Common stock equity | 48 | % | 50 | % |
Long-term debt | 41 | 49 | ||
Short-term debt | 11 | 1 | ||
Total | 100 | % | 100 | % |
Common Stock Equity
We satisfy our external common equity requirements, if any, through issuances of our common stock, including the proceeds from stock issuances under our DRP. The DRP allows us, at our option, to use treasury shares or newly issued shares to raise capital. On December 4, 2019, the Company completed an equity offering which satisfied our current equity needs for fiscal 2020 and 2021. NJR raised approximately $212.9 million of equity, net of issuance costs, by issuing 5,333,334 shares of common stock related to the equity offering. NJR also raised approximately $3.6 million and $3.7 million of equity through the DRP by issuing approximately 80,000 and 82,000 shares of treasury stock, during the three months ended December 31, 2019 and 2018, respectively. NJR raised approximately $8 million of equity by issuing approximately 168,000 shares of common stock through the waiver discount feature of the DRP during the three months ended December 31, 2018. There were no shares of common stock issued through the waiver discount feature of the DRP during the three months ended December 31, 2019.
In 1996, the Board of Directors authorized us to implement a share repurchase program, which was expanded seven times since the inception of the program, authorizing a total of 19.5 million shares of common stock for repurchase. As of December 31, 2019, we repurchased a total of approximately 17.1 million of those shares and may repurchase an additional 2.4 million shares under the approved program. There were no shares repurchased during the three months ended December 31, 2019 and 2018.
58
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Common Stock Issuance and Forward Sale Agreement
On December 4, 2019, we completed an equity offering of 6,545,454 common shares, consisting of 5,333,334 common shares issued directly by the Company and 1,212,120 common shares issuable pursuant to forward sales agreements with investment banks. The issuance of 5,333,334 resulted in proceeds of approximately $212.9 million, net of issuance costs, and was reflected in shareholders' equity and as a financing activity on the statement of cash flows.
Under the forward sale agreements, a total of 1,212,120 common shares were borrowed from third parties and sold to the underwriters. Each forward sale agreement allows us, at our election and prior to September 30, 2020, to physically settle the forward sale agreements by issuing common shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement, which was initially $40.0125 per share, or, alternatively, to settle the forward sale agreements in whole or in part through the delivery or receipt of shares or cash. The forward sale price is subject to adjustment daily based on a floating interest rate factor and will decrease in respect of certain fixed amounts specified in the agreements, such as dividends.
Our current intent is to physically settle the forward sale agreements by issuing common shares. As of December 31, 2019, if we had elected to net settle the forward sale agreements, we would have been required to pay $5 million under a cash settlement or would have been required to deliver 112,805 common shares under a net share settlement.
Debt
NJR and its unregulated subsidiaries generally rely on cash flows generated from operating activities and the utilization of committed credit facilities to provide liquidity to meet working capital and short-term debt financing requirements. NJNG also relies on the issuance of commercial paper for short-term funding. NJR and NJNG periodically access the capital markets to fund long-life assets through the issuance of long-term debt securities.
We believe that our existing borrowing availability, equity proceeds and cash flow from operations will be sufficient to satisfy our and our subsidiaries' working capital, capital expenditures and dividend requirements for the next 12 months. NJR, NJNG, Clean Energy Ventures, Midstream and Energy Services currently anticipate that each of their financing requirements for the next 12 months will be met primarily through the issuance of short and long-term debt, meter and solar sale-leasebacks and proceeds from the issuance of equity.
We believe that as of December 31, 2019, NJR and NJNG were, and currently are, in compliance with all existing debt covenants, both financial and non-financial.
Short-Term Debt
We use our short-term borrowings primarily to finance Energy Services' short-term liquidity needs, Midstream investments and PennEast contributions, share repurchases and, on an initial basis, Clean Energy Ventures' investments. Energy Services' use of high volume storage facilities and anticipated pipeline park-and-loan arrangements, combined with related economic hedging activities in the volatile wholesale natural gas market, create significant short-term cash requirements.
As of December 31, 2019, NJR had revolving credit facilities totaling $575 million, with $365.5 million available under the facilities.
NJNG satisfies its debt needs by issuing short-term and long-term debt based on its financial profile. The seasonal nature of NJNG's operations creates large short-term cash requirements, primarily to finance natural gas purchases and customer accounts receivable. NJNG obtains working capital for these requirements, and for the temporary financing of construction and MGP remediation expenditures and energy tax payments, based on its financial profile, through the issuance of commercial paper supported by the NJNG Credit Facility or through short-term bank loans under the NJNG Credit Facility.
NJNG’s commercial paper is sold through several commercial banks under an issuing and paying agency agreement and is supported by the $250 million NJNG Credit Facility. As of December 31, 2019, the unused amount available under the NJNG Credit Facility, including amounts allocated to the backstop under the commercial paper program and the issuance of letters of credit, was $199.7 million.
59
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Short-term borrowings were as follows:
Three Months Ended | ||||
(Thousands) | December 31, 2019 | |||
NJR | ||||
Notes Payable to banks: | ||||
Balance at end of period | $ | 341,900 | ||
Weighted average interest rate at end of period | 2.62 | % | ||
Average balance for the period | $ | 407,175 | ||
Weighted average interest rate for average balance | 2.71 | % | ||
Month end maximum for the period | $ | 550,150 | ||
NJNG | ||||
Commercial Paper and Notes Payable to banks: | ||||
Balance at end of period | $ | 49,600 | ||
Weighted average interest rate at end of period | 1.83 | % | ||
Average balance for the period | $ | 43,707 | ||
Weighted average interest rate for average balance | 1.94 | % | ||
Month end maximum for the period | $ | 62,300 |
Due to the seasonal nature of natural gas prices and demand, and because inventory levels are built up during its natural gas injection season (April through October), NJR and NJNG's short-term borrowings tend to peak in the November through January time frame.
NJR
Based on its average borrowings during the three months ended December 31, 2019, NJR's average interest rate was 2.71 percent, resulting in interest expense of approximately $2.8 million, respectively.
As of December 31, 2019, NJR had two letters of credit outstanding totaling $4.8 million, which reduced the amount available under the NJR Credit Facility by the same amount. NJR does not anticipate that these letters of credit will be drawn upon by the counterparties.
On October 9, 2019, NJR entered into a $350 million Bridge Facility, which was used primarily to finance the Leaf River acquisition. The Bridge Facility accrues interest at the LIBOR rate for a 1-month interest period plus 0.875 percent during the first 180 days, and 1.075 percent after 180 days, which is dependent on the credit rating of NJNG from Fitch and Moody’s. The occurrence of an event of default under the Bridge Facility could result in all loans and other obligations of NJR becoming immediately due and payable and the Bridge Facility being terminated. Loans under the Bridge Facility are required to be prepaid to the extent of new cash proceeds received upon the issuance of equity of NJR, the incurrence of indebtedness by NJR or its subsidiaries, the disposition of assets by NJR or its subsidiaries or upon other specified events, in each case subject to certain exceptions set forth in the Bridge Facility. As of December 31, 2019, there were $137.1 million in borrowings remaining against the facility. The net proceeds from the December 2019 equity issuance were used to pay down the Bridge Facility.
On December 13, 2019, NJR entered into a four-month, $150 million revolving line of credit facility, which expires on April 13, 2020. The revolving line of credit facility may be prepaid at any time without premium or penalty other than normal break funding costs, proceeds will be used for working capital or other general business purposes of NJR. As of December 31, 2019, there were $85 million in borrowings against the facility.
Neither NJNG nor its assets are obligated or pledged to support the NJR Credit Facility.
NJNG
As noted above, based on its average borrowings during the three months ended December 31, 2019, NJNG's average interest rate was 1.94 percent, resulting in interest expense of approximately $211,000.
As of December 31, 2019, NJNG had two letters of credit outstanding for $731,000, which reduced the amount available under NJNG's committed credit facility by the same amount. NJNG does not anticipate that these letters of credit will be drawn upon by the counterparties.
60
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Short-Term Debt Covenants
Borrowings under the NJR Credit Facility and the NJNG Credit Facility are conditioned upon compliance with a maximum leverage ratio (consolidated total indebtedness to consolidated total capitalization as defined in the applicable agreements), of not more than .65 to 1.00 at any time. These revolving credit facilities contain customary representations and warranties for transactions of this type. They also contain customary events of default and certain covenants that will limit NJR's or NJNG's ability, beyond agreed upon thresholds, to, among other things:
•incur additional debt;
•incur liens and encumbrances;
•make dispositions of assets;
•enter into transactions with affiliates; and
•merge, consolidate, transfer, sell or lease all or substantially all of the borrower's or guarantors' assets.
These covenants are subject to a number of exceptions and qualifications set forth in the applicable agreements.
Default Provisions
The agreements governing our long-term and short-term debt obligations include provisions that, if not complied with, could require early payment or similar actions. Default events include, but are not limited to, the following:
•defaults for non-payment;
•defaults for breach of representations and warranties;
•defaults for insolvency;
•defaults for non-performance of covenants;
•cross-defaults to other debt obligations of the borrower; and
•guarantor defaults.
The occurrence of an event of default under these agreements could result in all loans and other obligations of the borrower becoming immediately due and payable and the termination of the credit facilities or term loan.
Long-Term Debt
NJR
As of December 31, 2019, NJR had the following outstanding:
•$50 million of 3.25 percent senior notes due September 17, 2022;
•$50 million of 3.20 percent senior notes due August 18, 2023;
•$100 million of 3.48 percent senior notes due November 7, 2024;
•$100 million of 3.54 percent senior notes due August 18, 2026;
•$100 million of 3.96 percent senior notes due June 8, 2028; and
•$150 million of 3.29 percent senior notes due July 17, 2029.
Neither NJNG nor its assets are obligated or pledged to support NJR's long-term debt.
61
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
NJNG
As of December 31, 2019, NJNG's long-term debt consisted of $892.8 million in fixed-rate debt issuances secured by the Mortgage Indenture, with maturities ranging from 2024 to 2059, and $25.8 million in capital leases with various maturities ranging from 2021 to 2026.
NJR is not obligated directly or contingently with respect to the NJNG notes or the FMBs.
Long-Term Debt Covenants and Default Provisions
The NJR and NJNG long-term debt instruments contain customary representations and warranties for transactions of their type. They also contain customary events of default and certain covenants that will limit NJR or NJNG's ability beyond agreed upon thresholds to, among other things:
•incur additional debt (including a covenant that limits the amount of consolidated total debt of the borrower at the end of a fiscal quarter to 65 percent of the consolidated total capitalization of the borrower, as those terms are defined in the applicable agreements, and a covenant limiting priority debt to 20 percent of the borrower's consolidated total capitalization, as those terms are defined in the applicable agreements);
•incur liens and encumbrances;
•make loans and investments;
•make dispositions of assets;
•make dividends or restricted payments;
•enter into transactions with affiliates; and
•merge, consolidate, transfer, sell or lease substantially all of the borrower's assets.
The aforementioned covenants are subject to a number of exceptions and qualifications set forth in the applicable note purchase agreements.
In addition, the FMBs issued by NJNG under the Mortgage Indenture are subject to certain default provisions. Events of Default, as defined in the Mortgage Indenture, consist mainly of:
•failure for 30 days to pay interest when due;
•failure to pay principal or premium when due and payable;
•failure to make sinking fund payments when due;
•failure to comply with any other covenants of the Mortgage Indenture after 30 days' written notice from the Trustee;
•failure to pay or provide for judgments in excess of $30 million in aggregate amount within 60 days of the entry thereof; or
•certain events that are or could be the basis of a bankruptcy, reorganization, insolvency or receivership proceeding.
Upon the occurrence and continuance of such an Event of Default, the Mortgage Indenture, subject to any provisions of law applicable thereto, provides that the Trustee may take possession and conduct the business of NJNG, may sell the trust estate, or proceed to foreclose the lien pursuant to the Mortgage Indenture. The interest rate on defaulted principal and interest, to the extent permitted by law, on the FMBs issued under the Mortgage Indenture is the rate stated in the applicable supplement or, if no such rate is stated, six percent per annum.
Sale-Leaseback
NJNG
NJNG received $4 million and $9.9 million in December 2019 and 2018, respectively, in connection with the sale-leaseback of its natural gas meters. NJNG exercised early purchase options with respect to certain outstanding meter leases by making final
62
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
principal payments of $1.2 million and $1.1 million during the three months ended December 31, 2019 and 2018, respecitively. NJNG continues to evaluate this sale-leaseback program based on current market conditions. As noted, natural gas meters are accepted as property under the Mortgage Indenture.
Clean Energy Ventures
Clean Energy Ventures has entered into transactions to sell certain of its commercial solar assets concurrent with agreements to lease the assets back over six to 15-year terms. These sale-leasebacks are financing obligations secured by the solar assets, related future cash flows from SREC and energy sales and a continuing guaranty by NJR. ITCs and other tax benefits associated with these solar projects were transferred to the buyer. Clean Energy Ventures will continue to operate the solar projects and retain ownership of SRECs generated, and has the option to renew the lease or repurchase the assets at the end of the lease term per the terms of the arrangement. Clean Energy Ventures did not enter into sale-leasebacks transactions during the three months ended December 31, 2019 and 2018.
Contractual Obligations
NJNG's total capital expenditures are projected to be $425 million and $305 million, in fiscal 2020 and 2021, respectively. Total capital expenditures spent or accrued during the three months ended December 31, 2019, were $76.7 million. NJNG expects to fund its obligations with a combination of cash flow from operations, cash on hand, issuance of commercial paper, available capacity under its revolving credit facility and the issuance of long-term debt. As of December 31, 2019, NJNG's future MGP expenditures are estimated to be $129.2 million. For a more detailed description of MGP expenditures see Note 13. Commitments and Contingent Liabilities in the accompanying Unaudited Condensed Consolidated Financial Statements.
Estimated capital expenditures are reviewed on a regular basis and may vary based on the ongoing effects of regulatory constraints, environmental regulations, unforeseen events, and the ability to access capital.
Clean Energy Ventures' expenditures include clean energy projects that support our goal to promote renewable energy. Accordingly, Clean Energy Ventures enters into agreements to install solar equipment involving both residential and commercial projects. During the three months ended December 31, 2019, total capital expenditures spent or accrued related to the purchase and installation of solar equipment were $32.3 million. We estimate solar-related capital expenditures for projects during fiscal 2020 to be between $140 million and $150 million.
Capital expenditures related to clean energy projects are subject to change due to a variety of factors that may affect our ability to commence operations at these projects on a timely basis or at all, including logistics associated with the start-up of residential and commercial solar projects, such as timing of construction schedules, the permitting and regulatory process, any delays related to electric grid interconnection, economic trends, unforeseen events and the ability to access capital or allocation of capital to other investments or business opportunities.
During the three months ended December 31, 2019, capital expenditures related to our Midstream investment in the Adelphia project were $2.6 million. We estimate capital expenditures related to our Midstream investment in the Adelphia project to be between $225 million and $250 million in fiscal 2020, which includes the remaining purchase price of $156 million that was paid upon the close of the acquisition of the related assets in January 2020. We estimate capital expenditures related to our Midstream investment in the PennEast project to be between $7 million and $8 million in fiscal 2020.
Energy Services does not currently anticipate any significant capital expenditures in fiscal 2020 and 2021.
More detailed information regarding contractual obligations is contained in Liquidity and Capital Resources - Contractual Obligations section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2019.
Off-Balance-Sheet Arrangements
Our off-balance-sheet arrangements consist of guarantees covering approximately $343.6 million of natural gas purchases, SREC sales and demand fee commitments and outstanding letters of credit totaling $5.5 million.
63
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Cash Flows
Operating Activities
Cash flows used in operating activities during the three months ended December 31, 2019, totaled $43.1 million compared with $104.8 million during the three months ended December 31, 2018. Operating cash flows are primarily affected by variations in working capital, which can be impacted by several factors, including:
•seasonality of our business;
•fluctuations in wholesale natural gas prices and other energy prices, including changes in derivative asset and liability values;
•timing of storage injections and withdrawals;
•the deferral and recovery of gas costs;
•changes in contractual assets utilized to optimize margins related to natural gas transactions;
•broker margin requirements;
•impact of unusual weather patterns on our wholesale business;
•timing of the collections of receivables and payments of current liabilities;
•volumes of natural gas purchased and sold; and
•timing of SREC deliveries.
The decrease of $61.7 million in cash flows used in operating activities during the three months ended December 31, 2019, compared with the three months ended December 31, 2018, was due primarily to lower financial margin at Energy Services and lower broker margin requirements along with decreased payables.
Investing Activities
Cash flows used in investing activities totaled $494.2 million during the three months ended December 31, 2019, compared with $93.7 million during the three months ended December 31, 2018. The increase of $400.5 million was due primarily to the acquisition of Leaf River, see Note 17. Acquisitions and Dispositions, for more detail, as well as, an increase in capital expenditures of $18 million for utility plant and $13.6 million in solar capital expenditures.
Financing Activities
Financing cash flows generally are seasonal in nature and are impacted by the volatility in pricing in the natural gas and other energy markets. NJNG's inventory levels are built up during its natural gas injection season (April through October) and reduced during withdrawal season (November through March) in response to the supply requirements of its customers. Changes in financing cash flows can also be impacted by gas management and marketing activities at Energy Services and clean energy investments at Clean Energy Ventures.
Cash flows from financing activities totaled $551.4 million during the three months ended December 31, 2019, compared with $204.7 million during the three months ended December 31, 2018. The increase of $346.7 million is due primarily to increased short-term debt activity at NJR primarily related to the acquisition of Leaf River.
64
New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Credit Ratings
The table below summarizes NJNG's credit ratings as of December 31, 2019, issued by two rating entities, Moody's and Fitch:
Moody's | Fitch | |
Corporate Rating | N/A | A- |
Commercial Paper | P-1 | F-2 |
Senior Secured | Aa3 | A+ |
Ratings Outlook | Negative | Stable |
NJNG's Moody's and Fitch ratings are investment-grade ratings. NJR is not a rated entity.
Although NJNG is not party to any lending agreements that would accelerate the maturity date of any obligation caused by a failure to maintain any specific credit rating, if such ratings are downgraded below investment grade, borrowing costs could increase, as would the costs of maintaining certain contractual relationships and future financing and our access to capital markets would be reduced. Even if ratings are downgraded without falling below investment grade, NJR and NJNG could face increased borrowing costs under their credit facilities. A rating set forth above is not a recommendation to buy, sell or hold NJR's or NJNG's securities and may be subject to revision or withdrawal at any time. Each rating set forth above should be evaluated independently of any other rating.
The timing and mix of any external financings will target a common equity ratio that is consistent with maintaining NJNG's current short-term and long-term credit ratings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
Commodity Market Risks
Natural gas is a nationally traded commodity. Its prices are determined effectively by the NYMEX, ICE and over-the-counter markets. The prices on the NYMEX, CME, ICE and over-the-counter markets generally reflect the national balance of natural gas supply and demand, but are also significantly influenced from time to time by other events.
Our regulated and deregulated businesses are subject to market risk due to fluctuations in the price of natural gas. To economically hedge against such fluctuations, we have entered into forwards, futures, options and swap agreements. To manage these derivative instruments, we have well-defined risk management policies and procedures that include daily monitoring of volumetric limits and monetary guidelines. Our natural gas businesses are conducted through two of our operating subsidiaries. NJNG is a regulated utility that uses futures, options and swaps to provide relative price stability, and its recovery of natural gas costs is governed by the BPU. Energy Services uses futures, options, swaps and physical contracts to economically hedge purchases and sales of natural gas.
The following table reflects the changes in the fair market value of financial derivatives related to natural gas purchases and sales:
Balance | Increase | Less | Balance | |||||||||||
(Thousands) | September 30, 2019 | (Decrease) in Fair Market Value | Amounts Settled | December 31, 2019 | ||||||||||
Natural Gas Distribution | $ | (188 | ) | (672 | ) | (497 | ) | $ | (363 | ) | ||||
Energy Services | (11,640 | ) | 31,775 | 4,972 | 15,163 | |||||||||
Total | $ | (11,828 | ) | 31,103 | 4,475 | $ | 14,800 |
There were no changes in methods of valuations during the three months ended December 31, 2019.
65
New Jersey Resources Corporation
Part I
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The following is a summary of fair market value of financial derivatives at December 31, 2019, excluding foreign exchange contracts discussed below, by method of valuation and by maturity for each fiscal year period:
(Thousands) | 2020 | 2021 | 2022 - 2024 | After 2024 | Total Fair Value | ||||||||||
Price based on NYMEX/CME | $ | 2,173 | 931 | 135 | — | $ | 3,239 | ||||||||
Price based on ICE | 12,855 | (448 | ) | (850 | ) | 4 | 11,561 | ||||||||
Total | $ | 15,028 | 483 | (715 | ) | 4 | $ | 14,800 |
The following is a summary of financial derivatives by type as of December 31, 2019:
Volume Bcf | Price per MMBtu(1) | Amounts included in Derivatives (Thousands) | ||||||
Natural Gas Distribution | Futures | 27.6 | 2.22 - 3.34 | $ | (363 | ) | ||
Energy Services | Futures | (34.6 | ) | 0.48 - 6.34 | 11,809 | |||
Swaps | (3.8 | ) | 2.72 - 3.46 | 3,354 | ||||
Total | $ | 14,800 |
(1) | Million British thermal unit |
The following table reflects the changes in the fair market value of physical commodity contracts:
Balance | Increase | Less | Balance | |||||||||||
(Thousands) | September 30, 2019 | (Decrease) in Fair Market Value | Amounts Settled | December 31, 2019 | ||||||||||
Natural Gas Distribution - Prices based on other external data | $ | (178 | ) | 25 | (17 | ) | $ | (136 | ) | |||||
Energy Services - Prices based on other external data | (31,624 | ) | 7,849 | (1,306 | ) | (22,469 | ) | |||||||
Total | $ | (31,802 | ) | 7,874 | (1,323 | ) | $ | (22,605 | ) |
Our market price risk is predominately linked with changes in the price of natural gas at the Henry Hub, the delivery point for the NYMEX natural gas futures contracts. Based on price sensitivity analysis, an illustrative 10 percent movement in the natural gas futures contract price, for example, increases (decreases) the reported derivative fair value of all open, unadjusted Henry Hub natural gas futures and fixed price swap positions by approximately $4.8 million. This analysis does not include potential changes to reported credit adjustments embedded in the $9.1 million reported fair value.
Derivative Fair Value Sensitivity Analysis | |||||||||||||||
(Thousands) | Henry Hub Futures and Fixed Price Swaps | ||||||||||||||
Percent increase in NYMEX natural gas futures prices | 0% | 5% | 10% | 15% | 20% | ||||||||||
Estimated change in derivative fair value | $ | — | $ | (2,416 | ) | $ | (4,833 | ) | $ | (7,249 | ) | $ | (9,666 | ) | |
Ending derivative fair value | $ | 9,133 | $ | 6,717 | $ | 4,300 | $ | 1,884 | $ | (533 | ) | ||||
Percent decrease in NYMEX natural gas futures prices | 0% | (5)% | (10)% | (15)% | (20)% | ||||||||||
Estimated change in derivative fair value | $ | — | $ | 2,416 | $ | 4,833 | $ | 7,249 | $ | 9,666 | |||||
Ending derivative fair value | $ | 9,133 | $ | 11,549 | $ | 13,966 | $ | 16,382 | $ | 18,799 |
Wholesale Credit Risk
The following is a summary of gross and net credit exposures, grouped by investment and non-investment grade counterparties, as of December 31, 2019. Gross credit exposure for Energy Services is defined as the unrealized fair value of derivative and energy trading contracts plus any outstanding wholesale receivable for the value of natural gas or power delivered and/or financial derivative commodity contract that has settled for which payment has not yet been received. Gross credit exposure for Midstream is defined as demand and estimated usage fees for contracted services and/or market value of loan balances for which payment has not yet been received. Net credit exposure is defined as gross credit exposure reduced by collateral received from counterparties and/or payables, where netting agreements exist. The amounts presented below exclude accounts receivable for NJNG retail natural gas sales and services.
66
New Jersey Resources Corporation
Part I
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Energy Services' & Clean Energy Ventures' counterparty credit exposure as of December 31, 2019, is as follows:
(Thousands) | Gross Credit Exposure | Net Credit Exposure | ||||||
Investment grade | $ | 193,280 | $ | 160,168 | ||||
Noninvestment grade | 17,744 | 2,743 | ||||||
Internally rated investment grade | 38,256 | 30,559 | ||||||
Internally rated noninvestment grade | 16,481 | 7,573 | ||||||
Total | $ | 265,761 | $ | 201,043 |
NJNG's counterparty credit exposure as of December 31, 2019, is as follows:
(Thousands) | Gross Credit Exposure | Net Credit Exposure | ||||||
Investment grade | $ | 4,089 | $ | 3,841 | ||||
Noninvestment grade | 78 | — | ||||||
Internally rated investment grade | 56 | 10 | ||||||
Internally rated noninvestment grade | 18,850 | 12,575 | ||||||
Total | $ | 23,073 | $ | 16,426 |
Due to the inherent volatility in the market price for natural gas, electricity and SRECs, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If a counterparty failed to perform the obligations under its contract (for example, failed to make payment for natural gas received), we could sustain a loss. This loss would comprise the loss on natural gas delivered but not paid for and/or the cost of replacing natural gas not delivered or received at a price that exceeds the original contract price. Any such loss could have a material impact on our financial condition, results of operations or cash flows.
Effects of Interest Rate and Foreign Currency Rate Fluctuations
We are also exposed to changes in interest rates on our debt hedges, variable rate debt and changes in foreign currency rates for our business conducted in Canada using Canadian dollars. We do not believe an immediate 10 percent increase or decrease in interest rates or foreign currency rates would have a material effect on our operating results or cash flows.
Information regarding NJR's interest rate risk can be found in Item 7A. Quantitative and Qualitative Disclosures About Market Risks and the Liquidity and Capital Resources - Debt section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended September 30, 2019.
Effects of Inflation
Although inflation rates have been relatively low to moderate in recent years, including the three most recent fiscal years, any change in price levels has an effect on operating results due to the capital-intensive and regulated nature of our utility subsidiary. We attempt to minimize the effects of inflation through cost control, productivity improvements and regulatory actions, when appropriate.
67
New Jersey Resources Corporation
Part I
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
68
New Jersey Resources Corporation
Part II
ITEM 1. LEGAL PROCEEDINGS
Information regarding reportable legal proceedings is contained in Part I, Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended September 30, 2019, and is set forth in Part I, Item 1, Note 13. Commitments and Contingent Liabilities-Legal Proceedings on the Unaudited Condensed Consolidated Financial Statements, which is incorporated by reference. No legal proceedings became reportable during the quarter ended December 31, 2019, and there have been no material developments during such quarter regarding any previously reported legal proceedings, which have not been previously disclosed.
ITEM 1A. RISK FACTORS
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical, under the circumstances, some level of risk and uncertainty will always be present. Part I, Item 1A. Risk Factors of our 2019 Annual Report on Form 10-K includes a detailed discussion of our risk factors. Those risks and uncertainties have the potential to materially affect our financial condition and results of operations. There have been no material changes in our risk factors from those previously disclosed in Part I, Item 1A, of our 2019 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth our repurchase activity for the quarter ended December 31, 2019:
Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs | ||||
10/01/19 - 10/31/19 | — | $ | — | — | 2,431,053 | |||
11/01/19 - 11/30/19 | — | — | — | 2,431,053 | ||||
12/01/19 - 12/31/19 | — | — | — | 2,431,053 | ||||
Total | — | $ | — | — | 2,431,053 |
The stock repurchase plan, which was authorized by our Board of Directors, became effective in September 1996 and as of December 31, 2019, included 19.5 million shares of common stock for repurchase, of which, approximately 2.4 million shares remained available for repurchase. The stock repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless the repurchase plan is earlier terminated by action of our Board of Directors or further shares are authorized for repurchase.
69
New Jersey Resources Corporation
Part II
ITEM 6. EXHIBITS
Exhibit Number | Exhibit Description |
10.1 | $350,000,000 Term Loan Credit Agreement, dated as of October 9, 2019, by and among New Jersey Resources Corporation and each of the Guarantors party thereto and the lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on October 11, 2019) |
10.2 | Form of Amended and Restated Employment Continuation Agreement dated as of November 12, 2019 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on November 18, 2019) |
10.3 | Form of Amended and Restated Employment Continuation Agreement for officers of NJR Energy Services Company dated as of November 12, 2019 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, as filed on November 18, 2019) |
10.4 | Forward Sale Agreement between New Jersey Resources Corporation and Wells Fargo Bank, National Association, dated December 4, 2019 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on December 9, 2019) |
10.5 | Forward Sale Agreement between New Jersey Resources Corporation and JPMorgan Chase Bank, National Association, dated December 4, 2019 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, as filed on December 9, 2019) |
10.6 | Additional Forward Sale Agreement between New Jersey Resources Corporation and Wells Fargo Bank, National Association, dated December 5, 2019 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, as filed on December 9, 2019) |
10.7 | Additional Forward Sale Agreement between New Jersey Resources Corporation and JPMorgan Chase Bank, National Association, dated December 5, 2019 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, as filed on December 9, 2019) |
10.8 | 4-Month $150,000,000 Revolving Line of Credit Facility, dated as of December 13, 2019, by and between New Jersey Resources Corporation and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, as filed on December 16, 2019) |
10.9 | Committed Line of Credit Note in the amount of $150,000,000, dated as of December 13, 2019, by New Jersey Resources Corporation for the benefit of PNC Bank National Association (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, as filed on December 16, 2019) |
10.10+ | |
31.1+ | |
31.2+ | |
32.1+ † | |
32.2+ † | |
101+ | Interactive Data File (Form 10-Q, for the fiscal period ended December 31, 2019, furnished in iXBRL (Inline eXtensible Business Reporting Language)) |
104+ | Cover Page Interactive Data File included in Exhibit 101 |
________________________________
+ | Filed herewith. |
† This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.
70
New Jersey Resources Corporation
Part II
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION | ||
(Registrant) | ||
Date: | February 6, 2020 | |
By:/s/ Patrick Migliaccio | ||
Patrick Migliaccio | ||
Senior Vice President and | ||
Chief Financial Officer |
71