NEW JERSEY RESOURCES CORPORATION 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 endedSeptember 30, 2020 . Our critical accounting policies have not changed from those reported in the 2020 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.
45
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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 U.S. and Canada . In addition, we invest in clean energy projects, storage
and transportation 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 2020 Annual Report on Form 10-K.
Reporting Segments
We have four primary reporting segments as presented in the chart below:
[[Image Removed: njr-20210331_g1.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.
Impacts of the COVID-19 Pandemic
We closely monitor developments related to the COVID-19 pandemic and have taken
steps intended to limit potential exposure for our employees and those we serve.
We have also taken proactive steps to ensure business continuity in the safe
operation of our business. Both NJR and NJNG continue to have sufficient
liquidity to meet their current obligations and business operations remain
fundamentally unchanged at this time. This remains an evolving situation, and we
cannot predict the extent or duration of the outbreak, the effects of the
pandemic on the global, national or local economy, or its effects on our
financial condition, results of operations and cash flows. We cannot predict the
nature and extent of impacts to future operations. We will continue to monitor
developments affecting our employees, customers, and operations and take
additional steps to address the COVID-19 pandemic and its impacts, as necessary.
46
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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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Net income (loss)
Natural Gas Distribution $ 80,541 54 % $ 86,336 117 % $ 130,008 56 % $ 130,192 87 %
Clean Energy Ventures (8,872) (6) (8,829) (12) (19,146) (8) (17,008) (11)
Energy Services 75,662 51 (8,435) (11) 114,534 49 27,590 18
Storage and Transportation 4,711 3 4,258 6 8,219 4 7,262 5
Home Services and Other 747 - 148 - 685 - 1,257 1
Eliminations (1) (2,980) (2) 368 - (3,446) (1) 305 -
Total $ 149,809 100 % $ 73,846 100 % $ 230,854 100 % $ 149,598 100 %
(1) Consists of transactions between subsidiaries that are eliminated in consolidation.
The increase in net income during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , was driven primarily by increased earnings at Energy Services due to strong market demand related to the extreme cold weather duringFebruary 2021 . 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:
March 31, September 30,
(Thousands) 2021 2020
Assets
Natural Gas Distribution $ 3,593,630 66 % $ 3,531,477 66 %
Clean Energy Ventures 848,290 16 814,277 15
Energy Services 224,069 4 244,836 5
Storage and Transportation 874,976 16 844,799 16
Home Services and Other 136,531 3 138,375 3
Intercompany assets (1) (252,362) (5) (257,287) (5)
Total $ 5,425,134 100 % $ 5,316,477 100 %
(1)Consists of transactions between subsidiaries that are eliminated in consolidation.
The increase in assets was due primarily to additional utility plant and an
increase in solar asset investments at
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 natural 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. 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 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, 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.
47
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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 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 Six Months Ended
March 31, March 31,
(Thousands, except per share data) 2021 2020 2021 2020
Net income $ 149,809 $ 73,846 $ 230,854 $ 149,598
Add:
Unrealized gain on derivative instruments and
related transactions 29,255 (3,773) (8,235) (45,539)
Tax effect (6,954) 897 1,958 10,828
Effects of economic hedging related to natural
gas inventory (1) (7,209) 14,622 (14,741) 5,735
Tax effect 1,713 (3,475) 3,503 (1,363)
NFE tax adjustment 3,990 2,174 1,922 (37)
Net financial earnings $ 170,604 $ 84,291 $ 215,261 $ 119,222
Basic earnings per share $ 1.56 $ 0.78 $ 2.40 $ 1.60
Add:
Unrealized gain on derivative instruments and
related transactions 0.30 (0.04) (0.09) (0.49)
Tax effect (0.08) 0.01 0.02 0.11
Effects of economic hedging related to natural
gas inventory (1) (0.07) 0.15 (0.15) 0.06
Tax effect 0.02 (0.04) 0.04 (0.01)
NFE tax adjustment 0.04 0.02 0.02 -
Basic NFE per share $ 1.77 $ 0.88 (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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Net financial earnings (loss)
Natural Gas Distribution $ 80,541 47 % $ 86,336 102 % $ 130,008 60 % $ 130,192 109 %
Clean Energy Ventures (8,872) (5) (8,829) (10) (19,146) (9) (17,008) (14)
Energy Services 96,528 57 2,487 3 98,028 46 (2,635) (2)
Storage and Transportation 4,711 3 4,258 5 8,219 4 7,262 6
Home Services and Other 747 - 148 - 685 - 1,257 1
Eliminations (1) (3,051) (2) (109) - (2,533) (1) 154 -
Total $ 170,604 100 % $ 84,291 100 % $ 215,261 100 % $ 119,222 100 %
(1) Consists of transactions between subsidiaries that are eliminated in consolidation.
The increase in NFE during the three and six months ended
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 throughoutBurlington ,Middlesex ,Monmouth ,Morris andOcean counties inNew Jersey to approximately 561,500 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, including those risks associated with COVID-19 and may include but is not limited to impacts to customer growth and customer usage, customer collections, the timing and costs of capital expenditures and construction of infrastructure projects, operating and financing costs, fluctuations in commodity prices and customer 48 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) conservation efforts. In addition, NJNG may be subject to adverse economic conditions, 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. 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.
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 six months endedMarch 31, 2021 , and estimates of expected investments for fiscal 2021 and 2022: [[Image Removed: njr-20210331_g2.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.
Infrastructure Investment Program
OnFebruary 28, 2019 , NJNG filed a petition with the BPU seeking authority to implement a five-year IIP. The IIP consists of two components: transmission and distribution investments and information technology replacement and enhancements. The total investment for the IIP is approximately$507 million . All approved investments will be recovered through annual filings to adjust base rates. OnOctober 28, 2020 , the BPU approved the Company's transmission and 49 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) distribution component of the IIP for$150 million over five years, effectiveNovember 1, 2020 . NJNG voluntarily withdrew the information technology upgrade component and will seek to recover associated costs in future rate case proceedings.
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 natural 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 approval 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 base rate cases, of which$23.4 million was approved in NJNG's 2019 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 natural 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. OnMarch 30, 2020 , NJNG filed a petition with the BPU requesting a rate increase of approximately$7.4 million for the recovery associated with NJ RISE and SAFE II capital investment costs of approximately$57.9 million . OnJuly 24, 2020 , the Company updated the filing with actual information throughJune 30, 2020 and the revised rate increase requested was$7.1 million based on$55.1 million of actual capital investments. OnSeptember 9, 2020 , the BPU approved the increase to base rate revenue, effectiveOctober 1, 2020 . OnMarch 31, 2021 , NJNG filed a petition with the BPU requesting the final base rate increase of approximately$311,000 for the recovery associated with NJ RISE and SAFE II capital investments cost of approximately$3.4 million made throughJune 30, 2021 . This filing will be updated for actual information throughJune 30, 2021 . Changes to base rates are anticipated to be effectiveOctober 1, 2021 .
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. Construction began on the project inDecember 2018 and is estimated to cost between$290 million and$310 million upon completion. OnMarch 30, 2021 , NJNG filed a base rate case with the BPU requesting rate recovery for SRL and other infrastructure investments. SRL is expected to be placed in service during fiscal 2021.
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:
March 31, March 31,
2021 2020
Firm customers
Residential 498,583 491,419
Commercial, industrial & other 31,313 30,545
Residential transport 22,574 22,783
Commercial transport 8,971 9,230
Total firm customers 561,441 553,977
Other 45 59
Total customers 561,486 554,036
50
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
During the six months ended March 31, 2021 and 2020, respectively, NJNG added
3,694 and 4,339 new customers. NJNG expects these new customer additions, and
those customers who added additional natural gas services to their premises to
contribute approximately $2.7 million to utility gross margin during the fiscal
year.
NJNG continues to expect to add approximately 28,000 to 30,000 new customers
during the three-year period of fiscal 2021 to 2023. 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 $6.3 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 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. OnMarch 3, 2021 , the BPU approved a three-year SAVEGREEN program consisting of approximately$126.1 million of direct investment,$109.4 million in financing options, and approximately$23.4 million in operation and maintenance expenses, to be effectiveJuly 1, 2021 . OnMay 29, 2020 , NJNG filed a petition with the BPU to minimally decrease its EE recovery rate. Throughout the course of the proceeding, NJNG updated the filing with additional actual information. Based on the updated information, the BPU approved NJNG to maintain its existing rate, which will result in an annual recovery of approximately$11.4 million , effectiveNovember 1, 2020 . The following table summarizes, loans, grants, rebates and related investments as of: March 31, September 30, (Thousands) 2021 2020 Loans$ 126,400 $ 119,400 Grants, rebates and related investments 82,900 80,500 Total$ 209,300 $ 199,900 Program recoveries from customers during the six months endedMarch 31, 2021 and 2020, were$5.3 million and$4.5 million , respectively. 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 natural 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 byJune 1 , coincident with NJNG's annual BGSS filing, during which NJNG can request rate changes to the CIP. InMay 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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Weather (1) $ 6,335 $ 25,363 $ 12,790 $ 23,144
Usage (3,839) (2,321) (3,245) (1,278)
Total $ 2,496 $ 23,042 $ 9,545 $ 21,866
(1)Compared with the 20-year average, weather was 4.1 percent warmer-than-normal
and 19.8 percent warmer-than-normal during the three months ended March 31, 2021
and 2020, respectively and 6.4 percent warmer-than-normal and 11.2 percent
warmer-than-normal during the.six months ended March 31, 2021 and 2020,
respectively.
51
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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 natural 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.
NJNG's residential and commercial markets are currently open to competition, and
its rates are segregated between BGSS (i.e., natural gas commodity) and delivery
(i.e., transportation) components. NJNG earns utility gross margin through the
delivery of natural gas to its customers and, therefore, is not negatively
affected by customers who use its transportation service and purchase natural
gas from another supplier. Under an existing order from the BPU, BGSS can be
provided by suppliers other than the state's natural gas utilities; however,
customers who purchase natural gas from another supplier continue to use NJNG
for transportation service.
On March 27, 2020 , the BPU approved, on a final basis, a decrease to NJNG's BGSS
rate for residential and small commercial customers, an increase to its
balancing charge rate, resulting in a $2.0 million decrease to the annual
revenues credited to BGSS, as well as changes to the CIP rates, which resulted
in a $10.6 million annual recovery increase, effective October 1, 2019 .
On November 20, 2020 , NJNG notified the BPU of its intent to provide BGSS bill
credits to residential and small commercial sales customers effective December
1, 2020 to December 31, 2020 . On December 22, 2020 , NJNG notified the BPU of the
extension of the BGSS bill credits through January 31, 2021 . The actual bill
credits given to customers totaled $20.6 million , $19.3 million net of tax.
On March 3, 2021 , the BPU approved, on a final basis, NJNG's annual petition to
modify its BGSS, balancing charge and CIP rates for residential and small
commercial customers. The rate changes resulted in a $20.4 million decrease to
the annual revenues credited to BGSS, a $3.8 million annual decrease related to
its balancing charge, as well as changes to CIP rates, which resulted in a $16.5
million annual recovery increase, effective October 1, 2020 . 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.
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 $2.1 million and
$1.6 million during the three months ended March 31, 2021 and 2020,
respectively, and $6.7 million and $4.3 million during the six months ended
March 31, 2021 and 2020, 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 natural gas sales volumes hedged by eachNovember 1 and at least 25 percent of the projected periodic BGSS natural 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.
52
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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.
[[Image Removed: njr-20210331_g3.jpg]]
(1) Data source from
The maximum price per MMBtu was$14.57 and$5.59 and the minimum price was$0.28 and$0.68 for the six months endedMarch 31, 2021 and 2020, respectively. A more detailed discussion of the impacts of the price of natural gas on operating revenues, natural 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.
Societal Benefits Charge
NJNG's qualifying customers are eligible for the USF program, which is administered by theNew Jersey Department of Community Affairs , to help make energy bills more affordable. OnJune 25, 2020 , NJNG filed its annual USF compliance filing proposing a decrease to the statewide USF rate, which will result in annual decreases of approximately$400,000 . OnSeptember 23, 2020 , the BPU approved the decrease, effectiveOctober 1, 2020 .
On
OnApril 7, 2021 , the BPU approved on a final basis NJNG's annual SBC application to recover remediation expenses, including an increase in the RAC, of approximately$1.3 million annually and an increase to the NJCEP factor, of approximately$6.0 million , which was effectiveApril 1, 2021 .
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$143.5 million as ofMarch 31, 2021 , a decrease of$7.1 million compared with the prior fiscal period. 53 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) InJune 2019 , NJNG initiated a preliminary assessment of a site in Aberdeen,New Jersey to determine prior ownership and if former MGP operations were active at the location. The Company is in the process of conducting site investigation activities to identify and evaluate the nature and extent of MGP-related contaminants present at the location. The costs associated with preliminary assessment and site investigation 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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues $ 310,167 $ 297,220 $ 505,896 $ 516,843
Operating expenses
Natural gas purchases (1) 118,452 114,256 177,761 210,078
Operation and maintenance 52,951 39,815 96,589 76,000
Regulatory rider expense 18,413 15,330 29,114 27,072
Depreciation and amortization 19,475 18,100 38,644 34,917
Total operating expenses 209,291 187,501 342,108 348,067
Operating income 100,876 109,719 163,788 168,776
Other income, net 4,293 3,792 8,189 5,058
Interest expense, net of capitalized interest 9,006 7,473 17,980 15,305
Income tax provision 15,622 19,702 23,989 28,337
Net income $ 80,541 $ 86,336 $ 130,008 $ 130,192
(1)Includes related party transactions of approximately $5.2 million and $2.7
million for the three months ended March 31, 2021 and 2020, respectively, and
$8.4 million and $6.7 million for the six months ended March 31, 2021 and 2020,
respectively, the majority of which is eliminated in consolidation.
Operating Revenues and Natural Gas Purchases
During the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 , operating revenues increased by 4.4 percent and natural gas purchases increased 3.7 percent. During the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 , operating revenues decreased by 2.1 percent and natural gas purchases decreased 15.4 percent.
The factors contributing to the increases and decreases in operating revenues and natural gas purchases are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2021 v. 2020 2021 v. 2020
Operating Natural gas Operating Natural gas
(Thousands) revenues purchases revenues purchases
Firm sales $ 39,422 $ 17,970 $ 31,218 $ 12,144
BGSS incentives 5,193 4,666 (5,682) (8,058)
SAFE II/NJ RISE 2,681 - 5,012 -
Base rate impact (117) - 5,076 -
CIP adjustments (20,546) - (12,321) -
Average BGSS rates (6,551) (6,551) (14,891) (14,891)
Bill credits (11,071) (11,071) (20,590) (20,590)
Other (1) 3,936 (818) 1,231 (922)
Total increase (decrease) $ 12,947 $ 4,196 $ (10,947) $ (32,317) (1)Other includes changes in rider rates, including those related to EE, NJCEP and other programs.
54
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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 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 revenues 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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues $ 310,167 $ 297,220 $ 505,896 $ 516,843
Less:
Natural gas purchases 118,452 114,256 177,761 210,078
Regulatory rider expense 18,413 15,330 29,114 27,072
Utility gross margin $ 173,302 $ 167,634 $ 299,021 $ 279,693 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.
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 Six Months Ended
March 31, March 31,
2021 2020 2021 2020
($ in thousands) Margin Bcf Margin Bcf Margin Bcf Margin Bcf
Utility gross margin/throughput
Residential $ 124,468 22.7
23,050 4.3 22,884 3.6 40,090 6.7 38,071 6.4
Firm transportation 22,878 5.7 21,469 5.1 40,166 9.6 37,128 9.4
Total utility firm gross margin/throughput 170,396 32.7
164,894 27.6 290,699 52.6 272,822 49.3 BGSS incentive programs 2,114 23.6 1,587 28.2 6,692 49.5 4,316 56.1 Interruptible/off-tariff agreements 792 0.8 1,153 4.7 1,630 5.3 2,555 13.7
Total utility gross margin/throughput
Utility Firm Gross Margin
Utility firm gross margin increased$5.5 million during the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 , due primarily to increased returns on infrastructure programs related to SAFE II and NJ RISE. Utility firm gross margin increased$17.9 million during the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 , due primarily to the increase in base rates, along with increased returns on infrastructure programs as previously discussed. 55 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) BGSS Incentive Programs
The factors contributing to the change in utility gross margin generated by BGSS incentive programs are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands) 2021 v. 2020 2021 v. 2020
Off-system sales $ 903 $ 767
Storage (327) 1,749
Capacity release (49) (140)
Total increase $ 527 $ 2,376
The increase in BGSS incentive programs during the three and six months ended
March 31, 2021 , compared with the three and six months ended March 31, 2020 , was
due primarily to increased margins from off-system sales along with improved and
earlier opportunities for storage incentive compared with the prior year.
Operation and Maintenance Expense
O&M expense increased
Depreciation Expense
Depreciation expense increased$1.4 million and$3.7 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , as a result of additional utility plant being placed into service. Interest Expense Interest expense increased$1.5 million and$2.7 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to increased outstanding long-term debt.
Other Income
Other income increased$501,000 and$3.1 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to increased AFUDC earned on infrastructure projects.
Income Tax Provision
Income tax provision decreased
Net Income
Net income decreased$5.8 million during the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 , due primarily to increased O&M, depreciation and interest expenses, as previously discussed. Net income remained relatively flat during the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 . 56 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Clean Energy Ventures Segment Overview OurClean 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. 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. Clean Energy Ventures is also subject to risks associated with COVID-19, which may include impacts to residential solar customer growth and customer collections, our ability to identify and develop commercial solar asset investments, impacts to our supply chain and our ability to source materials for construction. 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 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
March 31,
($ in Thousands) 2021 2020
Placed in service Projects MW Costs Projects MW Costs
Grid-connected 1 2.7 $ 5,492 2 20.0 $ 40,385
Net-metered:
Residential 80 0.8 2,230 157 1.7 5,075
Total placed in service 81 3.5 $ 7,722 159 21.7 $ 45,460
Six Months Ended
March 31,
($ in Thousands) 2021 2020
Placed in service Projects MW Costs Projects MW Costs
Grid-connected 2 5.6 $ 9,175 3 22.9 $ 52,092
Net-metered:
Residential 126 1.3 3,829 281 3.0 9,085
Total placed in service 128 6.9 $ 13,004 284 25.9 $ 61,177 (1)Includes an operational 2.9 MW commercial solar project acquired in
Since inception,Clean Energy Ventures has constructed a total of 364.3 MW of solar capacity. Projects that were placed in service throughDecember 31, 2019 , qualified for a 30-percent federal ITC. The credit declined to 26 percent for property under construction during 2020 and was originally scheduled to decline to 22 percent for property under construction during 2021 and 10 percent for any property that is under construction after 2021. OnDecember 27, 2020 , the 26 percent federal ITC was extended through the end of 2022. The credit declines to 22 percent after 2022 and to 10 percent after 2023. Projects placed in service afterDecember 31, 2019 , also qualified 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 theIRS guidance around the ITC safe harbor determination. We have taken steps to preserve the ITC at the higher rate for certain solar projects that are completed after the scheduled reduction in rates, in accordance withIRS guidance. 57 -------------------------------------------------------------------------------- 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 five 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, TRECs and energy sales. The ITCs and other tax benefits associated with these solar projects transfer to the buyer if applicable; however, the lease payments are structured so thatClean Energy Ventures is compensated for the transfer of the related tax incentives. Accordingly, for solar projects financed under sale leasebacks for which the assets were sold during the first 5 years of in service life,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. InDecember 2020 ,Clean Energy Ventures received proceeds of$12.1 million in connection with the sale leaseback of commercial solar assets. Clean Energy Ventures did not enter into any sale leaseback transactions for its commercial solar assets during the six months endedMarch 31, 2020 . As part of its solar investment portfolio,Clean Energy Ventures operates a residential and small commercial solar program, The Sunlight Advantage®, that provides qualifying homeowners and small business owners the opportunity to have a solar system installed at their home or place of business 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. For solar installations placed in-service inNew Jersey prior toApril 30, 2020 , 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 underNew Jersey's renewable portfolio standard. InDecember 2019 , the BPU established the TREC as pursuant to the successor program to the SREC program. TRECs provide a fixed compensation base multiplied by an assigned project factor in order to determine their value. The project factor is determined by the type and location of the project, as defined. All TRECs generated are required to be purchased monthly by a TREC program administrator as appointed by the BPU. SREC and TREC activity consisted of the following: Six Months Ended March 31, 2021 2020 SRECs TRECs SRECs Inventory balance as of October 1, 35,011 9,270 53,395 RECs generated 141,071 10,310 138,700 RECs delivered (9,495) (5,294) (19,693) Inventory balance as of December 31, 166,587 14,286
172,402
The average SREC sales price was
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
2021 98%
2022 97%
2023 97%
2024 93%
2025 36%
2026 10%
(1)Energy years are compliance periods for
There are no direct costs associated with the production of SRECs or TRECs 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.
58
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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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues $ 6,476 $ 5,995 $ 12,846 $ 12,207
Operating expenses
Operation and maintenance 8,260 7,479 17,461 14,813
Depreciation and amortization 4,685 6,603 10,118 12,919
Total operating expenses 12,945 14,082 27,579 27,732
Operating loss (6,469) (8,087) (14,733) (15,525)
Other income (expense), net 149 (41) 87 (124)
Interest expense, net 5,266 4,835 10,300 9,327
Income tax benefit (2,714) (4,134) (5,800) (7,968)
Net loss $ (8,872) $ (8,829) $ (19,146) $ (17,008)
Operating Revenues
Operating revenues increased
Operation and Maintenance Expense
O&M expense increased$781,000 and$2.6 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to increased project maintenance, lease and information technology expenses.
Depreciation Expense
Depreciation expense decreased$1.9 million and$2.8 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , primarily due to the change in estimated useful lives of our commercial solar assets, effectiveJuly 1, 2020 .
Income Tax Benefit
Income tax benefit decreased$1.4 million and$2.2 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to a decreased state tax rate.
Net Income
Net income remained relatively flat during the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 . Net income decreased$2.1 million during the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 , due primarily to the increased O&M, partially offset by decreased depreciation expense, as previously discussed.
Energy Services Segment
Overview
Energy Services markets and sells natural gas to wholesale and retail customers and manages natural gas transportation and storage assets throughout major market areas acrossNorth America . Energy Services maintains a strategic portfolio of natural gas transportation and storage contracts that it utilizes in conjunction with its market expertise to provide service and value to its customers. Availability of these transportation and storage 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 transportation and storage assets for natural gas producers and regulated utilities. These management transactions typically involve the release of producer/utility owned storage and/or transportation 59 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 transportation and storage 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 revenues or natural 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 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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues (1) $ 462,569 $ 313,701 $ 692,046 $ 684,116
Operating expenses
Natural gas purchases (including demand charges
(2)(3)) 330,280 318,912 504,117 636,636
Operation and maintenance 32,998 4,822 37,014 9,560
Depreciation and amortization 13 27 55 56
Total operating expenses 363,291 323,761 541,186 646,252
Operating income (loss) 99,278 (10,060) 150,860 37,864
Other income, net 87 113 179 192
Interest expense, net 575 937 1,255 2,163
Income tax provision (benefit) 23,128 (2,449) 35,250 8,303
Net income (loss) $ 75,662 $ (8,435) $ 114,534 $ 27,590
(1)Includes related party transactions of approximately $2.8 million and
$259,000 for the three months ended March 31, 2021 and 2020, respectively, and
$4.9 million and $1.9 million for the six months ended March 31, 2021 and 2020,
respectively, which are eliminated in consolidation.
(2)Costs associated with pipeline and storage capacity 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 $226,000 and $46,000 for
the three months ended March 31, 2021 and 2020, respectively, and $391,000 and
$92,000 for the six months ended March 31, 2021 and 2020, respectively, a
portion of which is eliminated in consolidation.
Energy Services' portfolio of financial derivative instruments are composed of:
Six Months Ended
March 31,
(in Bcf) 2021 2020
Net short futures contracts 12.4 29.9
60
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
Operating Revenues and Natural Gas Purchases
Operating revenues increased $148.9 million and natural gas purchases increased
$11.4 million during the three months ended March 31, 2021 , compared with the
three months ended March 31, 2020 . Operating revenues increased $7.9 million and
natural gas purchases decreased $132.5 million during the six months ended
March 31, 2021 , compared with the six months ended March 31, 2020 . The increases
during the three and six months were due primarily to increased natural gas
price volatility related to the extreme weather in the mid-continent and
southern regions of the U.S. during February 2021 compared to the prior period.
The decrease in gas purchases during the six months ended March 31, 2021 ,
compared with the six months ended March 31, 2020 , was due primarily to the
timing of injections and withdrawals for natural gas in storage.
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
warmer 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.
Operation and Maintenance Expense
O&M expense increased
Income Tax Provision
Income tax provision increased$25.6 million and$26.9 million during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to increased operating income related to increased natural gas price volatility duringFebruary 2021 as discussed above.
Net Income
Net income increased
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. GAAP also 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 Energy Services, as the adjustment primarily
relates to timing differences associated with certain derivative instruments
which impacts the estimate of the annual effective tax rate for NFE. 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 18.8 percent for fiscal 2021 and 18.2 percent
for fiscal 2020.
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 natural
gas flows.
61
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
Financial Margin
The following table is a computation of Energy Services' financial margin:
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues (1) $ 462,569 $ 313,701 $ 692,046 $ 684,116
Less: Natural gas purchases 330,280 318,912 504,117 636,636
Add:
Unrealized loss (gain) on derivative instruments
and related transactions 29,348 (3,146) (9,433) (45,340)
Effects of economic hedging related to natural gas
inventory (2) (7,209) 14,622 (14,741) 5,735
Financial margin $ 154,428 $ 6,265 $ 163,755 $ 7,875
(1)Includes unrealized (gains) losses related to an intercompany transaction
between NJNG and Energy Services that have been eliminated in consolidation of
approximately $(91,000) and $(626,000) for the three months ended March 31, 2021
and 2020, respectively, $1.2 million and $(199,000) for the six months ended
March 31, 2021 and 2020, respectively.
(2)Effects of hedging natural gas inventory transactions where the economic
impact is realized in a future period.
A reconciliation of operating income, the closest GAAP financial measure, to Energy Services' financial margin is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating income (loss) $ 99,278 $ (10,060) $ 150,860 $ 37,864
Add:
Operation and maintenance 32,998 4,822 37,014 9,560
Depreciation and amortization 13 27 55 56
Subtotal 132,289 (5,211) 187,929 47,480
Add:
Unrealized loss (gain) on derivative instruments
and related transactions 29,348 (3,146) (9,433) (45,340)
Effects of economic hedging related to natural gas
inventory (7,209) 14,622 (14,741) 5,735
Financial margin $ 154,428 $ 6,265 $ 163,755 $ 7,875 Financial margin increased
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 Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Net income (loss) $ 75,662 $ (8,435) $ 114,534 $ 27,590
Add:
Unrealized loss (gain) on derivative instruments
and related transactions 29,348 (3,146) (9,433) (45,340)
Tax effect (1) (6,976) 747 2,243 10,780 Effects of economic hedging related to natural gas inventory
(7,209) 14,622 (14,741) 5,735
Tax effect 1,713 (3,475) 3,503 (1,363)
Net income to NFE tax adjustment 3,990 2,174 1,922 (37)
Net financial earnings (loss) $ 96,528 $ 2,487 $ 98,028 $ (2,635)
(1)Includes taxes related to an intercompany transaction between NJNG and Energy
Services that have been eliminated in consolidation of approximately $23,000 and
$150,000 for the three months ended and 2020, respectively, and $(284,000) and
$48,000 for the six months ended March 31, 2021 and 2020, respectively.
62
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
NFE increased $94.0 million and $100.7 million during the three and six months
ended March 31, 2021 , compared with the three and six months ended March 31,
2020 , due primarily to higher 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.
Storage and Transportation Segment
Overview
OurStorage and Transportation segment invests in natural gas assets, such as natural gas transportation and storage facilities. We believe that acquiring, owning and developing these storage and transportation assets, which operate under a tariff structure that has either regulated or market-based rates, can provide us a growth opportunity. OurStorage and Transportation segment is subject to various risks, including the construction, development and operation of our transportation and storage assets, obtaining necessary governmental, environmental and regulatory approvals, our ability to obtain necessary property rights and our ability to obtain financing at reasonable costs for the constructions and maintenance of our assets. In addition, our storage and transportation assets may be subject to risk associated with the COVID-19 pandemic, such as disruption to the supply chain and availability of critical equipment and supplies, disruptions to the availability of our specialized workforce and contractors and changes to demand for natural gas, transportation and other downstream activities. OurStorage and Transportation segment is comprised of a 50 percent ownership interest inSteckman Ridge , a storage facility that operates under market-based rates and a 20 percent ownership interest in PennEast, a natural gas pipeline.NJR Pipeline Company acquired 100 percent ofLeaf River for$367.5 million , onOctober 11, 2019 .Leaf River owns and operates a 32.2 million Dth salt dome natural gas storage facility that operates under market-based rates. In addition, onJanuary 13, 2020 , Adelphia Gateway, acquired all of Talen's membership interests in IEC, an existing 84-mile pipeline in southeasternPennsylvania , including related assets and rights of way, for a base purchase price of$166.0 million . Adelphia Gateway operates under cost of service rates but can enter into negotiated rates with counterparties. The northern portion of the pipeline was operational upon acquisition and it currently serves two natural gas generation facilities. OnOctober 5, 2020 , we received a partial Notice to Proceed with construction fromFERC and have begun the conversion of the southern zone of the pipeline to natural gas. Through our subsidiaryNJR 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 northeastPennsylvania to westernNew Jersey . PennEast received a Certificate of Public Convenience and Necessity for the project fromFERC onJanuary 19, 2018 .
On
On
OnOctober 4, 2019 , PennEast filed a petition for Declaratory Order withFERC requesting an interpretation of the eminent domain authority of aFERC certificate holder under the Natural Gas Act. The Declaratory Order was granted onJanuary 30, 2020 . OnJanuary 30, 2020 , PennEast filed an amendment withFERC to construct the PennEast pipeline in two phases. Phase one consists of construction of a 68-mile pipeline inPennsylvania from the easternMarcellus Shale region inLuzerne County that would end inNorthampton County . Phase two includes construction of the remaining original certificated route inPennsylvania andNew Jersey . Construction is expected to begin following approval byFERC of the phased approach and receipt of any remaining governmental and regulatory permits. 63 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OnFebruary 18, 2020 , PennEast filed a writ of certiorari with theSupreme Court of the United States to review theSeptember 10, 2019 Third Circuit decision. OnJune 29, 2020 , theSupreme Court requested that the Solicitor General ofthe United States file a brief that expresses the views on the question of the use of eminent domain to acquire state owned lands for pipeline construction. The Solicitor General filed its brief with theSupreme Court onDecember 9, 2020 .
The
On
We evaluated our investment in PennEast for an other-than-temporary 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.
Due to the expiration of a customer contract for
The fair value of our investment inSteckman Ridge was determined using a discounted cash flow method and utilized management's best estimates and assumptions related to expected future results, including the price and capacity of firm natural gas storage contracting, operations and maintenance costs, the nature and timing of major maintenance and capital investment, and discount rates. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and other factors. As a result, it is reasonably possible that future unfavorable developments, such as the failure to execute storage contracts and other services for available capacity at anticipated price levels could result in an other-than temporary impairment charge in the Unaudited Condensed Consolidated Financial Statements.
As of
Operating Results
The financial results of ourStorage and Transportation segment are summarized as follows: Three Months Ended Six Months Ended March 31, March 31, (Thousands) 2021 2020 2021 2020 Operating revenues (1)$ 13,926 $ 11,076 $ 27,030 $ 20,148 Operating expenses Natural gas purchases 238 193 471 539 Operation and maintenance 7,139 6,094 13,681 10,972 Depreciation and amortization 2,364 2,397 5,004 4,078 Total operating expenses 9,741 8,684 19,156 15,589 Operating income 4,185 2,392 7,874 4,559 Other income, net 1,591 4,671 2,845 5,368 Interest expense, net 3,578 5,621 7,560 8,443 Income tax provision 873 1,105 1,519 1,807
Equity in earnings of affiliates 3,386 3,921 6,579 7,585 Net income
$ 4,711 $ 4,258 $ 8,219 $ 7,262
(1)Includes related party transactions of approximately
64
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
Operating Revenues
Operating revenues increased $2.9 million and $6.9 million during the three and
six months ended March 31, 2021 , compared with the three and six months ended
March 31, 2020 , due to increased operating revenues at Leaf River and Adelphia
Gateway .
Equity in earnings of affiliates decreased $535,000 and $1.0 million during the
three and six months ended March 31, 2021 , compared with the three and six
months ended March 31, 2020 , due primarily to decreases in storage revenue at
Steckman Ridge .
Operation and Maintenance Expense
O&M increased
Depreciation Expense
Depreciation expense remained relatively flat during the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 . Depreciation expense increased$926,000 during the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 , due primarily to operations of Adelphia Gateway during the six months endedMarch 31, 2021 , that were not present in the first quarter of fiscal 2020.
Interest Expense
Interest expense decreased
Net Income
Net income increased$453,000 and$957,000 during the three and six months endedMarch 31, 2021 , compared with the three and six months endedMarch 31, 2020 , due primarily to increased operating revenue, partially offset by increased O&M and depreciation expense, as previously discussed.
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 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 condensed financial results of Home Services and Other are summarized as
follows:
Three Months Ended Six Months Ended
March 31, March 31,
(Thousands) 2021 2020 2021 2020
Operating revenues $ 12,773 $ 12,365 $ 25,350 $ 25,272
Operation and maintenance $ 9,254 $ 8,926 $ 19,575 $ 19,459
Interest expense, net $ 1,728 $ 565 $ 2,844 $ 837
Income tax (benefit) provision $ (59) $ 1,956 $ 59 $ 2,175
Net income $ 747 $ 148 $ 685 $ 1,257
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
Operating Revenues
Operating revenues increased $408,000 during the three months ended March 31,
2021 , compared with the three months ended March 31, 2020 , due primarily to
increased service contract and installation revenue at NJRHS. Operating revenues
remained relatively flat during the six months ended March 31, 2021 , compared
with the six months ended March 31, 2020 .
Net Income
Net income increased$599,000 during the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 , due primarily to increased operating revenues as previously discussed along with decreased income tax expense, partially offset by higher interest expense. Net income decreased$572,000 during the six months endedMarch 31, 2021 , compared with the six months endedMarch 31, 2020 , due primarily to increased shared corporate costs and information technology expense. 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:
March 31, September 30,
2021 2020
Common stock equity 44 % 43 %
Long-term debt 55 53
Short-term debt 1 4
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. NJR raised approximately $3.6 million of equity through the DRP
by issuing 23,000 shares of common stock during the three months ended March 31,
2021 and raised $5.2 million during the three months ended March 31, 2020 by
issuing 143,000 shares of treasury stock. NJR raised approximately $7.5 million
of equity through the DRP by issuing 23,000 shares of common stock and
approximately 140,000 shares of treasury stock during the six months ended
March 31, 2021 , and raised $8.8 million during the six months ended March 31,
2020 , by issuing approximately 223,000 shares of treasury stock. There were no
shares of common stock issued through the waiver discount feature of the DRP
during the three and six months ended March 31, 2021 and 2020.
On
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 toSeptember 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 with respect to certain fixed amounts specified in the agreements, such as dividends. 66 --------------------------------------------------------------------------------New Jersey Resources Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OnSeptember 18, 2020 , we amended our forward sale agreements to extend the maturity date of such forward sales agreements fromSeptember 30, 2020 toSeptember 10, 2021 . OnMarch 3, 2021 , we cash settled a portion of the forward sale agreement for a payout of approximately$388,000 for 727,272 common shares. As ofMarch 31, 2021 , if we had elected to net settle the remaining forward sale agreement, we would have paid approximately$1.4 million under a cash settlement or issued 31,607 common shares under a net share settlement. 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 ofMarch 31, 2021 , we had 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 six months endedMarch 31, 2021 and 2020. 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 working capital, capital expenditures and dividend requirements for the next 12 months. NJR, NJNG,Clean Energy Ventures ,Storage and Transportation 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 and meter or solar asset sale leasebacks.
We believe that as of
As a result of the COVID-19 pandemic there have been disruptions, uncertainty and volatility in the credit and capital markets. Our ability to access funds from financial institutions at a reasonable cost may impact the nature and timing of future capital market transactions.
Short-Term Debt
We use our short-term borrowings primarily to finance Energy Services' short-term liquidity needs,Storage and Transportation 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
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 ofMarch 31, 2021 , 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$249.3 million . 67 -------------------------------------------------------------------------------- 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 Six Months Ended (Thousands) March 31, 2021 NJR Notes Payable to banks: Balance at end of period $ 8,500$ 8,500 Weighted average interest rate at end of period 1.75 % 1.75 % Average balance for the period $ 141,381$ 123,582 Weighted average interest rate for average balance 1.04 % 1.04 % Month end maximum for the period $ 153,000$ 153,000
NJNG
Commercial Paper and Notes Payable to banks: Balance at end of period $ - $ - Weighted average interest rate at end of period - % - % Average balance for the period $ 106 $ 292 Weighted average interest rate for average balance .06 % .04 % Month end maximum for the period $ 5,100$ 14,350
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 and six months endedMarch 31, 2021 , NJR's average interest rate was 1.04 percent and 1.04 percent, resulting in interest expense of approximately$362,000 and$643,000 , respectively. As ofMarch 31, 2021 , NJR had seven letters of credit outstanding totaling$10.3 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.
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 and six months endedMarch 31, 2021 , NJNG's average interest rate was 0.06 percent and 0.04 percent, respectively. NJNG's interest expense was immaterial for the three and six months endedMarch 31, 2021 . As ofMarch 31, 2021 , 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. Short-Term Debt Covenants Borrowings under the NJR Credit Facilities 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.
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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
•$50 million of 3.25 percent senior notes due
Neither NJNG nor its assets are obligated or pledged to support NJR's long-term debt.
NJNG
As of
NJR is not obligated directly or contingently with respect to NJNG's fixed-rate debt issuances.
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.
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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$4.0 million inDecember 2019 , 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 for both the six months endedMarch 31, 2021 and 2020. There were no natural gas meter sale leasebacks recorded during the six months endedMarch 31, 2021 .
Clean Energy Ventures
Clean Energy Ventures enters into transactions to sell the commercial solar assets concurrent with agreements to lease the assets back over a period of five to 15 years. These transactions are considered failed sale leasebacks for accounting purposes and are therefore treated as financing obligations, which are typically secured by the renewable energy facility asset and its future cash flows from SREC and energy sales. ITCs and other tax benefits associated with these solar projects are transferred to the buyer, if applicable. Clean Energy Ventures continues to operate the solar assets, including related expenses, and retain the revenue generated from SRECs and energy sales, and has the option to renew the lease or repurchase the assets sold at the end of the lease term. InDecember 2020 ,Clean Energy Ventures received proceeds of$12.1 million in connection with the sale leaseback of two commercial solar projects. Clean Energy Ventures did not receive proceeds related to the sale leaseback of commercial solar assets during the six months endedMarch 31, 2020 .
Contractual Obligations
NJNG's total capital expenditures are projected to be between$424 million and$454 million during fiscal 2021. Total capital expenditures spent or accrued during the six months endedMarch 31, 2021 , were$188.4 million . NJNG expects to fund its obligations with a combination of cash flows from operations, cash on hand, issuance of commercial paper, available capacity under its revolving credit facility and the issuance of long-term debt. As ofMarch 31, 2021 , NJNG's future MGP expenditures are estimated to be$143.5 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.
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
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 six months ended March 31, 2021 , total capital
expenditures spent or accrued related to the purchase and installation of solar
equipment were $37.5 million . We estimate solar-related capital expenditures for
projects during fiscal 2021 to be between $96 million and $118 million .
During the six months ended March 31, 2021 , our Storage and Transportation
segment had capital expenditures for the Adelphia Gateway project totaling $27.4
million and capital expenditures for Leaf River totaling $2.6 million . During
fiscal 2021, we expect expenditures related to the Adelphia Gateway project to
be between $110 million and $130 million and expenditures related to Leaf River
to be between $22 million and $23 million .
Energy Services does not currently anticipate any significant capital expenditures during fiscal 2021 and 2022.
OnDecember 16, 2020 , Energy Services entered into a series of asset management agreements with an investment grade public utility to release pipeline capacity associated with certain natural gas transportation contracts. The utility will provide certain asset management services and Energy Services may deliver natural gas to the utility in exchange for aggregate net proceeds of approximately$500 million , payable throughNovember 1, 2030 . The asset management agreements include a series of initial and permanent releases commencing onNovember 1, 2021 . NJR will receive approximately$260 million in cash from fiscal 2022 through fiscal 2024 and$34 million per year from fiscal 2025 through fiscal 2031 under the agreements. 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 endedSeptember 30, 2020 .
Off-Balance-Sheet Arrangements
As ofMarch 31, 2021 , our off-balance-sheet arrangements consist of guarantees covering approximately$196.5 million of natural gas purchases, SREC sales and demand fee commitments and outstanding letters of credit totaling$11.0 million . Cash Flows Operating Activities Cash flows from operating activities during the six months endedMarch 31, 2021 , totaled$356.3 million compared with$179.1 million during the six months endedMarch 31, 2020 . 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 natural 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 increase of
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New Jersey Resources Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
(Continued)
Investing Activities
Cash flows used in investing activities totaled $245.5 million during the six
months ended March 31, 2021 , compared with $751.1 million during the six months
ended March 31, 2020 . The decrease of $505.6 million was due primarily to the
acquisition of Leaf River and Adelphia in the prior period that did not recur
along with a decrease of $28.9 million in solar capital expenditures, partially
offset by an increase in capital expenditures of $20.1 million for utility plant
investments and $20.8 million for Storage and Transportation .
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 natural gas management and marketing activities at Energy Services and clean energy investments atClean Energy Ventures . Cash flows used in financing activities totaled$171.2 million during the six months endedMarch 31, 2021 , compared with cash flows from financing activities of$596.3 million during the six months endedMarch 31, 2020 . The decrease of$767.6 million is due primarily to increased short-term debt activity at NJR related to the acquisitions ofLeaf River andAdelphia in the prior period that did not recur and current period payments of short-term debt, partially offset by proceeds of$12.1 million from solar sale leasebacks atClean Energy Ventures in the current period. Credit Ratings
The table below summarizes NJNG's credit ratings as of
Moody's Fitch
Corporate Rating N/A A-
Commercial Paper P-2 F-2
Senior Secured A1 A+
Ratings Outlook Stable Stable
The Fitch ratings and outlook were reaffirmed on
OnMarch 18, 2020 , Moody's revised NJNG's secured rating from Aa3 to A1 and its commercial paper rating from P-1 to P-2 resulting from higher debt levels to fund NJNG's elevated capital program. The outlook was increased to stable from negative. This action does not currently affect any of NJNG's long-term borrowing rates or credit facility pricing. 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.
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New Jersey Resources Corporation
Part I© Edgar Online, source
