UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2003 Commission file number 1-8359
For the quarterly period ended December 31, 2003 Commission file number 1-8359 NEW JERSEY RESOURCES CORPORATION
(Exact(Exact name of registrant as specified in its charter)NEW JERSEY 22-2376465 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1415 WYCKOFF ROAD, WALL, NEW JERSEY - 07719 732-938-1480 (Address of principal executive offices) (Registrant's telephone number, including area code)
New Jersey 22-2376465 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1415 Wyckoff Road, Wall, New Jersey 07719 732-938-1480 (Address of principal executive offices) (Registrant’s telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES: [X] NO: [ ]
YES: [X] No: [] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES: [X] NO: [ ]
YES: [X] No: [] The number of shares outstanding of $2.50 par value Common Stock as of
MayFebruary 2,20032004, was27,126,769.27,450,758. 1
TABLE OF CONTENTSINFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain
of thestatements contained in this reportincluding,are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include, without limitation, those with respect to expected disposition of legal and regulatory proceedings, exposure under the Stagecoach agreement, expected capital expenditures, external financing requirements, the impact of changes in market rates of interest, matters relating totheremediation of manufactured gas plant(MGP)sites andtherecovery of related costs, and the impact of changes in market prices ofcommodities are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.commodities. Forward-looking statements can also be identified by the use of forward-looking terminology such as"may," "intend," "expect," "continue,"“may,” “intend,” “expect,” or “continue” or comparable terminology and are made based uponthe Company'smanagement’s expectations and beliefs concerning future developments and their potential effect uponthe Company.New Jersey Resources (NJR). There can be no assurance that future developments will be in accordance withCompanymanagement’s expectations or that the effect of future developments onthe CompanyNJR will be those anticipated by management.The Company wishes to cautionNJR cautions readers that the assumptions that form the basis for forward-looking statements,
with respect to, or that may impact earningsincluding those regarding financial results and capital requirements for fiscal20032004 and thereafter, include many factors that are beyondthe Company'sNJR’s ability to control or estimate precisely, such as estimates of future market conditions, the behavior of other market participants and changes ininterest rates.the debt and equity capital markets. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are weatherconditionsand economic conditions, demographic changes inNJNG'sthe New Jersey Natural Gas (NJNG) service territory, fluctuations in energy commodity prices, energy conversion activity and other marketing efforts, the conservation efforts ofNJNG'sNJNG’s customers, the pace of deregulation of retail gas markets, access to adequate supplies of natural gas, the regulatory and pricing policies of federal and state regulatory agencies, changes due to legislation at the federal and state level, thecontinued recoverabilitydisallowance of recovery of environmental remediation expenditures and other regulatoryand economic policychanges.While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the CompanyNJR does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.12
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME(unaudited)
- -------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2003 2002 2003 2002 - -------------------------------------------------------------------------------------------------------- (Thousands, except per share data)OPERATING REVENUES ............................ $ 1,152,101 $ 525,780 $ 1,820,880 $ 921,611 ----------- ----------- ----------- ----------- OPERATING EXPENSES Gas purchases ................................ 1,024,255 419,883 1,604,400 738,363 Operation and maintenance .................... 27,347 23,406 52,980 46,401 Depreciation and amortization ................ 8,002 7,538 16,083 15,969 Energy and other taxes ....................... 20,839 15,528 33,863 26,606 ----------- ----------- ----------- ----------- Total operating expenses ..................... 1,080,443 466,355 1,707,326 827,339 ----------- ----------- ----------- ----------- OPERATING INCOME .............................. 71,658 59,425 113,554 94,272 Other income .................................. (321) 873 377 2,048 Interest charges, net ......................... 3,456 4,070 7,785 8,455 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES .................... 67,881 56,228 106,146 87,865 Income tax provision .......................... 26,637 21,298 41,579 33,254 ----------- ----------- ----------- ----------- NET INCOME .................................... $ 41,244 $ 34,930 $ 64,567 $ 54,611 =========== =========== =========== =========== EARNINGS PER COMMON SHARE BASIC ....................................... $ 1.52 $ 1.30 $ 2.39 $ 2.04 =========== =========== =========== =========== DILUTED ..................................... $ 1.50 $ 1.29 $ 2.35 $ 2.01 =========== =========== =========== =========== DIVIDENDS PER COMMON SHARE .................... $ .31 $ .30 $ .62 $ .60 =========== =========== =========== =========== AVERAGE SHARES OUTSTANDING BASIC ...................................... 27,048 26,863 27,016 26,800 =========== =========== =========== =========== DILUTED .................................... 27,467 27,163 27,428 27,108 =========== =========== =========== ===========
(Unaudited)
Three Months Ended December 31, 2003 2002 (Thousands, except per share data) $ 643,454 $ 668,779 Gas purchases 550,946 580,145 Operation and maintenance 25,022 24,313 Regulatory rider expenses 2,630 1,320 Depreciation and amortization 8,230 8,081 Energy and other taxes 13,971 13,024 Total operating expenses 600,799 626,883 42,655 41,896 Other income 972 698 Interest charges, net 3,653 4,329 39,974 38,265 Income tax provision 15,596 14,942 $ 24,378 $ 23,323 $ .89 $ .86 $ .87 $ .85 $ .325 $ .31 27,336 26,983 27,886 27,325 See Notes to Consolidated Financial Statements
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- ---------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, (Thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 64,567 $ 54,611 Adjustments to reconcile net income to cash flows Depreciation and amortization....................................... 16,083 15,969 Amortization of deferred charges.................................... 3,398 2,816 Deferred income taxes............................................... 12,217 2,315 Manufactured gas plant remediation costs ........................... (9,240) (6,197) Change in working capital........................................... 77,526 (42,366) Other, net.......................................................... (482) (383) --------- --------- Net cash flows from operating activities.............................. 164,069 26,765 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock........................................... 5,470 6,639 Proceeds from long-term debt......................................... - 68,600 Proceeds from sale-leaseback transaction ............................ 5,294 20,631 Payments of long-term debt .......................................... (131,353) (815) Purchases of treasury stock.......................................... (912) (1,676) Payments of common stock dividends................................... (16,441) (15,867) Redemption of preferred stock........................................ (295) - Net change in short-term debt........................................ 8,400 (80,600) --------- --------- Net cash flows from financing activities.............................. (129,837) (3,088) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for Utility plant....................................................... (18,573) (20,368) Real estate properties and other.................................... (993) (318) Cost of removal .................................................... (1,318) (1,854) Proceeds from asset sales............................................ 1,046 1,014 --------- --------- Net cash flows from investing activities.............................. (19,838) (21,526) --------- --------- Net change in cash and temporary investments.......................... 14,394 2,151 Cash and temporary investments at September 30........................ 1,282 4,044 --------- --------- Cash and temporary investments at March 31............................ $ 15,676 $ 6,195 ========= ========= CHANGES IN COMPONENTS OF WORKING CAPITAL Receivables.......................................................... $(312,514) $(128,669) Inventories.......................................................... 23,446 27,752 Deferred gas costs................................................... (1,703) 12,672 Purchased gas........................................................ 297,224 48,814 Prepaid and accrued taxes, net....................................... 44,732 34,751 Customers' credit balances and deposits.............................. (15,251) (3,791) Accounts payable & other............................................. 15,191 (6,638) Broker margin accounts............................................... 33,818 (15,571) Other, net........................................................... (7,417) (11,686) --------- --------- Total................................................................. $ 77,526 $ (42,366) ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid for Interest (net of amounts capitalized)................................ $ 7,826 $ 7,288 Income taxes......................................................... $ 7,402 $ 27,428
(Unaudited)
Three Months Ended December 31, (Thousands) 2003 2002 Net income $ 24,378 $ 23,323 Adjustments to reconcile net income to cash flows Depreciation and amortization 8,230 8,081 Amortization of deferred charges 201 1,358 Deferred income taxes (1,541 ) 6,044 Manufactured gas plant remediation costs (2,063 ) (3,595 ) Changes in working capital (116,321 ) (52,695 ) Non-current regulatory assets (5,508 ) (1,012 ) Other non-current assets 5,484 7,093 Other non-current liabilities 6,226 (12,360 ) Net cash flows from operating activities (80,914 ) (23,763 ) Proceeds from common stock 3,942 2,523 Proceeds from long-term debt 12,000 — Proceeds from sale-leaseback transaction 3,941 5,294 Payments of long-term debt (464 ) (50,622 ) Payments of common stock dividends (8,442 ) (8,072 ) Redemption of preferred stock — (295 ) Net change in short-term debt 98,300 86,750 Net cash flows from financing activities 109,277 35,578 Expenditures for Utility plant (12,867 ) (10,142 ) Real estate properties and other (3,681 ) (216 ) Cost of removal (738 ) (711 ) Investment in construction fund (7,800 ) — Proceeds from asset sales — 267 Net cash flows from investing activities (25,086 ) (10,802 ) Net change in cash and temporary investments 3,277 1,013 Cash and temporary investments at September 30 1,839 1,282 Cash and temporary investments at December 31 $ 5,116 $ 2,295 Receivables $ (178,596 ) $ (118,793 ) Inventories (7,396 ) (29,770 ) Underrecovered gas costs 15,703 2,496 Purchased gas 73,662 65,313 Prepaid and accrued taxes, net 27,970 20,253 Accounts payable and other (15,755 ) 6,115 Broker margin accounts (28,507 ) 7,910 Other current assets (7,330 ) 449 Other current liabilities 3,928 (6,668 ) Total $ (116,321 ) $ (52,695 ) Cash paid for Interest (net of amounts capitalized) $ 3,776 $ 5,474 Income taxes $ 2,101 $ 3 See Notes to Consolidated Financial Statements
34
CONSOLIDATED BALANCE SHEETS
ASSETS
- -------------------------------------------------------------------------------------- MARCH 31, MARCH 31, 2003 SEPTEMBER 30, 2002 (unaudited) 2002 (unaudited) - -------------------------------------------------------------------------------------- (Thousands)PROPERTY, PLANT AND EQUIPMENT Utility plant, at cost .................. $ 1,070,692 $ 1,053,086 $ 1,034,225 Real estate properties and other, at cost 26,137 25,144 27,075 ----------- ----------- ----------- 1,096,829 1,078,230 1,061,300 Accumulated depreciation and amortization (335,121) (321,833) (312,262) ----------- ----------- ----------- Property, plant and equipment, net ..... 761,708 756,397 749,038 ----------- ----------- ----------- CURRENT ASSETS Cash and temporary investments .......... 15,676 1,282 6,195 Construction fund ....................... - - 3,600 Customer accounts receivable ............ 462,517 158,591 171,502 Unbilled revenues ....................... 25,723 4,679 33,139 Allowance for doubtful accounts ......... (5,837) (4,395) (3,775) Regulatory assets ....................... 43,975 43,973 29,946 Gas in storage, at average cost ......... 62,630 86,340 93,158 Materials and supplies, at average cost.. 3,046 2,782 2,726 Prepaid state taxes ..................... 450 10,973 - Derivatives ............................. 18,925 8,136 10,645 Broker margin accounts .................. 2,104 38,943 44,469 Other ................................... 29,950 14,654 15,490 ----------- ----------- ----------- Total current assets ................... 659,159 365,958 407,095 ----------- ----------- ----------- DEFERRED CHARGES AND OTHER Equity investments ...................... 13,387 14,302 14,316 Regulatory assets ....................... 136,085 134,537 102,280 Derivatives ............................. 12,881 10,952 9,222 Other ................................... 29,414 37,158 37,907 ----------- ----------- ----------- Total deferred charges and other ....... 191,767 196,949 163,725 ----------- ----------- ----------- Total assets ........................ $ 1,612,634 $ 1,319,304 $ 1,319,858 =========== =========== ===========
December 31, December 31, 2003 September 30, 2002 (Unaudited) 2003 (Unaudited) (Thousands) Utility plant, at cost $ 1,109,034 $ 1,097,591 $ 1,062,632 Real estate properties and other, at cost 34,353 30,999 25,358 1,143,387 1,128,590 1,087,990 Accumulated depreciation and amortization (280,685 ) (275,986 ) (259,521 ) Property, plant and equipment, net 862,702 852,604 828,469 Cash and temporary investments 5,116 1,839 2,295 Customer accounts receivable 269,589 126,910 241,244 Unbilled revenues 40,111 3,649 41,821 Allowance for doubtful accounts (5,901 ) (5,635 ) (5,298 ) Regulatory assets 64,539 75,735 44,807 Gas in storage, at average cost 195,844 188,679 116,099 Materials and supplies, at average cost 2,985 2,754 2,793 Prepaid state taxes 450 11,056 450 Derivatives 62,453 �� 21,290 12,303 Broker margin accounts 35,107 6,600 31,033 Other 19,669 16,846 19,063 Total current assets 689,962 449,723 506,610 Equity investments 16,514 15,432 14,132 Regulatory assets 183,444 189,140 126,873 Derivatives 18,094 16,105 6,341 Construction fund 7,800 — — Other 40,410 47,975 29,857 Total non-current assets 266,262 268,652 177,203 Total assets $ 1,818,926 $ 1,570,979 $ 1,512,282 See Notes to Consolidated Financial Statements
45
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
- ---------------------------------------------------------------------------------- MARCH 31, MARCH 31, 2003 SEPTEMBER 30, 2002 (unaudited) 2002 (unaudited) - ---------------------------------------------------------------------------------- (Thousands)CAPITALIZATION Common stock equity ..................... $ 424,972 $ 361,453 $ 372,839 Redeemable preferred stock .............. - 295 298 Long-term debt .......................... 269,118 370,628 415,822 ---------- ---------- ---------- Total capitalization ................... 694,090 732,376 788,959 ---------- ---------- ---------- CURRENT LIABILITIES Current maturities of long-term debt .... 2,393 26,942 26,922 Short-term debt ......................... 68,300 59,900 5,200 Purchased gas ........................... 466,006 168,782 184,754 Accounts payable and other .............. 33,437 34,688 28,906 Postretirement employee benefit liability 17,438 4,996 2,622 Dividends payable ....................... 8,389 8,072 8,069 Accrued taxes ........................... 54,577 15,025 45,717 Derivatives ............................. 19,192 25,397 35,337 Customers' credit balances and deposits . 12,391 23,642 10,632 ---------- ---------- ---------- Total current liabilities .............. 682,123 367,444 348,159 ---------- ---------- ---------- DEFERRED CREDITS Deferred income taxes ................... 108,090 92,435 77,067 Deferred investment tax credits ......... 8,975 9,148 9,323 Deferred revenue ........................ 14,219 15,019 15,820 Derivatives ............................. 13,694 6,612 5,307 Manufactured gas plant remediation ...... 65,830 65,830 53,840 Postretirement employee benefit liability 9,038 19,950 7,273 Other ................................... 16,575 10,490 14,110 ---------- ---------- ---------- Total deferred credits ................. 236,421 219,484 182,740 ---------- ---------- ---------- Total capitalization and liabilities. $1,612,634 $1,319,304 $1,319,858 ========== ========== ==========
December 31, December 31, 2003 September 30, 2002 (Unaudited) 2003 (Unaudited) (Thousands) Common stock equity $ 438,049 $ 418,941 $ 385,210 Long-term debt 233,094 257,899 344,892 Total capitalization 671,143 676,840 730,102 Current maturities of long-term debt 27,730 2,448 2,350 Short-term debt 299,100 185,800 151,650 Purchased gas 274,292 200,630 234,095 Accounts payable and other 25,298 41,053 27,976 Postretirement employee benefit liability 2,769 3,321 17,823 Dividends payable 8,902 8,442 8,369 Accrued taxes 52,328 36,515 27,811 Derivatives 60,691 22,750 12,495 Customers’ credit balances and deposits 27,124 22,644 17,283 Total current liabilities 778,234 523,603 499,852 Deferred income taxes 112,875 113,608 101,466 Deferred investment tax credits 8,714 8,801 9,062 Deferred revenue 13,018 13,418 14,619 Derivatives 20,275 22,039 3,151 Manufactured gas plant remediation 108,800 108,800 65,830 Postretirement employee benefit liability 15,640 15,248 7,714 Regulatory liabilities 78,791 77,433 75,238 Other 11,436 11,189 5,248 Total non-current liabilities 369,549 370,536 282,328 Total capitalization and liabilities $ 1,818,926 $ 1,570,979 $ 1,512,282 See Notes to Consolidated Financial Statements
56
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended December 31, 2003 2002 Net income $ 24,378 $ 23,323 Other comprehensive income: Change in fair value of equity investments, net of tax of $(151) and $362 218 (525 ) Change in fair value of derivatives, net of tax of $893 and $(5,765) (979 ) 6,743 Other comprehensive income (761 ) 6,218 Comprehensive income $ 23,617 $ 29,541 See Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The September 30,
20022003, balance sheet data is derived from the audited financial statements of New Jersey ResourcesCorporation(NJR or the Company).Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is recommended that theseThese financial statements should be read in conjunction with the financial statements and the notes thereto included inthe Company's 2002NJR’s 2003 Annual Report on Form 10-K.In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results of the interim periods. Because of the seasonal nature of
the Company'sNJR’s utility and wholesale energy services operations,and NJR Energy Services Company (Energy Services) operations, andin addition to other factors, the financial resultsof operationsfor the interim periods presented are not indicative of the results to be expected for the entire year.Certain reclassifications2. Principles of Consolidation
The consolidated financial statements include the accounts of NJR and its subsidiaries, New Jersey Natural Gas (NJNG), NJR Energy Services (NJRES), NJR Retail Holdings (Retail Holdings), NJR Capital Services (Capital) and NJR Service. Significant intercompany transactions and accounts have been
made of previously reported amounts to conform to current year classifications. 2.eliminated.The Retail and Other segment includes Retail Holdings and its wholly-owned subsidiary, NJR Home Services (NJRHS). NJRHS has a wholly-owned subsidiary, NJR Plumbing Services. Retail and Other also includes Capital and its wholly-owned subsidiaries, Commercial Realty & Resources (CR&R), NJR Investment and NJR Energy.
3. New Accounting Standards
In December
2002,2003, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," (SFAS 148), an amendment of FASB Statement No 123. SFAS 148 provides implementation guidance for the adoption of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which the Company adopted as of October 1, 2002. The Company has complied with the guidelines of SFAS 148 with respect to the adoption and disclosure of SFAS 123 (See Note 6.-Earnings Per Share (EPS)). The Company completed its assessment of SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which became effective October 1, 2002, and based on its analysis, the Company does not expect this statement to have a material effect on its financial position, results of operations, or cash flows. SFAS 143 requires the Company to disclose certain asset retirement information. As of March 31, 2003, September 30, 2002, and March 31, 2002, the Company had asset retirement costs recovered through rates in excess of actual costs incurred totaling $70.5 million, $67.8 million, and $66.2 million, respectively, which are included in Accumulated depreciation on the Consolidated Balance Sheets. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," (FIN 45). FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies" (SFAS 5), related to a guarantors accounting for, and disclosures of, the issuance of certain types of guarantees (see Note 11. - Commitments and Contingent Liabilities). The Company has completed an analysis of FIN 45 and has determined that there were no guarantees for unrelated third parties. NJR has issued parental guarantees for certain supply transactions entered into by Energy Services. As of March 31, 2003, approximately $32 million of parental guarantees related to firm commitments. 6In January 2003, the FASB issuedrevised Interpretation No. 46"Consolidation“Consolidation of Variable InterestEntities"Entities” (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51,"Consolidated“Consolidated Financial Statements."” ThisInterpretationinterpretation provides guidance on the identification and consolidation of variable interest entities (VIEs), wherebycontrolconsolidation is achieved through means other than throughvoting rights. The Companycontrol. NJR has completedan analysisits assessment of FIN 46 and has determined that it does not have any VIEs.3. PrinciplesIn December 2003, the FASB revised Statement of
Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, New Jersey Natural Gas Company (NJNG), Energy Services, NJR Retail Holdings Corporation (Retail Holdings), NJR Capital Services Corporation (Capital) and NJR Service Corporation. Significant intercompany transactions and accounts have been eliminated. The RetailFinancial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Othersegment include Retail HoldingsPostretirement Benefits (SFAS 132).” SFAS 132 revises employers’ disclosures about pension and other postretirement benefit plans. NJR has complied with the guidelines of SFAS 132 as they relate to the interim period disclosures (See Note 9. – Employee Benefit Plans).In July 2003, the Emerging Issues Task Force (EITF) issued EITF No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That are Subject to FASB Statement No. 133 and Not Held for Trading Purposes.” EITF No. 03-11 clarifies the income statement presentation for derivative contracts not held for trading purposes. NJR has completed its
wholly owned subsidiary, NJR Home Services Company (Home Services). Home Servicesassessment of EITF No. 03-11 and hasa wholly owned subsidiary, NJR Plumbing Services Company. Retail and Other also includes Capital anddetermined that it will not have an impact on itswholly owned subsidiaries, Commercial Realty & Resources Corp. (CR&R), NJR Investment Company and NJR Energy Corporation (NJR Energy).financial condition, results of operations or cash flows.8
4. Capitalized and Deferred Interest
The Company'sNJR’s capitalized interest totaled
$65,000$91,000 and$106,000$81,000 for the three months endedMarchDecember 31, 2003 and 2002, respectively, at average interest rates of 1.52 percent and$146,0001.81 percent, respectively. These amounts are included in construction work in progress, a component of Utility plant on the Consolidated Balance Sheets and$228,000reflected in the Consolidated Statements of Income as a reduction to Interest charges, net. NJNG does not capitalize a cost of equity forthe six months ended March 31, 2003 and 2002, respectively.its utility plant construction activities.Pursuant to a New Jersey Board of Public Utilities (BPU) order,
NJNG'sNJNG is permitted to recover carrying costsare recoverableon uncollected balances related to underrecovered natural gas costs incurred through October 31, 2001, and itsMGPmanufactured gas plant (MGP) remediationexpenditures (seeexpenditures. (See Note5c.-Manufactured Gas Plant5d. – MGP Remediation). Accordingly, Other income included $743,000 and $525,000 of deferred interestof $547,000 and $658,000 for the three months ended March 31, 2003 and 2002, respectively, and $1.1 million and $1.5 million for the six months ended March 31, 2003 and 2002, respectively,related to remediation and underrecovered gascosts.costs for the three months ended December 31, 2003 and 2002, respectively.5. Legal and Regulatory Proceedings
a. Energy Deregulation Legislation
In February 1999, the Electric Discount and Energy Competition Act (EDECA), which provides the framework for the restructuring of New
Jersey'sJersey’s energy market, became law. In March 2001, the BPU issued a written order that approved a stipulationagreementamong various parties to fully openNJNG'sNJNG’s residential markets to competition, restructure its rates and expand an incentive for residential and small commercial customers to switch to transportation service. As required by EDECA, NJNG restructured its rates to segregate its Basic Gas Supply Service (BGSS), the component of rates whereby NJNG provides the commodity and capacity to the customer, and delivery (i.e., transportation)prices as required by EDECA and expand an incentive for residential and small commercial customers to switch to transportation service.prices.In June 2001, the BPU initiated a proceeding regarding the provision of BGSS. In July 2001, NJNG submitted a BGSS proposal that provides for additional customer choices, including various pricing options. In January 2002, the BPU issued an order, which stated that BGSS could be provided by suppliers other
7than the state'sstate’s natural gas utilities, butat this time itBGSS should be provided by thestate'sstate’s natural gasutilities. The parties are currently discussing NJNG's July 2001 proposal. In Marchutilities until further BPU action. On October 22, 2003, the BPU approved apermanent statewide Universal Service Fund (USF)stipulation whereby the parties agreed to develop a commodity pooling program,effective July 1, 2003. The USF program was established for all gas and electric utilities in New Jersey for the benefit of low-income customers. Eligible customers will receive a credit toward their utility bill, the cost ofwhichwill be recovered through a USF rider.is related to NJNG’s proposal.The BPU is required to audit the
state'sstate’s energyutilitiesutilities’ competitive services business every two years. The primary purpose of the audit is to ensure thatNJNGutilities anditstheir affiliates offeringcompetitiveunregulated retail services do not have any unfair competitive advantage overnon-affiliatednonaffiliated providers ofcompetitivesimilar retail services. In June 2002, the BPU initiated a complianceaudit.audit of NJNG. In March 2003, an independent consulting firm, engaged by the BPU, completed its audit of NJNG. The audit report found that NJNG and its affiliates do not have an unfair competitive advantage over other competitive service providers. It also confirmed that NJNG has established and maintained effective accounting, functional and management separation between itself and its affiliates.TheApproval of the audithas been submitted toby the BPU is pending.b. BGSS
On January 6, 2003, the BPU approved a statewide BGSS agreement requiring all New Jersey natural gas utilities to make an annual filing by June 1 for
approval. b.review of BGSS andOther Adjustment Clauses On October 17, 2002, NJNG filedaBGSS request with the BPU for a 3 percentpotential priceincrease reflecting higher projected gas costs,change to be effective October 1. After proper notice and BPU action on the June filing, the agreement allows natural gas utilities to increase residential and small commercial customer BGSS prices up to 5 percent on a self-9
implementing basis on December 1
2002andthe opportunityFebruary 1. Such increases are subject to subsequent BPU review and approval.On February 6, 2003, NJNG received approval for
an additional adjustment in February 2003 to address potential changes in market conditions. The filing also requested an extension of the BGSS margin-sharing incentives. In lieu of the December price change, NJNG updated the BGSS request in January 2003 to seeka 6 percent price increase effectiveFebruary 1, 2003. On February 5,immediately, and on August 18, 2003, NJNG receiveda provisional 6approval for an 8.7 percent price increase effective September 1, 2003. These increases became final in January 2004.On December 30, 2003, NJNG filed supporting documentation for a 5 percent self-implementing price increase that became effective on February 1, 2004. The increase was necessary due primarily to higher wholesale commodity costs and is subject to refund with
interest,interest.During fiscal 2002, NJNG received a 10.8 percent price decrease effective December 1, 2001, and a 3 percent price decrease effective February 6, 2002, reflecting
higherlower projected wholesale natural gas costs.The parties to the BGSS proceeding continue to review the filing to extend the BGSS incentives beyond October 31, 2003.NJNG is eligible to receive incentives for reducing BGSS costs through a series of margin-sharing programs that include off-system sales, capacity release, portfolio-enhancing and
portfolio-enhancingfinancial risk management programs. On October30, 2002,22, 2003, the BPU approved an agreement whereby the existing85/15margin sharing between customers and shareowners for off-system sales, capacity release and financial risk management transactions was extended through October 31,2003.2006. As part of this agreement, the portfolio-enhancing programs, which include an incentive for the permanent reduction of the cost of capacity, continued to receive60/40sharing treatment between customers and shareowners through April 30, 2004, for transactionscompletedentered into on or before December 31, 2002.AnyThis BPU action also provided for the parties to evaluate the appropriateness of a newtransactions that became effective after Januarycapacity reliability incentive for the BPU’s consideration by October 1,2003, are not eligible under the portfolio-enhancing programs.2004. NJNG believes that the elimination of the portfolio-enhancing program will not have a material effect on its financial position, results of operations or cash flows.NJNGThe BPU also
believes as part of the BGSS proceedings that it can replace these programs withapproved a newincentive-based programspilot storage incentive program that willnot haveshare gains and losses on an 80/20 percent basis between customers and shareowners, respectively. This 1-year program will measure the difference between the actual cost of natural gas in storage and amaterial effect on its financial position, results of operations or cash flows, however, no assurance can be given asbenchmark applicable to theultimate resolutionApril-through-October injection season.c. Other Adjustment Clauses
On October 22, 2003, the BPU approved NJNG’s request to update factors used in its weather-normalization clause (WNC), which is designed to stabilize year-to-year fluctuations that may result from changing weather patterns on both NJNG’s gross margin and customers’ bills. Consumption factors had not been adjusted to reflect NJNG’s growth and actual customer base since the settlement of
these matters. On January 6,its last base rate case nearly a decade ago. Updating the consumption factors results in the WNC being more reflective of actual weather.In March 2003, the BPU approved a
generic BGSS agreement which requires that all New Jersey natural gas utilities make an annual filing by June 1 for a potential price change to be effective October 1 and, after proper notice and BPU action on the June filing, will allow gas utilities to increase residential and small commercial customer prices up to 5 percent on a self-implementing basis on December 1 and February 1. On May 1, 2003, NJNG submitted its annual BGSS filing, seeking an 8.8 percent increase to bepermanent statewide Universal Service Fund (USF) program, effective July 1,2003 reflecting higher wholesale2003. The USF program was established for all natural gascosts. 8NJNG is also involvedand electric utilities invarious proceedings associated with several other adjustment clauses (e.g., Transportation Initiation Clause (TIC) andNew JerseyClean Energy Program, formerly known as Comprehensive Resource Analysis), which in NJNG's opinionfor the benefit of limited-income customers. Eligible customers willnot havereceive amaterial adverse effectcredit toward their utility bill. The credits applied to eligible customers will be recovered through a USF rider. NJNG will recover carrying costs onits financial condition or results of operations.deferred USF balances.NJNG has proposed a Smart Growth pilot program for Asbury Park and Long Branch,
thatNew Jersey, which would invest new capital in the infrastructure of these cities.NJNG'sNJNG’s proposal features a recovery mechanism referred to as the Targeted Revitalization Infrastructure Program (TRIP), which would provide10
a current return on and return of
the newlyany capital investedcapital.in this program. NJNG estimates that itwillwould invest approximately$7$14 millionin Asbury Parkunder this program. The BPU is currently reviewing this proposal.NJNG
hasis alsofiled for approvalinvolved in various proceedings associated with several other adjustment clauses, which in NJNG’s opinion will not have a material adverse impact on its financial condition or results ofa special transportation price and agreement for service to the Ocean Peaking Power Plant, a new gas-fired electric generation facility located in Lakewood, New Jersey, which is expected to commence commercial operation by June 2003. The BPU is currently reviewing the proposal and is expected to issue an order by June 2003. c. Manufactured Gas Plant (MGP)operations.d. MGP Remediation
NJNG has identified 11 former MGP sites, dating back to the late 1800s and early 1900s, which contain contaminated residues from the former gas manufacturing operations. Ten of the 11 sites in question were acquired by NJNG in 1952.
All of the gasGas manufacturing operations ceased at these sites at least by the mid-1950s and, in some cases, had been discontinued many yearsearlier, and allearlier. All of the former gas manufacturing facilities were subsequently dismantled by NJNG or the previous owners. Since October 1989, NJNG hasentered intobeen operating under Administrative Consent Orders or Memoranda of Agreement with the New Jersey Department of Environmental Protection (NJDEP) covering all 11 sites. These orders and agreements establish the procedures to be followedby NJNGin developing a final remedialclean-upcleanup plan for each site. NJNG is currently involved in administrative proceedings with the NJDEP with respect to the plant sites in question, and is participating in various studies and investigations by outside consultants to determine the nature and extent of any such contaminated residues and to develop appropriate programs of remedial action, where warranted. Until September 2000, most of the cost of such studies and investigations had been shared under an agreement with the former owner, Jersey Central Power & Light Company (JCP&L), now owned by FirstEnergy Corporation, and operator of 10 of the MGP sites. In September 2000, a revised agreement was executed pursuant to which NJNG is responsible for two of the sites, whilethe former ownerJCP&L is responsible for the remaining eight sites. Also in September 2000, NJNG purchased a 20-year cost-containment insurance policy foritsthe tworemainingsites. NJNG continues to participate in the investigation and remedial actionforand bear the cost related to the one MGP site that was not subject to the original cost-sharing agreement.TheIn June 1992, the BPU approved a
Remediation Rider inremediation rider through which NJNG,recoversmay, subject to BPU approval, recover its remediationexpensesexpenditures, including carrying costs, overarolling 7-yearperiod.periods. NJNG is currently recoveringitsremediation expenditures incurred through June 30, 1998. In September 1999NJNG filed for recovery of remediation expenditures incurred through June 30, 1999. Inand January 2001, NJNG filed for recovery of remediation expenditures, including carrying costs, incurredthroughin the years ended June 30,2000.1999 and 2000, respectively. In March 2003, NJNG filed testimony for recovery of remediation expenditures, including carrying costs, for the 2-year period ending June 30, 2002. The BPU is currently reviewing these three filings, seeking total recovery of $55 million and, while NJNG believes that all costs are probable of recovery, no assurance can be given as to the ultimate resolution of this matter. As ofMarchDecember 31, 2003,$116.1$46.2 million of previously incurredand accruedremediation costs, net of recoveries from customers and insurancerecoveries, isproceeds received and anticipated, are included in Regulatory assets on the Consolidated BalanceSheet.Sheet (See Note 12. – Commitments and Contingent Liabilities).In March 1995, NJNG instituted an action for declaratory relief against 24 separate insurance companies in the Superior Court of New Jersey, Docket
numberNo. OCM-L-859-95. These insurance9carriers provided comprehensive general liability coverage to NJNG from 1951 through 1985. The complaint was amended in July 1996 to name Kaiser-Nelson Steel and Salvage Company (Kaiser-Nelson) and its successors as additional defendants. In September 2001, NJNG reached a favorable settlement with the insurance carrier that provided the majority of NJNG'sNJNG’s coverage. This settlement involves a significant cash payment to NJNG that will be paid in fourinstallments.installments ending October 2004. NJNG has now dismissed or reached a settlement with all of its insurance carriers. NJNG continues to pursue its claim11
against Kaiser-Nelson for environmental damages caused by
Kaiser-Nelson'sKaiser-Nelson’s decommissioning of structures at several MGP sites.TheFormal mediation was held in January 2004, which was unsuccessful. As a result, a trialhas been postponed pending resolution of various pre-trial motions.is currently scheduled for March 15, 2004. No assurance can be given as to the ultimate resolution of this matter.d.e. Long Branch MGP Site Litigation
Since July 2003, a total of 303 complaints have been filed in the Superior Court of New Jersey, Monmouth County Law Division, Docket No. MON-L-2883-03, against NJNG, NJR and JCP&L alleging, among other things, personal injuries, wrongful death, survivorship actions, and property damage stemming from the operation and remediation of the former MGP site in Long Branch, New Jersey. The relief sought, which has yet to be quantified by plaintiffs, includes compensatory damages, the establishment of a medical monitoring fund, disgorgement of alleged profits, cost of cleanup and remediation, natural resource damages, and punitive damages.
JCP&L has made a demand upon NJNG for indemnification as a result of the September 2000 agreement between it and NJNG, whereby NJNG assumed responsibility for the Long Branch site. NJNG has agreed to honor the terms of the indemnity agreement. NJNG and NJR have answered all of the complaints. In February 2004, the complaints were designated as a mass tort for centralized case management purposes and transferred from the Superior Court of New Jersey, Monmouth County Law Division to the Bergen County Law Division.
The Company’s insurance carriers have been notified of the claims, and its insurer, under an Environmental Response, Compensation and Liability Policy, has agreed to provide a defense and certain coverage, subject to a reservation of rights regarding certain allegations in the complaints.
The Company believes that it is not liable under the allegations of the complaints, and further believes that any liability that could possibly be assessed against it, with the exception of liability for punitive damages, would be recoverable through insurance or may be recoverable through the remediation rider. However, no assurance can be given as to the ultimate resolution of this matter or the impact on the Company’s financial condition, results of operations or cash flows.
f. Various
The Company is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the
Company'sCompany’s opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition,orresults ofoperations.operations or cash flows.6. Earnings Per Share
(EPS)In accordance with SFAS No. 128,
"Earnings“Earnings PerShare,"Share” (EPS), which established standards for computing and presenting basic and diluted EPS, the incremental shares required for inclusion in the denominator for the diluted EPS calculation were419,349549,972 and300,635341,459 for the three months endedMarch 31, 2003 and 2002, respectively and 412,523 and 308,252 for the six months ended MarchDecember 31, 2003 and 2002, respectively. These shares relate to stock options and restricted stock and were calculated using the treasury stock method. The numerator for each applicable basic and diluted EPS calculation was net income.Effective12
In October
1,2002,the Company hasNJR adopted the fair value method of recording stock-based compensation under SFAS123, which is considered the preferred method of accounting. The Company123. NJR adopted the prospective application of SFAS 123 for options granted after October 1, 2002, the cost of which will be expensed through the income statement based on the fair value of the award at the grant date.The Company recognized $53,000 of expenseIn December 2002, the FASB issued SFAS 148, which provides implementation guidance for thesix months ended March 31, 2003, relatedadoption of SFAS 123. NJR has complied with the guidelines of SFAS 148 with respect tostock options granted after October 1, 2002.the adoption and disclosure of SFAS 123. The following is acomparisonreconciliation of theas reportedAs Reported andpro formaPro Forma net income for options granted prior to October 1, 2002, which are accounted for under Accounting Principles Board Opinion No. 25,"Accounting“Accounting for Stock Issued to Employees." 10”
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 --------------------------------------------- (Thousands)As Reported: Net income $ 41,244 $ 34,930 $ 64,567 $ 54,611 ========= ========= ========= ========= Earnings Per Share-Basic $ 1.52 $ 1.30 $ 2.39 $ 2.04 ========= ========= ========= ========= Earnings Per Share-Diluted $ 1.50 $ 1.29 $ 2.35 $ 2.01 ========= ========= ========= ========= Pro Forma for options issued prior to October 1, 2002: Net income $ 40,778 $ 34,418 $ 64,101 $ 54,099 ========= ========= ========= ========= Earnings Per Share-Basic $ 1.51 $ 1.28 $ 2.37 $ 2.01 ========= ========= ========= ========= Earnings per Share-Diluted $ 1.48 $ 1.27 $ 2.34 $ 1.99 ========= ========= ========= =========
Three Months Ended December 31, 2003 2002 (Thousands) Net Income, as reported $ 24,378 $ 23,323 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 31 — Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (142 ) (153 ) Pro forma Net Income $ 24,267 $ 23,170 Earnings Per Share: Basic – as reported $ .89 $ .86 Basic – pro forma $ .89 $ .86 Diluted – as reported $ .87 $ .85 Diluted – pro forma $ .87 $ .85 7. Construction Fund and Long-Term Debt
OnIn December
23, 2002, the Company2003, NJR entered into$380a $200 millionofcommitted creditfacilitiesfacility with several banks, which replaced$335a $180 millionofcreditagreements. The NJR portion of thefacility. This facility consists of$100$120 million with a 364-day term and an $80 million revolving credit facility with a 3-year term expiring January2006, and2006. The NJR facility is used to finance its unregulated operations. NJNG, nor the results of its operations, are obligated or pledged to support the NJR facility.In December 2003, NJNG
portion of theentered into a $225 million credit facility with several banks, which replaced a $200 million credit facility. This facility consists of$150$175 million with a 364-day term and a $50 million revolving credit facility with a 3-year term expiring January 2006. TheNJR facilities areNJNG facility is used tofinance unregulated operations. NJNG's facilities are used toprimarily support its commercial paper borrowings. Consistent withNJNG'sNJNG’s intent to maintain a portion of its commercial paper borrowings on a long-term basis, and as supported by its long-term revolving credit facility,$25 million, $25$15 million and$50$20 million of commercial paper borrowings are included in Long-term debt on the Consolidated Balance Sheets atMarch 31, 2003,September 30,20022003, andMarchDecember 31, 2002, respectively.In July 2002,No commercial paper borrowings are included in Long-term debt on the Consolidated Balance Sheets at December 31, 2003.13
NJNG enters into loan agreements with the New Jersey Economic Development Authority (EDA) under which the EDA issues tax-exempt bonds to the public, and the proceeds are loaned to NJNG. To secure its loans from the EDA, NJNG issues First Mortgage Bonds to the EDA with interest rates and maturity dates identical to the EDA Bonds. In July 2002, the EDA approved $12 million of new funds to finance
NJNG'sconstruction in NJNG’s northern divisionconstructionin Morris County overthe nextthree years.On March 25,In September 2003,NJNG filed a petition withthe BPU approved NJNG’s petition to issueand deliver over the next three yearsup to $112 million of First Mortgage Bonds, Private Placement Bonds, EDA loan agreements, orMedium TermMedium-Term Notesinover theprincipal amount up to $100 million.next three years. In December 2003, NJNGexpects the BPU to approve the filing by September 30, 2003. Upon approval NJNG will enterentered into a loan agreementwithwhereby the EDA loaned NJNG the proceeds from its $12 million, 5% Natural Gas Facilities Revenue Bonds, which NJNG deposited into a construction fund. NJNG issued andexpectsdelivered to the EDA like amounts of its 5% Series HH First Mortgage Bonds, due December 2038, and immediatelydrawdrew down$4 million. As of March 31, 2003, NJNG has not issued any debt under this facility.$4.2 million from the construction fund.In July 2002, NJNG entered into interest-rate caps of $97.1 million,
of interest-rate capswith several banks at a rate of 3.25 percent, expiring in July 2004. These caps are designed to limitNJNG'sNJNG’s variable rate debt exposure foralloutstanding tax-exempt EDA Bonds, the proceeds ofits outstanding tax exempt EDA Bonds.which were loaned to NJNG. The interest-rate caps are treated as cash flow hedges with changes in fair value accounted for in Other comprehensive income.In
fiscalDecember 2003 and 2002, NJNGentered into an agreement with a financing company whereby NJNGreceived$20.6$3.9 millionrelated to the saleandleaseback of a portion of its meters. In December 2002, NJNG 11received$5.3 millionunder this agreementin connection with the sale-leaseback of its vintage2001 meters.2003 and 2002 meters, respectively. NJNG has the ability to continue the sale-leaseback meter program on an annual basis.In December 2002, NJNG's $25 million, 7.5 percent Series V First Mortgage Bonds matured.14
8. Segment Reporting
The Natural Gas Distribution segment consists of regulated
energynatural gas and off-system and capacity management operations. The Energy Services segment consists of unregulated fuel and capacity management and wholesale marketing operations. The Retail and Other segmentconsistconsists ofservice, salesappliance and installationof appliances,services, commercial real estate development, investment and other corporate activities.
Three Months Ended Six Months Ended March 31, March 31, -------------------------------------------------------- 2003 2002 2003 2002 -------------------------------------------------------- (Thousands)Operating Revenues Natural Gas Distribution $ 334,795 $ 289,609 $ 560,879 $ 509,557 Energy Services 814,654 231,581 1,253,466 402,469 Retail and Other 5,182 4,612 10,181 9,705 ----------- ----------- ----------- ----------- Subtotal 1,154,631 525,802 1,824,526 921,731 Intersegment revenues * (2,530) (22) (3,646) (120) ----------- ----------- ----------- ----------- Total $ 1,152,101 $ 525,780 $ 1,820,880 $ 921,611 =========== =========== =========== =========== Operating Income Natural Gas Distribution $ 58,434 $ 53,002 $ 93,232 $ 83,000 Energy Services 12,461 5,222 19,381 8,747 Retail and Other 763 1,201 941 2,525 -------------------------------------------------------- Total $ 71,658 $ 59,425 $ 113,554 $ 94,272 =========== =========== =========== ===========* Consists
Three Months Ended December 31, 2003 2002 (Thousands) Operating Revenues Natural Gas Distribution $ 252,234 $ 226,084 Energy Services 385,498 438,812 Retail and Other 5,745 4,999 Subtotal 643,477 669,895 Intersegment revenues* (23 ) (1,116 ) Total $ 643,454 $ 668,779 Operating Income Natural Gas Distribution $ 33,090 $ 34,798 Energy Services 9,193 6,920 Retail and Other 372 178 Total $ 42,655 $ 41,896 Net Income Natural Gas Distribution $ 19,065 $ 19,523 Energy Services 5,273 3,871 Retail and Other 40 (71 ) $ 24,378 $ 23,323 *Consists of transactions between subsidiaries that are eliminated in consolidation.
The Company'sNJR’s assets
of each offor the various business segments are detailed below:
As of As of As of March 31, 2003 September 30, 2002 March 31, 2002 ---------------------------------------------------- (Thousands)Assets Natural Gas Distribution $1,134,926 $1,059,417 $1,054,556 Energy Services 398,724 207,964 213,586 Retail and Other 78,984 51,923 51,716 ------------ ---------- ---------- Total $1,612,634 $1,319,304 $1,319,858 ============ ========== ==========
As of As of As of December 31, September 30, December 31, 2003 2003 2002 (Thousands) Assets Natural Gas Distribution $ 1,351,392 $ 1,285,894 $ 1,179,846 Energy Services 387,418 213,253 247,480 Retail and Other 80,116 71,832 84,956 Total $ 1,818,926 $ 1,570,979 $ 1,512,282 15
9.
Investments IncludedEmployee Benefit PlansPension Plans
NJR has two trusteed, noncontributory defined benefit retirement plans covering regular represented and nonrepresented employees with more than one year of service. All represented employees of NJRHS hired on or after October 1, 2000, are covered by an enhanced defined contribution plan instead of the defined benefit plan. Defined benefit plan benefits are based on years of service and average compensation during the highest 60 consecutive months of employment.
The components of the qualified plans net pension cost were as follows:
Three Months Ended December 31, 2003 2002 (Thousands) Service cost $ 742 $ 705 Interest cost 1,471 1,399 Expected return on plan assets (1,967 ) (1,870 ) Amortization of: Prior service cost 26 25 Unrecognized loss 190 180 Total net pension cost $ 462 $ 439 NJR does not have any minimum funding requirements in
Equity investmentsfiscal 2004. If market performance is less than anticipated, additional funding may be required.Other Postretirement Benefits
NJR provides postretirement medical and life insurance benefits to employees who meet the eligibility requirements.
Effective October 1, 1998, the BPU approved the recovery of $4.9 million of deferred costs over 15 years, which is included in Regulatory assets on the Consolidated Balance
SheetSheets.The components of the net Other Postretirement Benefits (OPEB) cost are as follows:
Three Months Ended December 31, 2003 2002 (Thousands) Service cost $ 321 $ 249 Interest cost 562 435 Expected return on plan assets (213 ) (165 ) Amortization of: Transitional obligation 101 79 Prior service cost 21 16 Unrecognized loss 173 134 Total net OPEB cost $ 965 $ 748 16
For the 3-month period ended December 31, 2003, $1.2 million of contributions have been made to the OPEB plan. NJR anticipates contributing an additional $2.1 million during the remainder of fiscal 2004. If market performance is
the Company's less-than-1-percent ownership interest in the Capstone Turbine Corporation (Capstone), a developer of microturbines.less than anticipated, additional funding may be required.10. Investments
In July 2001,
the CompanyNJR entered into a 5-year, zero-premium collar to hedgechanges incash flows associated with thevalueforecasted sale of12100,000 shares of its investment in Capstone.Capstone Turbine Corporation. The collar consists of a purchased put option with a strike price of $9.97 per share and a sold call option with a strike price of $24.16 per share for 100,000 shares.The Company entered into this transaction to hedge its anticipated sale of 100,000 shares of Capstone at the settlement date in 2006 and, accordingly,NJR accounts for the transaction as a cash flow hedge, with changes in fair value accounted forinas Other comprehensive income.The change inOther comprehensive income for thesixthree months endedMarchDecember 31, 2003,wasincluded a$5,000$1,000 unrealized gain related to this collar. ThroughMarchDecember 31, 2003, Accumulated other comprehensive incomeincludes an $846,000included a $752,000 unrealized gain related to this collar.In July 2002, the Company sold all of its unhedged Capstone shares and realized an after-tax loss of $449,000. In March 2003, the Company had an after-tax loss of approximately $341,000 related to the sale of equity investments. 10.11. Comprehensive Income
The components of Comprehensive income are as follows:
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 -------------------------------------------- (Thousands)Comprehensive Income: Net income $ 41,244 $ 34,930 $ 64,567 $ 54,611 -------- -------- -------- -------- Other comprehensive income: Change in fair value of equity investments, net $ 78 $ (821) $ (446) $ (201) Change in fair value of derivatives, net 3,700 (18,233) 10,443 (25,127) -------- -------- -------- -------- Total Other comprehensive income $ 3,778 $(19,054) $ 9,997 $(25,328) -------- -------- -------- -------- Comprehensive income $ 45,022 $ 15,876 $ 74,564 $ 29,283 ======== ======== ======== ======== Accumulated Other Comprehensive Income: Beginning balance $ (6,155) $ 4,786 $(12,374) $ 11,060 Other comprehensive income 3,778 (19,054) 9,997 (25,328) -------- -------- -------- -------- Ending balance $ (2,377) $(14,268) $ (2,377) $(14,268) ======== ======== ======== ========The amounts included in
OtherAccumulated other comprehensive income related to natural gas instruments, which have been designated cash flow hedges, will reduce orbe charged toincrease natural gas costs as the underlying physical transactionsettles.impacts earnings. Based on the amount recorded in Accumulated other comprehensive income atMarchDecember 31, 2003, $3.2 million is expected to be recorded as a decrease to natural gas costs for the remainder of fiscal2003.2004. For the three months endedMarchDecember 31, 2003 and 2002,$33.8$10.9 million was credited and $1.4 million was chargedand $16 million was creditedtogas costs, respectively, and for the six months ended March 31, 2003 and 2002, $54.3 million was charged and $31.3 million was credited tonatural gas costs, respectively.13TheThese cash flow hedgesdescribed abovecover various periods of time ranging fromMay 2003January 2004 to October 2010.11.12. Commitments and Contingent Liabilities
NJNG is involved with
theenvironmental investigations and remedial actions at certain MGP sites(see(See Note5c. - Manufactured Gas Plant (MGP) Remediation)5d. – MGP Remediation and Note 5e. – Long Branch MGP Site Litigation). InJuly 2002,September 2003, with the assistance of an outside consulting firm, NJNG updated an environmental review of the MGP sites, including a review ofitstheir potential liability for investigation and remedial action.On the basis of suchBased on this review, NJNG estimates that, exclusive of any insurance recoveries, total future expenditures to remediate and monitorknownthe three MGP sites it is responsible for will range from$65.8$108.8 million to$83.3$146.3 million.NJNG'sNJNG’s estimate of these liabilities is based upon currently available facts, existing technology and presently enacted laws andregulations; however,regulations. However, actual costs may differmateriallyfrom these estimates. Where available information is sufficient to estimate the amount of the liability, it isNJNG'sNJNG’s policy to accrue the full amount of such estimate. Where the information is sufficient only to establish a range of probable liability and no point within the range is more likely than any other, it isNJNG'sNJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has recorded an MGP remediation liabilityof $65.8 millionand a corresponding Regulatory asset of$50.3$108.8 millionnet of insurance recoveries,on the Consolidated Balance Sheet. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations,andthe ultimate ability of other responsible parties topay.pay and any insurance recoveries. NJNGbelieves allwill continue to seek recovery of such costsare recoverablethrougha Remediation Rider, however, no assurance canits remediation rider. If any future regulatory position indicates that the recovery of such costs is not probable, the related cost would begiven ascharged to income.NJRES is the
ultimate resolution of this matter. Energy Services has entered into amarketingand management agreementagent for the Stagecoach storage project. Stagecoach is a high-injection/high-withdrawal facility in New YorkStatewith 12 billion cubic feet (Bcf) of working natural gas capacityand interstate pipeline connectionsconnected to theNortheast markets. Stagecoach received Federal Energy Regulatory Commission (FERC) certification for full operations in June 2002. Energy Services is the exclusive agent forTennessee Gas Pipeline.17
NJRES’ marketing
Stagecoach services for a 10-year period,and management agreement ends March 31, 2012, subject to terminationrights, ending March 31, 2012.rights. During this period,Energy ServicesNJRES has agreed to arrange contracts for, or purchase at fixed prices, sufficient services to provide Stagecoach with revenues of approximately $22 million annually from April 1, 2003, to March 31, 2012. Stagecoachcan require Energy Services to make the foregoing purchases only if Stagecoach is capable of providing the underlying services andmust notifyEnergy ServicesNJRES of its intent to sell services under the aforementioned contract by November 30 of the prior annual period.In addition, Energy Services believes that the price at which it would be required to purchase these services is currently below market.Stagecoach did not notifyEnergy ServicesNJRES of its intent to sell services for the annual period ended March 31,2004 and therefore Energy Services2005. Therefore, NJRES has no purchase obligation related to this period.Energy ServicesNJRES has reached 1- to3-year5-year agreements with Stagecoach customers with varying expiration dates, the last of which isOctoberAugust 31,2005.2008. The value of these servicestotal 68totals 74 percent, 57 percent and1450 percent ofthe Company'sNJR’s potential purchase obligation for the annual periods ended March 31,2005 and March 31,2006 through 2008, respectively.In August 2002, NJNG, in connection with its system requirements,
was awardedentered into 2-year agreements for Stagecoach storage and transportationservices.services ending July 31, 2004. In January 2004, NJNG extended its agreements with Stagecoach through March 31, 2008. These agreements were awarded pursuant to an open bid process.The NJNG agreements represent an additional 35 percent of the required level of services for the 2-year period ending July 31, 2004. 14Due to the price levels of the potential purchase obligations to
Energy Services,NJRES, as compared with current market prices, and the current and expected level of contracts,the CompanyNJR does not currently believe that the potential purchase obligation in the Stagecoach agreement will result in any material future losses.Additionally, underUnder the Stagecoach agreement,
Energy ServicesNJRES is also required to provideto,and maintainat, the Stagecoach facility2 Bcf of firm base natural gasand to manage up to 3 Bcf of interruptible base gasat the Stagecoach facility for the term of the agreement.12.18
13. Regulatory Assets & Liabilities
At
each of MarchDecember 31, 2003, September 30,2002,2003, andMarchDecember 31, 2002, respectively,the CompanyNJR had the followingregulatoryRegulatory assets on the Consolidated Balance Sheets:
As of As of As of December 31, September 30, December 31, 2003 2003 2002 Recovery Period (Thousands) Regulatory assets – current Underrecovered gas costs $ 64,539 $ 80,242 $ 34,909 Less than one year(1) Weather-normalization clause — (4,507 ) 9,898 Less than one year(4) $ 64,539 $ 75,735 $ 44,807 Regulatory assets – non-current Remediation costs Expended, net $ 46,180 $ 44,117 $ 45,190 (2) Liability for future expenditures 108,800 108,800 65,830 (3) Underrecovered gas costs 7,360 2,827 11,625 Through Nov. 2004(1) Postretirement benefit costs 2,946 3,021 3,247 Through Sept. 2013(4) Weather-normalization clause 1,242 — — (4) Derivatives 15,678 28,870 — Through Oct. 2010(5) Societal benefit charges 1,238 1,505 981 Various(2)(4) $ 183,444 $ 189,140 $ 126,873
As of As of As of March 31, September 30, March 31, 2003 2002 2002 ----------------------------------- (Thousands)(1) Recoverable, subject to BPU approval, without interest except for $13.9 million that is recoverable with interest. (2) Recoverable, subject to BPU approval, with interest over rolling 7-year periods. See Note 5. – Legal and Regulatory assets-current Underrecovered gas costs $ 44,910 $ 33,912 $ 18,888 Weather-normalization clause (935) 10,061 11,058 --------- --------- --------- $ 43,975 $ 43,973 $ 29,946 ========= ========= ========= Regulatory assets - non-current Remediation costs Expended, net $ 50,316 $ 42,187 $ 24,445 Liability forProceedings.(3) Estimated future expenditures 65,830 65,830 53,840 Underrecovered gas costs 5,823 15,118 16,781 Postretirement benefit costs 3,172 3,322 3,473 Weather-normalization clause - 4,858 4,101 Derivatives 10,551 2,562 - Other 393 660 (360) --------- --------- --------- $ 136,085 $ 134,537 $ 102,280 ========= ========= =========not yet recovered through a rate order.(4) Recoverable/refundable, subject to BPU approval, through a specific rate order. (5) Recoverable, subject to BPU approval, through BGSS. 13.If there are changes in regulatory positions that indicate the recovery of regulatory assets is not probable, the related cost would be charged to income.
As of As of As of December 31, September 30, December 31, 2003 2003 2002 (Thousands) Regulatory liabilities – non-current Cost of removal obligation $ 72,873 $ 71,494 $ 69,081 Market development fund 5,918 5,939 6,157 $ 78,791 $ 77,433 $ 75,238 19
14. Other
At
MarchDecember 31, 2003, there were27,072,73127,391,806 shares of common stock outstanding, and the book value per share was$15.70. 15$15.99. Certain reclassifications have been made of previously reported amounts to conform to current year classifications.
20
ITEM 2.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREEAND SIXMONTHS ENDEDMARCHDECEMBER 31, 2003RESULTS OF OPERATIONS Consolidated netManagement’s Overview
New Jersey Resources (NJR or the Company) is an energy services holding company providing retail and wholesale natural gas and related energy services to customers in states from the Gulf Coast to New England, and Canada. Its principal subsidiary, New Jersey Natural Gas (NJNG), is a natural gas utility providing natural gas service in central and northern New Jersey and also participates in the off-system sales and capacity release markets. NJNG is regulated by the New Jersey Board of Public Utilities (BPU). Other operating subsidiaries include NJR Energy Services (NJRES), which provides unregulated fuel and capacity management and wholesale marketing services. Included in the Retail and Other segment is NJR Home Services (NJRHS), which provides service, sales and installation of appliances; NJR Energy, an investor in energy-related ventures; Commercial Realty and Resources (CR&R), a commercial real estate developer; and NJR Investment, which makes energy-related equity investments. Net income and assets by business segment are as follows:
Three Months Ended December 31, 2003 2002 (Thousands) Net Income Natural Gas Distribution $ 19,065 78 % $ 19,523 84 % Energy Services 5,273 22 3,871 16 Retail and Other 40 — (71 ) — Total $ 24,378 100 % $ 23,323 100 %
As of As of December 31, December 31, 2003 2002 (Thousands) Assets Natural Gas Distribution $ 1,351,392 74 % $ 1,179,846 78 % Energy Services 387,418 21 247,480 16 Retail and Other 80,116 5 84,956 5 Total $ 1,818,926 100 % $ 1,512,282 100 % The Natural Gas Distribution operations have been managed with the goal of growing profitability, without the need for traditional base rate increases. NJNG, working together with the BPU, has been able to accomplish this goal over the last 10 years through several key initiatives including:
¨ Managing its customer growth, which is expected to increase at about 2.5 percent annually. ¨ Generating earnings from various BPU-authorized margin-sharing incentive programs, which have been extended through 2006. 21
¨ Reducing the impact of weather on NJNG’s earnings through a recently updated weather-normalization clause (WNC). ¨ Managing the volatility of wholesale natural gas prices through a hedging program to help keep our customers’ prices as stable as possible. The energy services segment focuses on pipeline capacity trading, storage management and marketing services, and on providing natural gas management services. NJRES’ contribution to earnings has increased over the past several years due primarily to increases in pipeline and storage capacity assets, higher volumes of natural gas sold and under management and the volatile nature of natural gas prices. Future growth is expected to come from opportunities that include NJRES’ role as the marketing agent for the Stagecoach storage field, along with the acquisition of additional storage and pipeline capacity assets and portfolio management services.
In the Retail and Other segment, NJRHS is focused on growing an installation business through its existing service contract customer base. CR&R is currently constructing a 200,000-square-foot building and seeking additional opportunities to enhance the value of its undeveloped land.
In the conduct of the Company’s business, management focuses on factors it believes may have significant influence on the Company’s future financial results. Our policy is to work together with all of our stakeholders, including customers, regulators and policymakers, to achieve favorable results for all of our stakeholders. These factors include the rate of NJNG’s customer growth in its service territory, which can be influenced by general economic conditions, as well as political and regulatory policies that may impact the new housing market. A healthy part of NJNG’s customer growth comes from the conversion market, which is influenced by the delivered cost of natural gas as compared with other competing fuels, interest rates and other economic conditions. While the impact of weather on NJNG’s gross margin has been significantly mitigated due to the WNC, significant variations from normal weather can impact NJNG’s gross margin. NJNG’s operating expenses are heavily influenced by labor costs, a large component of which are covered by a recently renegotiated collective bargaining agreement which expires in 2008. Labor-related fringe benefit costs, which are also subject to numerous factors, may also influence the Company’s results.
As a regulated company, NJNG is required to record the impact of regulatory decisions on its financial statements. As a result, certain costs are deferred and treated as regulatory assets pending BPU decisions regarding their ultimate recovery from customers. The most significant costs incurred that are subject to this accounting treatment include wholesale natural gas costs and manufactured gas plant (MGP) remediation costs. Actual remediation costs may vary from management’s estimates due to the developing nature of remediation requirements and related litigation. If there are changes in the regulatory position on the recovery of these costs, such costs would be charged to income.
Due to the capital-intensive nature of NJNG’s operations, and the seasonal nature of the Company’s working capital requirements, significant changes in interest rates can also impact our results.
Results of Operations
Net income for the quarter ended
MarchDecember 31, 2003, increased184.7 percent to$41.2$24.4 million, compared with$34.9$23.3 million for the same period last year. BasicEPSearnings per share (EPS) increased173.5 percent to$1.52,$.89, compared with$1.30$.86 last year. Diluted EPS increased162.4 percent to$1.50,$.87, compared with$1.29$.85 last year.ConsolidatedThe increase in net income for the
sixthree months endedMarch 31, 2003, increased 18 percent to $64.6 million, compared with $54.6 million for the same period last year. Basic EPS increased 17 percent to $2.39, compared with $2.04 last year. Diluted EPS increased 17 percent to $2.35, compared with $2.01 last year. The increase in consolidated net income in both the three and six months ended MarchDecember 31, 2003, was attributable primarily tocolder weather and continued profitableexpanded market opportunities at NJRES. Continued customer growth and22
lower interest costs at
New Jersey Resources Corporation's (NJR orNJNG, substantially offset theCompany) principal subsidiary, New Jerseyimpact of weather that was 10.1 percent warmer than last year.Natural Gas
Company (NJNG), and higher margins from increased transportation and storage assets at NJR Energy Services Company (Energy Services). NATURAL GAS DISTRIBUTION OPERATIONSDistribution OperationsThe Natural Gas Distribution segment consists solely of
the Company's principal subsidiary,NJNG, which provides regulatedenergynatural gas services to customers in central and northern New Jersey and participates in the off-system sales and capacity release markets.NJNG'sNJNG’s financial results are summarized as follows:
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ----------------------------------------- (Thousands)Revenue $334,795 $289,609 $560,879 $509,557 ======== ======== ======== ======== Gross margin Residential and commercial $ 75,514 $ 71,528 $129,480 $121,480 Transportation 11,617 7,643 19,614 13,726 -------- -------- -------- -------- Total firm margin 87,131 79,171 149,094 135,206 Off-system and capacity management 1,706 1,241 2,924 2,876 Interruptible 79 210 298 422 -------- -------- -------- -------- Total gross margin 88,916 80,622 152,316 138,504 Operation and maintenance expense 22,033 19,594 42,083 38,736 Depreciation and amortization 7,799 7,337 15,681 15,573 Other taxes not reflected in gross margin 650 689 1,320 1,195 -------- -------- -------- -------- Operating income $ 58,434 $ 53,002 $ 93,232 $ 83,000 ======== ======== ======== ======== Other income $ 299 $ 463 $ 702 $ 1,564 ======== ======== ======== ======== Net income $ 34,161 $ 31,219 $ 53,684 $ 48,353 ======== ======== ======== ========16
Three Months Ended December 31, 2003 2002 (Thousands) Operating revenue $ 252,234 $ 226,084 Gross margin Residential and commercial $ 52,286 $ 52,907 Transportation 7,092 7,812 Total firm margin 59,378 60,719 Off-system and capacity management 1,546 1,218 Interruptible 278 144 Total gross margin 61,202 62,081 Operation and maintenance expense 19,337 18,730 Depreciation and amortization 8,063 7,882 Other taxes not reflected in gross margin 712 671 Operating income $ 33,090 $ 34,798 Other income $ 837 $ 403 Net income $ 19,065 $ 19,523 23
Gross Margin
Gross margin is defined as natural gas revenues less natural gas purchases, sales tax,
anda Transitional Energy Facilities Assessment (TEFA), which is included in Energy and other taxes on the Consolidated Statements ofIncome. NJNGIncome, and regulatory rider expenses. Regulatory rider expenses consist of recovery of state-mandated programs and the remediation adjustment clause costs. These expenses are designed to be primarily offset by corresponding revenues. Management believes that gross margin provides a more meaningful basis for evaluating utility operations thandoes revenuesrevenue since natural gas costs, sales tax, TEFA andTEFAregulatory rider expenses are passed through to customers, and therefore have no effect on gross margin.GasNatural gas costs are charged to operating expenses on the basis of therm sales at therates includedprices inNJNG's tariff. TheNJNG’s Basic Gas Supply Service (BGSS) tariff, approved by the BPU. The BGSS allowsNJNG to recoverthe recovery of natural gas costs that exceed the level reflected initsthe NJNG base rates. Sales tax is calculated at 6 percent of revenue and excludes sales to cogeneration facilities, other utilities, off-system sales and federal accounts. TEFA is calculated on a per-therm basis and excludes sales to cogeneration facilities, other utilities and off-system sales. Regulatory rider expenses are calculated on a per-therm basis. Sales tax and TEFA, which are presented gross in the Consolidated Statements of Income, totaled$19.9$12.9 million and$31.9$12 million for the threeand sixmonths endedMarchDecember 31, 2003respectively, compared with $14.4and 2002, respectively. The increase is due to increased revenues. Regulatory rider expense totaled $2.6 million and$24.5$1.3 million for thesame periods last year.three months ended December 31, 2003 and 2002, respectively. This increase is the result of higher rates for the Universal Service Fund.Firm Margin
ResidentialGross margin from residential and commercial
which NJNG considers to be firm gross margin,customers is subject to aWeather Normalization Clause (WNC),WNC, which provides for a revenue adjustment if the weather varies by more than one-half of 1 percent from normalorweather (i.e., 20-yearaverage, weather. The WNC doesaverage). On October 22, 2003, the BPU approved NJNG’s request to update factors used in the WNC. Several components of the calculation had notfully protect NJNG from factors such as unusually warm weather and declines in customer usage patterns, which were set atbeen adjusted to reflect NJNG’s growth since the conclusion ofNJNG'sNJNG’s last traditional base rate case in January 1994. Updating the consumption factors have made the resulting calculations from the WNC more reflective of the actual impact of weather. The accumulated adjustment from one heating season (i.e., October through May) is billed or credited to customers in subsequent periods. This mechanism reduces the variability of bothcustomercustomers’ bills andNJNG'sNJNG’s earnings due to weather fluctuations.The components of gross margin from firm customers are affected by customers switching between sales service and transportation service.
NJNG'sNJNG’s total gross margin is not affected negatively by customers whoutilizeuse its transportation service and purchasetheirnatural gas from another supplier because its tariff is designedsuchso that no profit is earned on the commodity portion of sales to firm customers. All customers who purchase natural gas from another supplier continue toutilizeuse NJNG for transportation service.Total firm margin
increased $8decreased $1.3 million, or10 percent, and $13.9 million, or 102 percent, for the threeand sixmonths endedMarchDecember 31, 2003,respectively,compared with the sameperiodsperiod lastyear,year. This decrease was due primarily to33the impact of weather that was 10.1 percentand 35 percent colder weatherwarmer thanthe three and six months fromlast year,respectively, and continuedwhich was partially offset by customer growth.The weather for the
sixthree months endedMarchDecember 31, 2003, was122.3 percentcolderwarmer than normal, which, in accordance with the WNC, resulted in thedeferralaccrual of$7.4$1.3 million of gross marginto be refunded to NJNG'sfor recovery from NJNG’s customers in the future. For thesixthree months endedMarchDecember 31, 2002,the 189.7 percentwarmer-than-normalcolder-than-normal weather resulted in$14.8$1.6 million of additional margin beingaccrueddeferred forfuture recovery under the WNC. At March 31, 2003, NJNG had a net $935,000 in accrued WNC margincredit tobe refunded to its customers through fiscal 2004, which takes into account previous year activity. NJNG estimates that for the six months ended March 31, 2003, the colder weather resulted in approximately $2.2 million of additional margin beyond the amount captured in the WNC. For the same period last year, NJNG estimates that approximately $3.6 million of margin was lost due to the warmer-than-normal weather.NJNG’s customers.24
Gross margin from sales to residential and commercial customers
increased $4 million,decreased $621,000, or5.6 percent, and $8 million, or 6.61.2 percent, for the threeand sixmonths endedMarchDecember 31, 2003,respectively,compared17with the same periodsperiod last year.The increase was due primarily to the colder weather and the impact of 10,536 customer additions during the 12 months ended March 31, 2003.Sales to residential and commercial customers were27.4 Bcf and 44.5 Bcf16.1 billion cubic feet (Bcf) for the threeand sixmonths endedMarchDecember 31, 2003, compared with20.6 Bcf and 33.717.1 Bcf for the sameperiodsperiod last year. These decreases were due to the warmer weather.Gross margin from transportation service
increased $4 million,decreased $720,000, or52 percent, and $5.9 million, or 439 percent, for the threeand sixmonths endedMarchDecember 31, 2003, compared with the sameperiodsperiod last year. NJNG transported 2.6 Bcf for the three months ended December 31, 2003, compared with 3 Bcf for the same period last year. Theincrease wasdecreases were due primarily toan increase incustomersutilizing the transportationswitching back to sales service, combined with thecolderwarmer weather.NJNG transported 4.8 Bcf and 7.8 Bcf for the three and six months ended March 31, 2003, respectively, compared with 3 Bcf and 5.1 Bcf, in the same periods last year. NJNG had 21,521 and 10,035 residential customers and 4,977 and 3,476 commercial customers using transportation service at March 31, 2003 and 2002, respectively. The increase in the number of transportation customers was due primarily to increased activity by third-party suppliers.Off-System and Capacity Management
To reduce the overall cost of its natural gas supply commitments, NJNG has entered into contracts to sell natural gas to customers outside its franchise territory when the natural gas is not needed for system requirements. These off-system sales enable NJNG to spread its fixed demand costs, which are charged by pipelines to access their supplies year round, over a larger and more diverse customer base. NJNG also participates in the capacity release market on the interstate pipeline network when the capacity is not needed for its firm system requirements.
EffectiveOn October1, 1998,22, 2003, the BPU approved the extension of an incentive related to these programs throughDecemberOctober 31,2002,2006, whereby NJNGretainedretains 15 percent of the gross margin from these sales, with 85 percent credited to firm customers through the BGSS.On October 30, 2002, the BPU approved an agreement whereby thisUnder a portfolio-enhancing program,
was extended through October 31, 2003. An incentive mechanismwhich is designed to reduce the fixed cost ofNJNG'sNJNG’s natural gas supply portfolio,also became effective October 1, 1998. Anyany savings achieved through the permanent reduction or replacement of capacity or other servicesishas been shared between customers and shareowners. Under this program, NJNG retained 40 percent of the savings for the first 12 months following any transaction and 15 percent for the remaining period through December 31, 2002, with 60 percent and 85 percent, respectively, credited to firm sales customers through the BGSS. On October30, 2002,22, 2003, the BPU approved an agreement whereby any transactions under this program entered into before December 31, 2002, would continue to receive60/40sharing treatment between customers andshareowners. Anyshareowners until April 30, 2004. This BPU action also provided for the parties to evaluate the appropriateness of a newtransactions that become effective after Januarycapacity reliability incentive for the BPU’s consideration by October 1,2003, would not be eligible under this program.2004. NJNG believes that the elimination of this programwillwould not have a material effect on its financial position, results of operations or cash flows.The
Financial Risk Managementfinancial risk management (FRM) program is designed to provide price stability toNJNG's systemNJNG’s natural gas supply portfolio. The FRM program includes an incentive mechanism designed to encourage the use of financial instruments to hedgeNJNG'sNJNG’s natural gas costs, with an 80/20 percent sharing of the costs and results between customers and shareowners,respectively, through December 31, 2002.respectively. On October30, 2002, the BPU approved an agreement whereby22, 2003, this program was extended through October 31,2003. NJNG believes as part of the BGSS proceedings that it can replace these programs with2006.The BPU also approved a new
incentive-based programspilot storage incentive program that willnot haveshare gains and losses on an 80/20 percent basis between customers and shareowners, respectively. This 1-year program will measure the difference between the actual cost of natural gas in storage and amaterial effect on its financial position, results of operations or cash flows, however, no assurance can be given asbenchmark applicable to theultimate resolution of this matter. NJNG'sApril-through-October injection season.NJNG’s off-system sales, capacity management and FRM programs totaled
12.413.5 Bcf and generated$1.7 million of gross margin, and 26.4 Bcf and $2.9$1.5 million of gross margin, for the threeand sixmonths18ended MarchDecember 31, 2003, compared with30.214 Bcf and $1.2 million of gross margin,and 56.4 Bcf and $2.9 million of gross marginfor therespective periodssame period last year. The increase in margin was due primarily to the permanent reduction in fixed demand costs, which is part of the portfolio-enhancing program discussed above.25
Interruptible
NJNG serves
4950 customers through interruptible sales and/or transportation tariffs. Sales made under the interruptible sales tariff are priced on market-sensitive energy parity rates. Although therms sold and transported to interruptible customers represented3.73.9 percent and 4.7 percent of total throughput for thesixthree months endedMarchDecember 31, 2003 and 2002, respectively, they accounted for less than 1 percent of the total gross margin in each period due to the margin-sharing formulas that govern these sales. Under these formulas, NJNG retains 10 percent of the gross margin from interruptible sales and 5 percent of the gross margin from interruptible transportation sales, with 90 percent and 95 percent, respectively, credited to firm sales customers through the BGSS. Interruptible sales were.2.1 Bcf and .1 Bcfforin thesixthree months endedMarchDecember 31, 2003 and 2002, respectively. In addition, NJNG transported2.81.2 Bcf and4.61.6 Bcfforin thesixthree months endedMarchDecember 31, 2003 and 2002, respectively, for its interruptible customers.Operation
& Maintenanceand maintenance ExpenseOperation and maintenance (O&M)
Expense O&Mexpense increased$2.4 million,$607,000, or12.4 percent, and $3.3 million, or 8.63.2 percent, for the threeand sixmonths endedMarchDecember 31, 2003, compared with the sameperiodsperiod lastyear. The increases in O&M wereyear due primarily to higher laborpension, and insurancecosts.Operating Income
Operating income
increased $5.4decreased $1.7 million, or10.2 percent, and $10.2 million, or 12.35 percent, for the threeand sixmonths endedMarchDecember 31, 2003, compared with the sameperiodsperiod last year. Theincreasedecrease was due primarily to the decrease in gross margin and the increase intotal gross marginO&M discussedabove, which more than offset increased O&M.above.Net Income
Net income
increased $2.9 million,decreased $458,000, or9 percent, and $5.3 million, or 112.3 percent, for the threeand sixmonths endedMarchDecember 31, 2003, compared with the sameperiodsperiod last year. Theincreases weredecrease was due primarily tohigherthe lower operating income discussedabove. The increase wasabove, partially offset by lower interest expense due primarily to lower interest rates, which more than offset higher average debt balances and an increase inincome taxes caused by the increase in pre-tax income and a decrease indeferred carrying costson deferredresulting from higher regulatoryassets caused by lower interest rates,asset balances, which is included in Other income.ENERGY SERVICES OPERATIONSEnergy Services Operations
NJRES provides unregulated wholesale energy services, including natural gas supply, pipeline capacity and storage management to customers in
New Jersey and instates from the Gulf Coast to New England, and Canada.Energy Services' natural gas marketingNJRES’ energy services activities include contracting to buy natural gas from suppliers at various points of receipt, aggregating natural gas supplies and arranging for their transportation, negotiating the sale of natural gas and matching natural gas receipts and deliveries based on volumes required by clients.
Energy Services'NJRES’ customers include wholesale and retail energy marketers, electric and natural gas utilities, independent power producers, natural gas producers and pipeline and storageoperators, among others. 19
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ------------------------------------------------- (Thousands)Revenues $ 814,654 $ 231,581 $1,253,466 $ 402,469 Gas purchases 800,713 225,256 1,231,316 391,724 ---------- ---------- ---------- ---------- Grossoperators.26
NJRES’ financial results are summarized as follows:
Three Months Ended December 31, 2003 2002 (Thousands) Operating revenue $ 385,498 $ 438,812 Gas purchases 375,409 430,603 Gross margin 10,089 8,209 Operation and maintenance expense 827 1,218 Depreciation and amortization 52 50 Other taxes 17 21 Operating income $ 9,193 $ 6,920 Net income $ 5,273 $ 3,871 NJRES’ revenues decreased for the three months ended December 31, 2003, compared with the same period last year due to lower volumes sold. Natural gas sold and managed by NJRES totaled 74.6 Bcf for the three months ended December 31, 2003, compared with 101.8 Bcf the same period last year. This reduction was due primarily to transportation portfolio restructuring and warmer weather.
NJRES’ gross margin
13,941 6,325 22,150 10,745 Operationandmaintenance expense 1,401 1,035 2,619 1,860 Depreciation and amortization 49 51 99 103 Other taxes 30 17 51 35 ---------- ---------- ---------- ---------- Operatingincome$ 12,461 $ 5,222 $ 19,381 $ 8,747 ========== ========== ========== ========== Net income $ 7,283 $ 3,035 $ 11,154 $ 5,171 ========== ========== ========== ==========Energy Services' revenuesincreased for the threeand sixmonths endedMarchDecember 31, 2003, compared to the sameperiodsperiod last year, due primarily toan increase ingreater margin from storage transactions, the addition of storage assets available for optimization, as well as volatile wholesaleprice ofnatural gasand higher gas volumes sold and managed. This increase in revenue created a corresponding increase in accounts receivable and gas purchases. Energy Services' gross margin, operating income and net income increased for the three and six months ended March 31, 2003, compared with the same periods last year, as a result of increased capacity management, storage assets, and volatility in the natural gas commoditymarkets.Energy deliveries totaled 114.2 Bcf and 216 Bcf for the three and six months ended March 31, 2003, respectively, compared with 86.9 Bcf and 147.8 Bcf for the same periods last year. The increases were due primarily to additional volumes from pipeline and storage capacity transactions, and additional sales to wholesale customers. RETAIL AND OTHER OPERATIONSRetail and
otherOther OperationsThe financial results of Retail and Other consists primarily of
NJR Home Services Company (Home Services),NJRHS, which provides service, sales and installation of appliances to approximately130,000 customers, Commercial Realty & Resources Corp. (CR&R),135,000 customers; CR&R, which develops commercial realestate,estate; and NJR Energy, which consists primarily of equity investments in Capstone TurbineCorporation (Capstone),Corporation; and the Iroquois Gas Transmission System, L.P. (Iroquois).The consolidated financial results of Retail and
otherOther are summarized as follows:
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ------------------------------------------- (Thousands)Revenues $ 5,182 $ 4,612 $ 10,181 $ 9,705 ======== ======== ======== ======== Other (loss) income $ (443) $ 485 $ (173) $ 581 ======== ======== ======== ======== Net (loss) income $ (200) $ 676 $ (271) $ 1,087 ======== ======== ======== ========
Three Months Ended December 31, 2003 2002 (Thousands) Operating revenue $ 5,745 $ 4,999 Other income $ 92 $ 249 Net income (loss) $ 40 $ (71 ) Retail and
other operationsOther revenues for the threeand sixmonths endedMarchDecember 31, 2003, increased compared with the sameperiodsperiod last year due primarily to increased installation business atHome Services. 20NJRHS. Net income for the three
and sixmonths endedMarchDecember 31, 2003,decreasedincreased compared with the sameperiodsperiod last year due primarily to$341,000 after-tax loss on the sale of equity investments incurred during the second fiscal quarter of 2003 and higher pension and insurance costs. The March 2002improved resultsincluded an after-tax gain of $302,000 associated with the sale of real estate.at Iroquois.27
In 1996, CR&R entered into a sale-leaseback
transaction thatagreement for NJR’s corporate headquarters, which generated apre-taxpretax gain of $17.8million, whichmillion. This gain is included in Deferred revenue and is being amortized to Other income over the 25-year term of the lease. The primary tenant of the facility, NJNG, is leasing the building under a long-term master lease agreement, which was approved by the BPU, and continues to occupy a majority of the space in the building.In April 2003, Home Services reached an agreement withLiquidity and Capital Resources
Consolidated
NJR’s objective is to maintain a consolidated capital structure that reflects the
union on a 4-year collective bargaining agreement, whichdifferent characteristics of each business segment and providesamong other things,adequate financial flexibility foran annualaccessing capital markets as required.NJR’s consolidated capital structure was as follows:
As of As of As of December 31, September 30, December 31, 2003 2003 2002 Common stock equity 44 % 48 % 44 % Long-term debt 23 30 39 Short-term debt 33 22 17 Total 100 % 100 % 100 % The increase in
base wagesshort-term debt at December 31, 2003, is due primarily to increased working capital requirements at NJNG and NJRES due primarily to increased levels of2.5 percent. Effective April 3, 2004, the annual increasenatural gas inwages will be 3 percent with an additional 0.5 percent in incentive compensation, if certain performance measures are met. Effective April 3, 2005storage and2006, the annual increase in wages will be 3 percent. LIQUIDITY AND CAPITAL RESOURCES The Company meetsbroker margin requirements. At December 31, 2003, NJNG reclassified its $25 million, 8.25% Series Z First Mortgage Bonds to current maturities of long-term debt due to its maturity date of October 1, 2004. NJR had $138.1 million and $42.3 million of outstanding debt, all of which was classified as short-term debt, at December 31, 2003 and September 30, 2003, respectively. At December 31, 2002, NJR’s outstanding debt balance was $138.4 million, of which $80 million was classified as long-term debt and $58.4 million as short-term debt.NJR obtains its external common equity requirements, if any, through
newissuances of its common stock, including the proceeds from stock issuances under its Automatic Dividend Reinvestment Plan (DRP). The DRP allowsthe CompanyNJR, at its option, to usenewly issued shares to satisfy its funding requirements. The Company also has the option of usingshares purchased on the openmarket.market or newly issued shares.In
order to meet the working capital and external debt financing requirements of its unregulated subsidiaries, as well as its own working capital needs, the Company maintainsDecember 2003, NJR entered into a $200 million committed creditfacilitiesfacility with severalbanks. On December 23, 2002, the Company entered into committedbanks, which replaced a $180 million creditfacilities totaling $380 million. The NJR portion of thefacility. This facility consists of$100$120 million with a 364-day term andaan $80 million revolving credit facility with a 3-year term expiringinJanuary 2006.At March 31,This facility, provides the debt requirements to meet the working capital and external debt-financing requirements of NJR and the unregulated companies. NJNG, nor the results of its operations, are obligated or pledged to support the NJR facility.In December 2003,
there was $45NJNG entered into a $225 millionoutstanding under these agreements.credit facility with several banks, which replaced a $200 million credit facility. This facility consists of $175 million with a 364-day term and a $50 million revolving credit facility with a 3-year term expiring January 2006.NJNG satisfies its debt needs by issuing short- and long-term debt based upon its own financial profile.
Due primarily to declining market values, the Company's pension plan assets have decreased. Further, the discount rate utilized to compute the estimated pension liability also declined, resulting in increased pension liabilities. Consequently, the Company recorded a minimum pension liability at September 30, 2002. In order to mitigate this situation, the Company anticipates making tax-deductible contributions to its pension plans of $7 million and $6 million in June 2003 and September 2003, respectively. If market performance is less than anticipated, additional funding levels may be required. 21The following table is a summary of contractual cash obligations and their applicable payment due dates.
Payments Due by Period Less than 1 1-3 4-5 Contractual Obligations Total Year Years Years After 5 Years - ------------------------------------------------------------------------------------------------------------------------- (Thousands)Long-term debt $ 217,845 - $ 50,000 - $ 167,845 Capital lease obligations 53,666 $ 2,393 7,813 $ 2,880 40,580 Operating leases 8,283 2,642 4,185 644 812 Short-term debt 68,300 68,300 - - - Potential storage obligations 159,676 1,672 46,191 43,992 67,821 Gas supply purchase obligations 923,674 178,535 432,237 142,801 170,101 ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $1,431,444 $ 253,542 $ 540,426 $ 190,317 $ 447,159 ========== ========== ========== ========== ==========NATURAL GAS DISTRIBUTIONThe seasonal nature ofNJNG'sNJNG’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, as well as for the temporary financing of construction and manufactured gas plant (MGP) remediation expenditures and energy tax payments, throughoperations,the issuance of commercial paper and short-term bank loans.The NJNG portion of the committed credit facility, totaling $200 million, consists of $150 million with a 364-day term and a $50 million revolving credit facility with a 3-year term expiring in January 2006. This facility is used toTo support the issuance of commercialpaper.paper, NJNG maintains a committed credit facility totaling $225 million, discussed earlier. NJNG had $161 million, $143.5 million and $93.3 million of commercial paper borrowings supported by these facilities at December 31, 2003, September 30, 2003, and December 31, 2002, respectively.The following table is a summary of contractual cash obligations as of December 31, 2003, and their applicable payment due dates.
Payments Due by Period Less than 1-3 4-5 After Contractual Obligations Total 1 Year Years Years 5 Years (Thousands) Long-term debt $ 204,845 $ 25,000 — — $ 179,845 Capital lease obligations 55,979 2,748 $ 8,936 $ 3,312 40,983 Operating leases 6,756 2,257 3,470 511 518 Short-term debt 299,100 299,100 — — — Construction obligations 19,745 19,745 — — — Potential storage obligations 119,734 — 28,411 41,832 49,491 Gas supply purchase obligations 1,124,554 699,396 291,114 82,800 51,244 Total contractual cash obligations $ 1,830,713 $ 1,048,246 $ 331,931 $ 128,455 $ 322,081 As of December 31, 2003, there were NJR guarantees covering approximately $229 million of natural gas purchases and demand fee commitments of NJRES, included in gas supply purchase obligations above, not yet reflected in Accounts payable on the Consolidated Balance Sheet.
In order to increase the funding level of its pension plans, NJR made tax-deductible contributions of $13.7 million in 2003 including a required minimum pension funding contribution of approximately $2.4 million. NJR is not currently required to make minimum pension funding contributions during fiscal 2004. If market performance is less than anticipated, additional funding may be required.
Off-Balance Sheet Arrangements
NJR does not have any off-balance sheet financing arrangements.
29
Cash Flows
Operating Activities
Cash used for operating activities totaled $80.9 million for the three months ended December
2002,31, 2003, compared with a $23.8 million use of funds for the three months ended December 31, 2002. The increased use of funds in 2003 was due to increased working capital requirements related primarily to higher customer receivables and increased minimum broker margin requirements, which related to volatile natural gas prices.NJNG estimates additional MGP remediation expenditures of approximately $28.3 million during the remainder of fiscal 2004 (See Note 5d. – MGP Remediation).
Financing Activities
Cash flow provided from financing activities totaled $109.3 million for the three months ended December 31, 2003, compared with $35.6 million provided for the three months ended December 31, 2002. The increase was due primarily to increased borrowings to fund increased working capital needs and higher capital expenditures.
In the first quarter of fiscal 2004, NJNG received
$5.3$3.9 millionin connectionunder an existing agreement with a finance company for the sale-leaseback of its vintage2001 meters2003 meters. In 2003, NJNG received $5.3 million from the sale-leaseback of its vintage 2002 meters.In December 2003, NJNG entered into a loan agreement under which the New Jersey Economic Development Authority (EDA) loaned NJNG the proceeds from its $12 million, 5% Natural Gas Facilities Revenue Bonds, which NJNG deposited into a construction fund. NJNG immediately drew down $4.2 million from the construction fund and issued like amounts of its 5% Series HH Bonds to the EDA. (See Note 7. – Construction Fund and Long Term Debt)
In December 2002, NJNG retired its 7.5% Series V First Mortgage Bonds of $25 million.
NJNG currently anticipates that its financing
agreement. Remaining fiscal 2003 construction expenditures are estimated at $31 million. These expendituresrequirements in 2004 and 2005 will beincurred for services, mains and meters to support NJNG's continued customer growth, and general system renewals and improvements. In addition, NJNG estimates additional Manufactured Gas Plant (MGP) remediation expenditures of approximately $16.5 million (see Note 5c - Manufactured Gas Plant Remediation). NJNG expects to finance these expendituresmet throughinternal generationinternally generated cash and the issuance of short- and long-term debt. NJNG also plans to continue its meter sale-leaseback program at approximately $5 million annually and to issue $35 million of Private Placement Bonds.In 2004, NJR expects to finance its unregulated operations primarily through its bank credit facilities and expects to refinance a portion of its borrowings with $25 million of Private Placement Bonds.
The timing and mix of any external financings will
be geared toward achievingtarget a common equity ratio that is consistent with maintainingitsNJNG’s current short- and long-term credit ratings.22Investing Activities
Cash used in investing activities totaled $25.1 million for the three months ended December 31, 2003, compared with $10.8 million for the same period last year. The increase was due primarily to the construction of a 200,000-square-foot build-to-suit building located in the Monmouth Shores Corporate Office Park II by CR&R, and the establishment of a construction fund related to NJNG’s EDA financing discussed above.
30
Remaining fiscal 2004 capital expenditures are estimated at $45.2 million. NJNG’s capital expenditures result primarily from the need for services, mains and meters to support its continued customer growth and general system improvements.
NJNG’s capital expenditures are expected to increase in 2004 and 2005 from historical levels due primarily to facilities required to serve a new large firm customer, upgrading NJNG’s system in targeted areas within its service territory and the system integrity and replacement required under pipeline safety rulemaking.
NJRES does not currently anticipate any significant capital expenditures in 2004 and 2005. However, the use of high-injection/high-withdrawal storage facilities and anticipated pipeline park-and-loan arrangements, combined with the related hedging activities in the volatile natural gas market, may create significant short-term cash requirements, which would be funded by NJR.
Retail and Other capital expenditures in 2004 are primarily related to the construction of a 200,000-square-foot build-to-suit building located in the Monmouth Shores Corporate Office Park II, which is supported by a 15-year lease with an unaffiliated tenant. Total capital expenditures for the project are estimated at $22.5 million, of which $9.9 million, including real estate commissions, has been expended to date, with an expected completion in the fourth quarter of fiscal 2004. These expenditures will be financed through NJR’s committed credit facility or a construction loan.
Credit Ratings
The table below summarizes
NJNG'sNJNG’s credit ratings issued by two rating entities, Standard andPoor'sPoor’s (S&P) Rating Information Service,a division of McGraw-Hill (Standard & Poor's),andMoody's InvestorMoody’s Investors Service, Inc.(Moody's)(Moody’s).
- ------------------------------------------------------------ Standard & Poor's Moody's - ------------------------------------------------------------S&P Moody’s Corporate Rating AA+ N/A - ------------------------------------------------------------Commercial Paper A-1 P-1 - ------------------------------------------------------------Senior Secured A+ A2 - ------------------------------------------------------------AA- Aa3 Ratings Outlook PositiveStable - ------------------------------------------------------------N/A In September 2003, NJNG received upgrades from both S&P and Moody’s. S&P increased the corporate rating to A+ from A, and its first mortgage bond rating was raised to AA- from A+. Moody’s raised the long-term debt rating of NJNG to Aa3 from A2.
NJNG’s S&P and Moody’s Senior Secured ratings are investment grade ratings and represent the fourth highest rating within the investment grade category. S&P and Moody’s give NJNG’s commercial paper the highest rating within the Commercial Paper investment grade category. Investment grade ratings are generally divided into three groups: high, upper medium, and medium. NJNG’s senior secured ratings and the commercial paper ratings fall into the high group. NJR is not a rated entity.
NJNG is not party to any lending or other agreements that would accelerate the maturity date of any obligation due to a failure to maintain any specific credit rating.
ENERGY SERVICES Energy Services doesThe ratings set forth above are not
currently anticipaterecommendations to buy, sell or hold NJR or NJNG’s securities and may be subject to revision or withdrawal at anysignificant capital expenditures in 2003, however, the usetime. These ratings should be evaluated independently ofhigh-injection/high-withdrawal storage facilities and pipeline park and loan arrangements combined with the related hedging activities in the volatile natural gas market may create significant short-term cash requirements, which are funded by the Company. RETAIL AND OTHER CR&R has signed a 15-year lease to construct a 200,000-square-foot build-to-suit building in the Monmouth Shores Corporate Office Park II. Total construction expenditures are estimated at $22.5 million with an expected completion date in the third fiscal quarter of 2004. These expenditures will be financed through the NJR portion of the committed credit facilities. Expenditures for the project through Marchany other rating.31
2003, totaled $946,000, excluding the cost of the land. CRITICAL ACCOUNTING POLICIES The following is a description of the most important generally accepted accounting principles in the United States of America that are used by the Company.Critical Accounting Policies
Management believes that it exercises good judgment in selecting and applying accounting principles. The consolidated financial statements of
the CompanyNJR includeestimates. Actualestimates, and actual results in the future may differ from such estimates.The Company'sNJR’s Critical Accounting Policies are described below.Regulatory Assets
&and LiabilitiesThe Company'sNJR’s largest subsidiary, NJNG, maintains its accounts in accordance with the Uniform System of Accounts as prescribed by the
New Jersey Board of Public Utilities (BPU).BPU. As a result of the ratemaking process, NJNG is required to follow SFAS No. 71,"Accounting“Accounting for the Effects of Certain Types ofRegulation"Regulation” (SFAS 71) and,as a result,consequently, the accounting principles applied by NJNG differ in23certain respects from those applied by unregulated businesses. NJNG is required under SFAS 71 to record the impact of regulatory decisions on its financial statements. NJNG'sNJNG’s BGSSformerly known as the Levelized Gas Adjustment clause,requires it to project its natural gas costsoverand provides thesubsequent 12 months andability to recover or refund the difference, if any, of such projected costs as compared withthosethe costs included inratesprices through a BGSS charge to customers. Any under- or over-recoveries aretreatedrecorded as a Regulatory asset or liability on the Consolidated Balance Sheets and reflected in the BGSS in subsequent years. NJNG also enters into derivatives that are used to hedge natural gas purchases, and the offset to the resulting derivative assets or liabilitiesareis recorded as a Regulatory asset orliability.liability on the Consolidated Balance Sheets.In addition to the BGSS, other regulatory assets
include theconsist primarily of remediation costs associated with MGP sites, which are discussed below under EnvironmentalItems,Costs, and theWNC, which is discussed in Natural Gas Distribution Operations segment of the MD&A.WNC. If there are changes in future regulatory positions that indicate the recovery of such regulatory assets is not probable, the related cost would be charged to income.Derivatives
Derivative activities are recorded in accordance with SFAS
No.133,"Accounting For Derivative Instruments and Hedging Activities," as amended (SFAS 133)under whichthe CompanyNJR records the fair value of derivatives held as assets and liabilities.TheNJR’s unregulated subsidiaries record changes in the fair value of the effective portion of derivatives qualifying as cash flow hedges,are recorded,net of tax, inOtherAccumulated other comprehensive income, a component of Common stock equity. Under SFAS 133,the CompanyNJR also has certain derivative instruments that do not qualify ascash flowhedges. The change in fair value of these derivatives is recorded inearnings.Gas purchases on the Consolidated Statements of Income. In addition, the changes in the fair value of the ineffective portion of derivatives qualifying for hedge accounting are recorded asan increaseincreases ordecreasedecreases in natural gas costs or interest expense, as applicable, based on the nature of the derivatives.TheNJNG’s derivatives thatNJNG utilizesare used to hedge itsgas purchasingnatural gas-purchasing activities are recoverable through its BGSS. Accordingly, the offset to the change in fair value of these derivatives is recorded as a Regulatory asset orliability. The Companyliability on the Consolidated Balance Sheets. NJR has not designated any derivatives as fair value hedges as ofMarchDecember 31, 2003.The fair value of derivative investments is determined by reference to quoted market prices of listed contracts, published quotations or quotations from independent parties. In the absence thereof,
the Company utilizesNJR uses mathematical models based on current and historical data. The effect on annual earnings of valuations fromourthese mathematical models has been, and is expected to continue to be, immaterial.In providing its unregulated fuel and capacity management and wholesale marketing services,
Energy ServicesNJRES enters into physical contracts to buy and sell natural gas. These contracts qualify as normal purchases and sales under SFAS 133 in that they provide for the purchase or sale of natural gas that will be delivered in quantities expected to be used or sold byEnergy ServicesNJRES over a reasonable period in the normal course of business. Accordingly,Energy ServicesNJRES accounts for these contracts under settlement accounting.32
Environmental
ItemsCostsNJNG
periodicallyannually updates the environmental review of its MGP sites, including a review of its potential liability for investigation and remedial action, based on assistance from an outside consulting firm. On the basis of such review, NJNG estimates expenditures to remediate and monitor these MGP sites, exclusive of any insurance recoveries.NJNG'sNJNG’s estimate of these liabilities is based upon currently24available facts, existing technology and presently enacted laws and regulations. Where available information is sufficient to estimate the amount of the liability, it is NJNG'sNJNG’s policy to accrue the full amount of such estimate.Where the information is sufficient only to establish a range of probable liability and no point within the range is more likely than any other, it is
NJNG'sNJNG’s policy to accrue the lower end of the range. Since NJNG believes that recovery of these expenditures, as well as related litigation costs,areis probable through the regulatory process, in accordance with SFAS 71, it has recorded aRegulatoryregulatory asset corresponding to the accrued liability. The actual costs to be incurred by NJNG are dependent upon several factors, including final determination of remedial action, changing technologies and governmental regulations, the ultimate ability of other responsible parties to pay and any insurance recoveries. If there are changes in future regulatory positions that indicate the recovery of such regulatory asset is not probable, the related cost would be charged to income. As ofMarchDecember 31, 2003,$116.1$46.2 million of previously incurredand accruedremediation costs, net of recoveries from customers and insurancerecoveries, isproceeds received and anticipated, are included in Regulatory assets on the Consolidated Balance Sheet. Also included in Regulatory assets at December 31, 2003, is $108.8 million of accrued future remediation costs.Unbilled Revenue
Revenues related to the sale of natural gas are generally recorded when natural gas is delivered to customers. However,
the determination ofdetermining natural gas sales to individual customers is based onthereadingoftheir meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of natural gas delivered to customers since the date of the last meter read are estimated, and the corresponding unbilled revenue is recorded. This unbilled revenue is estimated each month based onmonthlynatural gas delivered monthly into the system, unaccounted for natural gas based on historical results and applicable customer rates.Postretirement Employee Benefits
The Company'sNJR’s costs of providing postretirement employee benefits
(see Note 9.-Employee Benefit Plans in the Company's 2002 Annual Report on Form 10-K)are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.Postretirement employee benefit costs, for example, are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plans and the return on plan assets. Changes made to the provisions of the plans may also impact current and future postretirement employee benefit costs. Postretirement employee benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, health care cost trends and discount rates used in determining the projected benefit
obligations.obligations (PBO). In determiningpostretirement employee benefit obligationsthe PBO and cost amounts, assumptions can change from period to period, which could result in material changes to net postretirement employee benefit periodiccostcosts and the related liability recognized bythe Company. The Company'sNJR.33
NJR’s postretirement employee benefit plan assets consist primarily of
corporate equitiesU.S. equity securities, international equity securities andobligations, U.S. Government obligationsfixed income investments, with a targeted allocation of 52 percent, 18 percent andcash equivalents.30 percent, respectively. Fluctuations in actualequitymarket returns as well as changes in interest rates may result in increased or decreased postretirement employee benefit costs in future periods.New Accounting Policies 25The Company has discussed its new accounting standards and their potential impactPostretirement employee benefit expenses are included inNote 2 - New Accounting Standards, toO&M expense on the ConsolidatedFinancial Statements. 26Statements of Income. 34
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKFINANCIAL RISK MANAGEMENTFinancial Risk Management
Commodity Market Risks
Natural gas is a nationally traded commodity, and its prices are determined effectively by the New York Mercantile Exchange (NYMEX) and over-the-counter markets.
The pricesPrices on the NYMEX and over-the-counter markets generally reflect the notional balance of natural gas supply and demand, butarecan also be influenced significantly from time to time by other events.The regulated and unregulated natural gas businesses of
the Company and its subsidiariesNJR are subject to market risk due to fluctuations in the price of natural gas. To hedge against such fluctuations,the Company and its subsidiaries haveNJR has entered into futures contracts, options agreements and over-the-counter swap agreements. To manage these instruments,the CompanyNJR has well-defined risk management policies and procedures, which include daily monitoring of volumetric limits and monetary guidelines.The Company'sNJR’s natural gas businesses are conducted through three of its operating subsidiaries. First, NJNG is a regulated utility whose recovery of natural gas costs is protected by the BGSS, which utilizes futures, options and swaps to hedge against price fluctuations. Second, using futures and swaps,Energy ServicesNJRES hedges purchases and sales of storage gas and transactions with wholesale customers. Finally, NJR Energy has entered into several swap transactions to hedge the 10 remaining years of an 18-year fixed-price contract to sell approximately 20.9 Bcf of natural gas (Gas Sale Contract) to a gas marketing company.NJR Energy has hedged both its price and physical delivery risks associated with the Gas Sale Contract. To hedge its price risk, NJR Energy entered into two swap agreements, effective November 1995. Under the terms of these swap agreements, NJR Energy will pay to its swap counterparties the identical fixed price it receives from the natural gas marketing company in exchange for the payment by such swap counterparties of a floating price based on an index price plus a spread per Mmbtu for the total volumes under the Gas Sale Contract. In order to hedge its physical delivery risk, NJR Energy entered into a purchase contract with a second natural gas marketing company for the identical volumes that it is obligated to sell under the Gas Sale Contract, under which it pays the identical floating price it receives under the swap agreements mentioned above.
The following table reflects the changes in the fair market value of commodity derivatives from September 30,
20022003 toMarchDecember 31, 2003.
Balance Increase Less Balance September 30, (Decrease) in Fair Amounts March 31, 2002 Market Value Settled 2003 ----------------------------------------------------------- (Thousands)NJNG $ (2,564) $ 2,800 $ 10,787 $(10,551) Energy Services (14,689) (31,967) (43,880) (2,776) NJR Energy 3,362 10,920 2,897 11,385 -------- -------- -------- -------- Total $(13,891) $(18,247) $(30,196) $ (1,942) ======== ======== ======== ========27
Balance Increase Less Balance September 30, (Decrease) in Fair Amounts December 31, 2003 Market Value Settled 2003 (Thousands) NJNG $ (28,870 ) $ 8,473 $ (4,719 ) $ (15,678 ) NJRES 5,784 3,539 11,830 (2,507 ) NJR Energy 14,940 1,141 (933 ) 17,014 Total $ (8,146 ) $ 13,153 $ 6,178 $ (1,171 ) 35
There were no contracts originated and valued at fair market value and no changes in methods of valuations during the
sixthree months endedMarchDecember 31, 2003.The following is a summary of fair market value of commodity derivatives at
MarchDecember 31, 2003, by method of valuation and by maturity.
After Remaining Fiscal Fiscal Fiscal Total Fiscal 2003 2004 2005-2007 2007 Fair Value ---------------------------------------------------------- (Thousands)Price based on NYMEX $ (2,983) $(10,696) $ (5,948) $ (398) $(20,025) Price based on over-the-counter published quotations 6,202 5,046 6,155 1,154 18,557 Price based upon models - - 562 (1,036) (474) -------- -------- -------- -------- -------- $ 3,219 $ (5,650) $ 769 $ (280) $ (1,942) ======== ======== ======== ======== ========
After Remaining Fiscal Fiscal Fiscal Total Fiscal 2004 2005 2006-2008 2008 Fair Value (Thousands) Price based on NYMEX $ (2,719 ) $ (9,089 ) $ (9,532 ) $ (1,091 ) $ (22,431 ) Price based on over-the-counter published quotations 7,508 4,025 8,212 — 19,745 Price based upon models — — 566 949 1,515 Total $ 4,789 $ (5,064 ) $ (754 ) $ (142 ) $ (1,171 ) The following is a summary of commodity derivatives by type as of
MarchDecember 31, 2003:
Amounts included in Volume Price per Derivatives (Bcf) Mmbtu (Thousands) ---------------------------------------------------NJNG Futures 3.7 $ 3.95 - 5.72 $ 4,967 Options 1.5 $ 3.00 - 10.00 1,220 Swaps 34.6 - (16,738) Energy Services Futures 1.9 $ 2.85 - 4.43 (4,034) Swaps 46.7 - 1,258 NJR Energy Swaps 22.1 - 11,385 ---------- $ (1,942) ==========The Company
Volume Price per Amounts included in (Bcf) Mmbtu Derivatives (Thousands) NJNG Futures 1.7 $ 4.02–$6.24 $ 9,546 Options 0.4 $ 3.25–$10.00 (1,488 ) Swaps 31.2 — (23,736 ) NJRES Futures (12.9 ) $ 3.29–$7.25 (6,876 ) Options 0.3 $ 4.50–$7.40 953 Swaps 38.7 — 3,417 NJR Energy Swaps 19.9 — 17,013 Total $ (1,171 ) NJRES uses a value-at-risk (VAR) model to assess the market risk of its net futures, swaps and options positions. The VAR at
MarchDecember 31, 2003, using the variance-covariance method with a 95 percent28confidence level and a one-day1-day holding period, was$870,000.$687,000. The VAR with a 99 percent confidence level and a 10-day holding period was$3.9$3.1 million. The calculated VAR represents an estimate of the potential change in the value of the net positions. These estimates may not be indicative of actual results since actual market fluctuations may differ from forecasted fluctuations.36
Interest Rate Risk
-– Long-Term DebtAt
MarchDecember 31, 2003, the Company (excluding NJNG) had no variable rate long-term debt.At
MarchDecember 31, 2003, NJNG had total variable-rate, long-term debt outstanding of$122.1$97 million,ofwhich$97.1 million has beenis hedged by the purchase of a 3.25-percent interest-rate cap through July 2004.According to the Company's sensitivity analysis, at March 31, 2003, NJNG's annual interest rate exposure on the $97.1 million, based on the difference between current average rates and the 3.25 percent interest-rate cap, is limited to $215,000, net of tax.If interest rates were to change by 1 percent on theremaining $25$97 million of variable rate debt atMarchDecember 31, 2003,NJNG'sNJNG’s annual interest expense, net of tax, would change by$148,000. 29$574,000. 37
ITEM 4. CONTROLS AND PROCEDURES
WithinAs of the
90-dayend of the periodprior to the date ofreported on in this report, we have undertaken an evaluationwas carried out,under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in theSEC'sSEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.There have been no significant changes in our internal controls, other than the completion during the quarter ended December 31, 2003, of an automated derivative valuation system, or in other factors that could significantly affect internal controls subsequent to the date of the evaluation described above.
3038
PART II - OTHER INFORMATION
ITEM1. Legal ProceedingsI. LEGAL PROCEEDINGSInformation required by this Item is incorporated herein by reference to Part I, Item 1, Note
4-5. – Legal and Regulatory Proceedings.ITEM 4. Submission of Matters to a Vote of Security Holders (a) An annual meeting of shareholders was held on February 26, 2003. (c) The shareholders voted upon the following matters at the February 26, 2003 annual shareholders meeting: (i) The election of five (5) directors, four for terms expiring in 2006, and one for a term expiring in 2004. The results of the voting were as follows:
Director For Withheld - -------- --- --------Hazel S. Gluck 21,103,116 323,528 James T. Hackett 21,122,992 303,652 J. Terry Strange 21,180,958 245,686 Gary W. Wolf 21,017,102 409,542 George R. Zoffinger 21,149,221 277,423(ii) The approval of the action to retain Deloitte & Touche LLP as auditors for the fiscal year ending September 30, 2003. The results of the voting were as follows:
For Against Abstain --- ------- -------20,796,477 463,522 166,645ITEM 6.
Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K(a) Exhibits
99-1 Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act* 99-2 Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act* * This certificate accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.
4-1 Amended and Restated Credit Agreement by and among NJR, PNC Bank and other parties named therein, dated December 19, 2003 4-2 Amendment and consent to the NJR syndicated credit agreement dated December 19, 2003, among NJR, PNC Bank and other parties named therein 4-3 Second amendment and consent to the NJNG syndicated credit agreement, dated December 19, 2003, among NJNG, PNC Bank and other parties named therein 31-1 Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act 31-2 Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act 32-1 Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act* 32-2 Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act* (b) Reports on Form 8-K
On
February 7,October 29, 2003, a report on Form 8-K was filed bythe Company furnishing under Item 9 information disclosed pursuant to Regulation FD. 31On April 24, 2003, a report on Form 8-K was filed by the CompanyNJR furnishing under Item 9 information disclosed pursuant to Regulation FD (Item 12, Results of Operations and Financial Condition).On
May 5,December 2, 2003, a report on Form 8-K was filed bythe CompanyNJR furnishing under Item 9 information disclosed pursuant to Regulation FD.32
* This certificate accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended. 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION Date: May 12, 2003 /s/Glenn C. Lockwood -------------------- Glenn C. Lockwood Senior Vice President and Chief Financial Officer 33CERTIFICATIONS I, Laurence M. Downes, certify that: 1) I have reviewed this Quarterly Report on Form 10-Q of New Jersey Resources Corporation; 2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a.) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b.) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c.) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6) The Registrant's other certifying officers and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By: /s/Laurence M. Downes --------------------- Laurence M. Downes Chairman & Chief Executive Officer 34CERTIFICATIONS I, Glenn C. Lockwood, certify that: 1) I have reviewed this Quarterly Report on Form 10-Q of New Jersey Resources Corporation; 2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a.) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b.) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c.) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6) The Registrant's other certifying officers and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By: /s/Glenn C. Lockwood -------------------- Glenn C. Lockwood Senior Vice President, Chief Financial Officer 35
| NEW JERSEY RESOURCES CORPORATION | ||||
| Date: February 9, 2004 | /s/ | Glenn C. Lockwood | ||
| Glenn C. Lockwood | ||||
| Senior Vice President | ||||
| and Chief Financial Officer | ||||
40