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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999 Commission file number 1-8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2376465
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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:
The number of shares outstanding of $2.50 par value Common Stock as of January
31, 2000 was 17,779,421.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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THREE MONTHS ENDED
DECEMBER 31,
(Thousands, except per share data) .... 1999 1998
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OPERATING REVENUES .................... $263,438 $244,590
-------- --------
OPERATING EXPENSES
Gas purchases ....................... 193,981 176,337
Operation and maintenance ........... 20,607 21,137
Depreciation and amortization ....... 7,981 7,399
Energy and other taxes .............. 10,044 10,480
-------- --------
Total operating expenses .............. 232,613 215,353
-------- --------
OPERATING INCOME ...................... 30,825 29,237
Other income, net ..................... 445 552
Interest charges, net ................. 5,176 5,280
-------- --------
INCOME BEFORE INCOME TAXES ........... 26,094 24,509
Income tax provision .................. 9,915 9,266
-------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS 16,179 15,243
Preferred stock dividends ............. 8 91
-------- --------
NET INCOME ............................ $ 16,171 $ 15,152
======== ========
EARNINGS PER COMMON SHARE
BASIC ........................... $ .91 $ .85
======== ========
DILUTED ......................... $ .90 $ .84
======== ========
DIVIDENDS PER COMMON SHARE ............ $ .43 $ .42
======== ========
AVERAGE SHARES OUTSTANDING
BASIC ........................... 17,780 17,844
======== ========
DILUTED ......................... 17,914 17,963
======== ========
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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THREE MONTHS ENDED
DECEMBER 31,
(Thousands) 1999 1998
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CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income ...................................... $ 16,171 $ 15,152
Adjustments to reconcile net income to cash flows
Depreciation and amortization .................. 7,981 7,399
Amortization of deferred charges ............... 1,512 770
Deferred income taxes .......................... (2,905) 6,118
Changes in working capital ..................... (41,224) (32,046)
Other, net ..................................... 2,275 (893)
-------- --------
Net cash flows (used in) from operating activities (16,190) (3,500)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt .................... 5,300 6,800
Proceeds from common stock ...................... 2,056 2,317
Payments of preferred stock ..................... -- (20,000)
Purchases of treasury stock ..................... (2,803) (129)
Payments of common stock dividends .............. (7,465) (7,304)
Net change in short-term debt ................... 35,300 32,300
-------- --------
Net cash flows from financing activities .......... 32,388 13,984
-------- --------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES
Expenditures for
Utility plant .................................. (14,215) (11,038)
Real estate properties ......................... (118) (23)
Cost of removal ................................ (1,735) (1,052)
Proceeds from sale of assets ................... 556 --
-------- --------
Net cash flows (used in) from investing activities (15,512) (12,113)
-------- --------
Net change in cash and temporary investments ...... 686 (1,629)
Cash and temporary investments at September 30 .... 2,123 2,476
-------- --------
Cash and temporary investments at December 31 ..... $ 2,809 $ 847
======== ========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ..................................... $(44,830) $(83,528)
Inventories ..................................... 4,471 14,887
Deferred gas costs .............................. 1,940 9,037
Accounts payable ................................ (3,886) (11,546)
Purchased gas ................................... (2,536) 40,553
Prepaid and accrued taxes, net .................. 11,890 11,359
Customers' credit balances and deposits ......... 554 556
Other, net ...................................... (8,827) (13,364)
-------- --------
Total ............................................. $(41,224) $(32,046)
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) .......... $ 6,742 $ 6,545
Income taxes ................................... $ 547 $ 1,737
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
ASSETS
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DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1999 1998
(Thousands) (unaudited) (unaudited)
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PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost .................. $ 954,751 $ 941,490 $ 906,070
Real estate properties and other, at cost 26,437 26,326 26,019
----------- ----------- -----------
981,188 967,816 932,089
Accumulated depreciation and amortization (267,695) (262,372) (246,703)
----------- ----------- -----------
Property, plant and equipment, net ...... 713,493 705,444 685,386
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments .......... 2,809 2,123 847
Construction fund ....................... 12,100 12,100 16,000
Customer accounts receivable ............ 101,080 80,974 111,295
Unbilled revenues ....................... 28,061 2,950 24,548
Allowance for doubtful accounts ......... (2,021) (1,684) (1,622)
Gas in storage, at average cost ......... 31,451 35,718 37,686
Materials and supplies, at average cost . 3,513 3,717 4,070
Prepaid taxes .......................... -- 4,749 568
Deferred gas costs ...................... -- -- 5,249
Other ................................... 15,921 8,598 18,049
----------- ----------- -----------
Total current assets .................... 192,914 149,245 216,690
----------- ----------- -----------
DEFERRED CHARGES AND OTHER
Equity investments ...................... 8,619 8,813 8,856
Regulatory assets ....................... 65,610 64,063 40,553
Long-term deferred gas costs ............ 6,113 9,744 24,136
Other ................................... 23,991 22,703 33,183
----------- ----------- -----------
Total deferred charges and other ........ 104,333 105,323 106,728
----------- ----------- -----------
Total assets ............................ $ 1,010,740 $ 960,012 $ 1,008,804
=========== =========== ===========
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
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DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1999 1998
(Thousands) (unaudited) (unaudited)
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CAPITALIZATION
Common stock equity .................... $ 310,426 $ 302,169 $ 301,229
Redeemable preferred stock ............. 520 520 640
Long-term debt ......................... 313,023 287,723 333,541
---------- ---------- ----------
Total capitalization ................... 623,969 590,412 635,410
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt ... 318 20,318 1,957
Short-term debt ........................ 97,000 61,700 93,000
Purchased gas .......................... 76,293 78,829 88,014
Accounts payable and other ............. 24,613 28,499 18,160
Dividends payable ...................... 7,649 7,465 7,507
Accrued taxes .......................... 8,343 2,138 7,204
Overrecovered gas costs ................ 1,678 3,369 --
Customers' credit balances and deposits 16,024 15,470 14,208
---------- ---------- ----------
Total current liabilities .............. 231,918 217,788 230,050
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes .................. 63,752 65,559 79,877
Deferred investment tax credits ........ 10,106 10,293 10,580
Deferred revenue ....................... 22,514 23,020 19,088
Other .................................. 58,481 52,940 33,799
---------- ---------- ----------
Total deferred credits ................. 154,853 151,812 143,344
---------- ---------- ----------
Total capitalization and liabilities .. $1,010,740 $ 960,012 $1,008,804
========== ========== ==========
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). The September 30, 1999 balance sheet data is derived from the audited
financial statements of New Jersey Resources Corporation (the Company). Although
management believes that the disclosures are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 1999 Annual Report on Form 10-K.
In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of the interim periods. Because of the seasonal
nature of the Company's utility operations and other factors, the results of
operations for the interim periods presented are not indicative of the results
to be expected for the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries -- New Jersey Natural Gas Company (NJNG), NJR Energy Holdings
Corporation (Energy Holdings) and NJR Development Company (NJR Development). NJR
Energy Services Company (Energy Services), New Jersey Natural Energy Company
(Natural Energy) and NJR Energy Corporation (NJR Energy) are wholly-owned
subsidiaries of Energy Holdings and Commercial Realty & Resources Corp. (CR&R),
is a wholly-owned subsidiary of NJR Development. Significant intercompany
accounts and transactions have been eliminated.
3. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Investments and Hedging Activities," which must be adopted by the
quarter ending December 31, 2000. The Company is currently evaluating the
effects of SFAS No. 133 on its financial condition and results of operations,
which will vary based on the Company's use of derivative instruments during any
given reporting period following the time of adoption.
The Company has adopted Emerging Issues Task Force 98-10 "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" the impact
of which was immaterial to its financial condition and results of operations.
4. Capitalized Interest
The Company's capitalized interest totaled $254,000 and $182,000 for the
three months ended December 31, 1999 and 1998, respectively.
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5. Legal and Regulatory Proceedings
a. Energy Deregulation Legislation
In February 1999, the Electric Discount and Energy Competition Act (the Act),
which provides the framework for the restructuring of New Jersey's energy
markets, became law. In January 2000, the New Jersey Board of Public Utilities
(the BPU) approved a stipulation agreement among various parties to fully open
NJNG's residential markets to competition, restructure its rates to include a
rate for Basic Gas Supply Service (BGS) and Delivery service as required by the
Act, and expand an incentive for residential and small commercial customers to
switch to transportation service. The stipulation agreement also extends
incentives for NJNG's off-system sales and capacity management programs through
December 31, 2002. Additionally, NJNG received approval to recover carrying
costs on its expenditures associated with remediating its former manufactured
gas plants. These expenditures are recovered over a seven-year period and are
subject to annual BPU review and approval.
The Act also allows continuation of each utility's role as a gas supplier at
least until December 31, 2002, when the BPU must determine the ongoing role of
each utility in providing gas supply services. The Act allows natural gas
utilities to provide competitive services (e.g., appliance services). By
December 31, 2000 the BPU is expected to decide whether some or all customer
account services (i.e., meter reading, billing and collections) should be
competitive. The BPU is continuing to issue standards and rules to implement
the Act.
b. Levelized Gas Adjustment (LGA) and Other Adjustment Clauses
In September 1999, NJNG filed to reduce its LGA by less than 1%, reflecting a
proposal to decrease the Prior Gas Cost Adjustment (PGCA) and Transportation
Education and Implementation (TEI), partially offset by a minor increase to its
Remediation Adjustment (RA) factor. No change was proposed for the Gas Cost
Recovery (GCR), Demand Side Management (DSM) and Weather Normalization Clause
(WNC) factors. The rate restructuring mandated by the Act did not impact the
rates or revenues of any of the individual clauses.
In August 1999, NJNG filed a Comprehensive Resource Analysis (CRA) plan
pursuant to a BPU order. The CRA, which will replace NJNG's current DSM program,
includes a program cost of $2.9 million recoverable through rates. NJNG expects
the BPU to rule on the filing in February 2000.
c. Gas Remediation
NJNG has identified eleven former manufactured gas plant (MGP) sites, dating
back to the late 1800's and early 1900's, which contain contaminated residues
from the former gas manufacturing operations. Ten of the eleven sites in
question were acquired by NJNG in 1952. All of the gas manufacturing operations
ceased at these sites at least by the mid-1950's and in some cases had been
discontinued many years earlier, and all of the old gas manufacturing facilities
were subsequently dismantled by NJNG or the former owners. NJNG is currently
involved in administrative proceedings with the New Jersey Department of
Environmental Protection (NJDEP) and local government authorities 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. Since October 1989, NJNG has entered into
Administrative Consent
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Orders or Memoranda of Agreement with the NJDEP covering all eleven sites. These
documents establish the procedures to be followed by NJNG in developing a final
remedial clean-up plan for each site.
Most of the cost of such studies and investigations is being shared under an
agreement with the former owner and operator of ten of the MGP sites. Through a
Remediation Rider approved by the BPU, NJNG is recovering its expenditures
incurred through June 30, 1998 over a seven-year period. Costs incurred
subsequent to June 30, 1998, including carrying costs on the deferred
expenditures, as noted above, will be reviewed annually and recovered over
seven-year periods, subject to BPU approval.
In March 1995, NJNG filed a complaint in New Jersey Superior Court against
various insurance carriers for declaratory judgment and for damages arising from
such defendants' breach of their contractual obligations to defend and/or
indemnify NJNG against liability for claims and losses (including defense costs)
alleged against NJNG relating to environmental contamination at the former MGP
sites and other sites. NJNG is seeking (i) a declaration of the rights, duties
and liabilities of the parties under various primary and excess liability
insurance policies purchased from the defendants by NJNG from 1951 through 1985,
and (ii) compensatory and other damages, including costs and fees arising out of
defendants' obligations under such insurance policies. The complaint was amended
in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and
its successors as additional defendants. The Company is seeking (a) a
declaration of the rights, duties and liabilities of the parties under
agreements with respect to claims against the Company that allege property
damage caused by various substances used, handled or generated by NJNG or the
predecessor in title that were removed from several of the MGP sites by
Kaiser-Nelson, and (b) money damages or compensatory relief for the harm caused
by Kaiser-Nelson's aforementioned actions. Discovery is proceeding in this
matter. There can be no assurance as to the outcome of these proceedings.
d. South Brunswick Asphalt, L.P.
NJNG has been named as a defendant in a civil action commenced in New Jersey
Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated
companies seeking damages arising from alleged environmental contamination at
three sites owned or occupied by SBA and its affiliated companies. Specifically,
the suit charges that tar emulsion removed from 1979 to 1983 by an affiliate of
SBA (Seal Tite Corp.) from NJNG's former gas manufacturing plant sites has been
alleged by the NJDEP to constitute a hazardous waste and that the tar emulsion
has contaminated the soil and ground water at the three sites in question. In
February 1991, the NJDEP issued letters classifying the tar emulsion/sand and
gravel mixture at each site as dry industrial waste, a non-hazardous
classification. In April 1996, in a meeting with all parties to the litigation
and the judge assigned to the case, the NJDEP confirmed the non-hazardous
classification, which will allow for conventional disposal. In May 1997, SBA
submitted applications to NJDEP for permits to allow SBA to recycle the tar
emulsion/sand and gravel mixture at each site into asphalt, to be used as a
paving materials. In July 1998, SBA filed an amended complaint adding NJDEP to
the proceedings to facilitate the resolution of these applications. Following
service of SBA's amended complaint, NJDEP filed a motion for dismissal of the
amended complaint, but has not formally granted or denied SBA's permit
applications. In March 1999, the court granted NJDEP's motion in part and denied
NJDEP's motion in part, and directed SBA to file a more definite statement of
its claims for equitable relief against NJDEP, including its request that a
mandatory injunction be imposed compelling NJDEP to issue the subject permits.
SBA's more definite statement of its claims has not yet
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been filed. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on its consolidated financial
condition or results of operations
e. Combe Fill South Landfill
NJNG has been joined as a third-party defendant in two civil actions commenced
in October 1998 in the U.S. District Court for the District of New Jersey by the
U.S. Environmental Protection Agency and NJDEP. These two actions seek recovery
of costs expended in connection with, and for continuation of the cleanup of,
the Combe Fill South Landfill, a Superfund site in Chester, New Jersey. The
plaintiffs claim that hazardous waste NJNG is alleged to have generated was sent
to the site. There are approximately 180 defendants and third-party defendants
in the actions thus far. Each third-party complaint seeks damages under CERCLA
Section 113 and the New Jersey Spill Act, declaratory relief holding each
third-party defendant strictly liable, and contribution and indemnification
under the common law of the United States and New Jersey. No specific monetary
demands or scope of cleanup work have been set forth to date. NJNG is in the
process of investigating the allegations, formulating its position with respect
thereto and has agreed to participate in an alternate dispute resolution process
encouraged by the Court. Its insurance carriers have been notified and one has
agreed to assume responsibility for the legal expenses, while reserving its
rights with regard to liability. NJNG is currently unable to predict the extent,
if any, to which it may have cleanup or other liability with respect to these
civil actions, but would seek recovery of any such costs through the ratemaking
process. No assurance can be given as to the timing or extent of the ultimate
recovery of any such costs.
f. Various
The Company is party to various other claims, legal actions and complaints
arising in the ordinary course of business. In management's opinion, the
ultimate disposition of these matters will not have a material adverse effect on
its financial condition or results of operations.
6. Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings per Share" which establishes
standards for computing and presenting basic and diluted earnings per share
(EPS). The incremental shares required for inclusion in the denominator for the
diluted EPS calculation were 133,620 and 119,874 for the three months ended
December 31, 1999 and 1998, respectively. These shares relate to stock options
and restricted stock and were calculated using the treasury stock method. The
numerator for both the basic and diluted calculation was net income. There was a
one-cent dilutive effect for the three months ended December 31, 1999 and 1998.
7. Long-Term Debt
In April 1998, NJNG entered into a loan agreement whereby the New Jersey
Economic Development Authority loaned NJNG the proceeds from the Authority's $18
million Natural Gas Facilities Revenue Bonds, Series 1998C, which were deposited
into a construction fund. NJNG may obtain these funds in reimbursement for
certain qualified expenditures. In April 1998, NJNG drew down $2 million from
the construction fund and issued $2 million of its Series GG Bonds. In April
1999, NJNG drew down $3.9 million from the construction fund and issued $3.9
million of its Series GG Bonds. In fiscal 2000, NJNG anticipates drawing down
approximately $5 million from the construction fund.
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8. Subsequent Event
In May 1995, the Company adopted a plan to exit the oil and natural gas
production business and pursue the sale of the reserves and related assets of
NJR Energy and its subsidiary, New Jersey Natural Resources Company (NJNR). The
Company accounted for this segment as a discontinued operation and in fiscal
1995 recorded an after-tax charge of $8.7 million, or $.49 per share. This
charge was based on estimates of the anticipated loss from operations until the
assets were sold, the estimated loss on the sale of the remaining reserves and
other costs related to the closing of its offices in Dallas and Tulsa. Based
upon actual proceeds received from the sale of the assets and costs incurred,
net of insurance recoveries received in January 2000, the Company will close out
its reserve balance and report income from discontinued operations of
approximately $820,000, or $.05 per share in the quarter ended March 31, 2000.
9. Other
At December 31, 1999 there were 17,783,264 shares of common stock outstanding
and the book value per share was $17.46.
Certain reclassifications have been made of previously reported amounts to
conform with current year classifications.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999
A. RESULTS OF OPERATIONS
Consolidated net income for the quarter ended December 31, 1999 increased 7%
to $16.2 million, compared with $15.2 million for the same period last year.
Basic EPS increased 7% to $.91, compared with $.85 last year. Diluted EPS also
increased 7% to $.90, compared with $.84 last year.
The increase in consolidated net was attributable primarily to continued
profitable customer growth at the Company's principal subsidiary, NJNG.
NJNG OPERATIONS
NJNG's financial results are summarized as follows:
Three months Ended
December 31,
1999 1998
------- -------
(Thousands)
Gross margin
Residential and commercial $44,300 $43,679
Firm transportation 9,249 7,159
------- -------
Total firm margin 53,549 50,838
Interruptible 220 148
Off-system and capacity management 1,564 1,321
------- -------
Total gross margin $55,333 $52,307
======= =======
Appliance service revenues $ 3,086 $ 3,057
======= =======
Operating income $29,205 $26,961
======= =======
Net income $15,500 $14,118
======= =======
Gross Margin
Gross margin is defined as gas revenues less gas costs, sales tax and a
Transitional Energy Facilities Assessment (TEFA). Gross margin provides a more
meaningful basis for evaluating utility operations, since gas costs, sales tax
and TEFA are passed through to customers and, therefore, have no effect on
earnings. Gas costs are charged to operating expenses on the basis of therm
sales at the rates included in NJNG's tariff. The LGA clause allows NJNG to
recover gas costs that exceed the level reflected in its base rates. Sales tax
is calculated at 6% of revenue and excludes off-system sales, sales to other
utilities and federal accounts. TEFA is calculated on a per therm basis and
excludes sales to other utilities, off-system sales and federal accounts.
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Firm Margin
Residential and commercial (i.e., firm) gross margin is subject to the WNC,
which provides for a revenue adjustment if the weather varies by more than
one-half of 1% from normal, or 20-year average, weather. The WNC does not fully
protect NJNG from factors such as unusually warm weather and declines in
customer usage patterns, which were set at the conclusion of NJNG's last base
rate case in January 1994. The accumulated adjustment from one heating season
(i.e., October-May) is billed or credited to customers in subsequent periods.
This mechanism reduces the variability of both customer bills and NJNG's
earnings due to weather fluctuations.
The components of gross margin from firm customers are being impacted by
customers switching from sales service to firm transportation service. NJNG's
total gross margin is not negatively impacted by customers who utilize its firm
transportation service and purchase their gas from another supplier. This is due
to NJNG's tariff which is designed such that no profit is earned on the
commodity portion of sales to firm customers, and all customers who purchase gas
from another supplier continue to utilize NJNG for transportation.
Total firm margin increased by $2.7 million, or 5.3% for the three months
ended December 31, 1999, compared with the same period last year, reflecting
customer growth and 1% colder weather.
The weather for the three months ended December 31, 1999 was 9% warmer than
normal, which, in accordance with the WNC, resulted in $2.9 million of gross
margin being accrued for future recovery from customers.
Gross margin from sales to firm customers increased $621,000, or
approximately 1% for the three months ended December 31, 1999, compared with the
same period last year. The increase in gross margin for the three months ended
was due to an increase in therm sales, which primarily resulted from 1% colder
weather than last year, and 11,872 customer additions during the twelve months
ended December 31, 1999.
Sales to firm customers were 12.6 billion cubic feet (Bcf) for the three
months ended December 31, 1999 compared with 12.3 Bcf for the same period last
year. The increase in sales was due to the colder weather and customer growth.
Gross margin from transportation customers increased $2.1 million, or 29%,
for the three months ended December 31, 1999, compared with the same period last
year as more customers chose this service. NJNG transported 3.2 Bcf and 2.6 Bcf
for the three months ended December 31, 1999 and 1998, respectively.
The growth in the number of transportation customers was primarily due to
NJNG's participation in an open, competitive market which allows residential
customers to change natural gas suppliers. Under this program 30,527 and 24,459
residential customers and 4,248 and 4,053 commercial customers were using this
service at December 31, 1999 and 1998, respectively. The number of customers
switching from sales to transportation may continue to grow as all residential
customers have the ability to switch to transportation service beginning January
1, 2000.
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Interruptible
NJNG services 51 customers through interruptible sales and/or transportation
tariffs. Sales made under the interruptible sales tariff are priced on
market-sensitive oil and gas parity rates. Although therms sold and transported
to interruptible customers represented 4% and 3% of total therm throughput in
the three months ended December 31, 1999 and 1998, respectively, they accounted
for less than 1% of the total gross margin in each period due to the regulated
margin-sharing formulas that govern these sales. Under these formulas, NJNG
retains 10% of the gross margin from the interruptible sales and 5% of the gross
margin from transportation sales, with the balance credited to firm sales
customers through the LGA clause.
Off-System and Capacity Management
In order to reduce the overall cost of its gas supply commitments, NJNG has
entered into contracts to sell gas to customers outside its franchise territory
when the gas is not needed for system requirements. These 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 own system requirements. Effective
October 1, 1998 through December 31, 2002, NJNG retains 15% of the gross margin
from these sales.
In order to reduce the fixed cost of NJNG's gas supply portfolio, any savings
achieved through the permanent reduction or replacement of capacity or other
services will be shared between customers and shareholders. Under this program,
NJNG retains 40% of the savings for the first 12 months following any
transaction and retains 15% for the remaining period through December 31, 2002,
with the balances credited to firm sales customers through the LGA clause.
NJNG's off-system and capacity management sales totaled 36 Bcf and generated
$1.6 million of gross margin for the three months ended December 31, 1999,
compared with 38.6 Bcf and $1.3 million of gross margin for the same period last
year.
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Operating Income
Operating income increased $2.2 million, or 8%, for the three months ended
December 31, 1999, compared with the same period last year due primarily to the
increase in firm gross margin, discussed above, which more than offset increased
operating expenses.
Net Income
Net income increased $1.4 million, or 10%, for the three months ended
December 31, 1999, compared with the same period last year due primarily to the
increased operating income discussed above, and lower financing costs due
primarily to lower debt levels.
ENERGY HOLDINGS OPERATIONS
Energy Holdings' consolidated financial results, which include Energy
Services and Natural Energy, the Company's unregulated fuel and capacity
management and retail marketing subsidiaries, and the continuing operations of
NJR Energy, which consist primarily of its equity investment in the Iroquois Gas
Transmission System, L.P., are summarized as follows:
Three months Ended
December 31,
1999 1998
----------------------------
(Thousands)
Revenues $63,287 $68,119
======= =======
Operating income $ 826 $ 1,809
======= =======
Net income $ 698 $ 913
======= =======
Energy Holdings' operating income and net income decreased for the three
months ended December 31, 1999 when compared with the same period last year,
primarily due to lower storage management margins which were partially offset by
a gain on the sale of Natural Energy's commercial customers to Reliant Energy in
November 1999.
Energy Service's gas under management totaled 25.5 Bcf and 30.5 Bcf for the
three months ended December 31, 1999 and 1998 respectively. Retail gas sales
totaled 1.2 Bcf and 1.9 Bcf for the three months ended December 31, 1999 and
1998, respectively.
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NJR DEVELOPMENT OPERATIONS
NJR Development's consolidated financial results, which consist solely of
CR&R's operations, are summarized as follows:
Three months Ended
December 31,
1999 1998
---------------------------
(Thousands)
Revenues $ 277 $ 251
===== =====
Other income, net $ 58 $ 102
===== =====
Net income (loss) $(150) $ 27
===== =====
In 1996, CR&R entered into a sale-leaseback transaction which generated a
pre-tax gain of $17.8 million, which is included in Deferred revenue and is
being amortized to Other income, net over 25 years in accordance with generally
accepted accounting principles. The primary tenant of the facility, NJNG, is
leasing the building under a long-term master lease agreement and continues to
occupy a majority of the space in the building.
The decrease in net income for the three months ended December 31, 1999
compared with the same period last year is due primarily to marketing costs
associated with CR&R's remaining land portfolio.
THE YEAR 2000 ISSUE
The Company developed and implemented a plan to address Year 2000 issues
facing the Company. The Company has not experienced any material incidents
during the transition to Year 2000. All computers, infrastructure and business
systems have been running smoothly following the transition to Year 2000. The
Company will continue to closely monitor the Year 2000 issue and does not
believe that any potential future failure to be Year 2000 compliant, including
with respect to leap year calculations or other dates, would have a material
adverse effect on the Company. The capitalized costs through December 31, 1999
of updating the Company's enterprise computer systems were $22.6 million. The
Company incurred $1.3 million in the quarter ended December 31, 1999 for
projects that have addressed Year 2000 readiness, of which $1.2 million was for
new software and hardware which the Company capitalized.
B. LIQUIDITY AND CAPITAL RESOURCES
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 maintains committed credit facilities with a number of banks totaling
$100 million. At December 31, 1999, $64.1 million was outstanding under these
agreements and is included in long-term debt. It is the Company's objective to
maintain a consolidated capital structure that reflects the different
characteristics of each business segment and provides adequate financial
flexibility for accessing capital markets as required. Based upon its existing
mix of investments, it is the Company's goal to maintain a common equity ratio
of between 50% and 55%, which is consistent with maintaining its current
short-term and long-term credit ratings. NJNG satisfies its debt needs by
issuing short-term and long-term debt based upon its own financial profile. The
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Company meets the common equity requirements of each subsidiary, if any, through
new issuances of the Company's common stock, including the proceeds from its
Automatic Dividend Reinvestment Plan (DRP). The DRP also allows for the purchase
of shares in the open market to satisfy the plan's needs. The Company can switch
funding options every 90 days.
NJNG
The seasonal nature of NJNG's operations creates large short-term cash
requirements, primarily to finance gas purchases and customer accounts
receivable. NJNG obtains working capital for these requirements, as well as for
the temporary financing of construction expenditures, sinking fund needs and
energy tax payments through the issuance of commercial paper and short-term bank
loans. To support the issuance of commercial paper, NJNG maintains committed
credit facilities totaling $100 million of which $97 million is outstanding at
December 31, 1999 and is included in Short-term debt.
Remaining fiscal 2000 construction expenditures are estimated at $38 million.
These expenditures will be incurred for services, mains and meters to support
NJNG's continued customer growth, and general system renewals and improvements.
NJNG expects to finance these expenditures through internal generation and the
issuance of short-term and long-term debt.
ENERGY HOLDINGS
Energy Holdings does not currently expect any material capital expenditures
or external financing requirements in fiscal 2000.
NJR DEVELOPMENT
CR&R's future capital expenditures will be limited to the fit-up of existing
tenant space, developing existing acreage and additional investments to preserve
the value of its existing real estate holdings. CR&R does not currently expect
any material capital expenditures or external financing requirements in fiscal
2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
The regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and
over-the-counter swap agreements. The Company's natural gas businesses are
conducted through three of its operating subsidiaries. First, NJNG is a
regulated utility whose recovery of gas costs is protected by the LGA, but to
further hedge against price fluctuations, utilizes futures and options through
its financial risk management program. Second, Energy Services has hedged its
commitments to purchase natural gas for the retail customers of Natural Energy
and hedged purchases and sales of storage gas and fixed price sales to wholesale
customers. Finally, NJR Energy has entered into a long-term, fixed-price
contract to sell approximately 27.7 Bcf of natural gas to a gas marketing
company at prices ranging from $2.69 to $4.41 per Million British Thermal Units
(Mmbtu).
Natural gas is a nationally traded commodity, and its prices are effectively
determined by the New York Mercantile Exchange (NYMEX) and over-the-counter
markets. The prices on the NYMEX and over-the-counter markets generally reflect
the national balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
NJNG entered into futures contracts to buy and sell 8.6 Bcf of natural gas
through October 2000 at prices ranging from $2.23 to $3.00 per Mmbtu, and as of
December 31, 1999, NJNG had a deferred unrealized gain of approximately $1.6
million from these contracts.
Additionally, through its Financial Risk Management program, NJNG had options
on 4.2 Bcf of natural gas at strike prices ranging from $2.00 to $3.00 per Mmbtu
on which it had an unrealized gain of $200,000 as of December 31, 1999.
As of December 31, 1999, Energy Services had entered into futures contracts
to buy 4.8 Bcf of natural gas through February 2002, at prices ranging from
$2.10 to $3.03 per Mmbtu, and had a deferred unrealized gain of $600,000 from
these futures contracts. Energy Services also entered into natural gas swap
agreements in order to hedge its risks on 58.9 Bcf of natural gas. As of
December 31, 1999, Energy Services had a deferred unrealized gain of
approximately $3.4 million from these swap agreements. Energy Services also held
options for 85,000 Mmbtu at strike prices of $2.00 to $2.25 on which it had an
realized gain of $21,000 as of December 31, 1999.
NJR Energy has hedged both its price and physical delivery risks associated
with a long-term, fixed-price sales contract with a gas marketing company (the
"Gas Sale Contract"). To hedge its price risk, NJR Energy entered into two swap
agreements. Under the terms of these two swap agreements, NJR Energy will pay to
the counterparties the identical fixed price it receives from the gas marketing
company in exchange for the payment by the counterparties of an index price plus
a spread per Mmbtu for the total volumes under the Gas Sale Contract. The swap
agreements were effective as of November 1995. In order to hedge its physical
delivery risk, NJR Energy entered into a purchase contract with a second gas
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marketing company for the identical volumes it is obligated to sell under the
Gas Sale Contract. NJR Energy has agreed to pay this second gas marketing
company the identical floating price it receives under the swap agreements
mentioned above.
To manage these instruments, the Company has well-defined risk management
policies and procedures, which include volumetric limits and monetary
guidelines.
All of the futures contracts, options and swap agreements described are held
for hedging, rather than trading, purposes except for 85,000 Mmbtu of options
held by Energy Services. With respect to futures contracts, options and swap
agreements, the Company has performed a sensitivity analysis to estimate its
exposure to market risk arising from natural gas price fluctuations using the
net futures positions and the net swaps positions. Futures contracts, options
and swap agreements are substantially all settled at the NYMEX settlement date
and the related natural gas quantity is purchased or sold in the physical market
and, therefore, their notional values, which represent the absolute sum of all
outstanding natural gas futures contracts or swap agreements, as the case may
be, are not accurate measurements of risk to the Company from those futures
contracts or swap agreements. With respect to natural gas futures contracts as
of December 31, 1999 and 1998, in the event of a hypothetical 10% change in
natural gas prices, the value of the Company's contracts would change by
approximately $800,000 and $2.1 million, respectively. With respect to natural
gas swap agreements as of December 31, 1999 and 1998, in the event of a
hypothetical 10% change in natural gas prices, the value of such agreements
would change by approximately $100,000 and $500,000. Finally, with respect to
options as of December 31, 1999, in the event of a hypothetical 10% change in
the option premiums related to the natural gas futures prices, the value of the
options would change by approximately $100,000. There were no options
outstanding as of December 31, 1998. However, any such additional changes in
value under the futures contracts and the option and swap agreements would be
substantially offset by a corresponding change in the related underlying
contracts that are being hedged.
Interest Rate Risk
NJNG has total variable rate debt of $97 million, of which $56 million has
been hedged by the purchase of a 6.5% interest rate cap through the year 2003.
According to the Company's sensitivity analysis, NJNG's annual interest rate
exposure on the $56 million, based on the difference between current average
rates and the 6.5% interest rate cap, is limited to $1.1 million, net of tax. If
interest rates were to change by 100 basis points on the remaining $41 million
of variable rate debt, NJNG's annual interest expense, net of tax, would change
by $242,000. The Company has variable rate debt of $64.1 million, if interest
rates were to change by 100 basis points, annual interest expense, net of tax,
would change by $378,000.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact), including, without
limitation, impact of deregulation, expected disposition of legal and regulatory
proceedings, effect of new accounting standards and impact of the Year 2000
computer issue, are forward-looking statements. Forward-looking statements are
made based upon management's expectations and beliefs concerning future
developments and their potential effect upon the Company. There can be no
assurance that future developments will be in accordance with management's
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expectations or that the effect of future developments on the Company will be
those anticipated by management.
The Company wishes to caution readers that the assumptions which form the
basis for forward-looking statements with respect to, or that may impact
earnings for, the first quarter of fiscal 2000 and thereafter include many
factors that are beyond the Company's ability to control or estimate precisely,
such as estimates of future market conditions and the behavior of other market
participants. Among the factors that could cause actual results to differ
materially from estimates reflected in such forward-looking statements are
weather conditions, economic conditions in NJNG's service territory,
fluctuations in energy-related commodity prices, conversion activity and other
marketing efforts, the conservation efforts of NJNG's customers, the pace of
deregulation of retail gas markets, competition for the acquisition of gas, the
regulatory and pricing policies of federal and state regulatory agencies, the
availability of Canada's reserves for export to the United States and other
regulatory changes.
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 Company 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.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Information required by this Item is incorporated herein by reference to
Part I, Item 1, Note 5 - Legal and Regulatory Proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
On January 26, 2000, the stockholders voted upon the following matters
at the annual stockholder meeting.
(a) The election of four (4) directors, each to serve for three-year
terms expiring in 2002, and until their respective successors are duly elected
and are qualified. The results of the voting were as follows:
Director For Withheld
-------- --- --------
Hazel Gluck 13,931,318 174,866
James Hacket 13,973,095 133,089
Gary Wolf 13,972,389 133,796
George Zoffinger 13,975,446 130,739
(b) The amendment to the Long-Term Incentive Compensation Plan. The
results of the voting were as follows:
For Against Abstain
--- ------- -------
8,814,490 2,218,238 254,001
(c) The stockholders approved the action to retain Deloitte & Touche LLP
as auditors for the fiscal year ending September 30, 2000. The votes were as
follows:
For Against Abstain
--- ------- -------
13,970,192 70,044 65,948
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3-2 By-Laws of the Company, as adopted by the Board of Directors on
November 17, 1999.
27-1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1999.
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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: February 10, 2000 /s/Glenn C. Lockwood
---------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
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