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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 June 30, 2001 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 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:
The number of shares outstanding of $2.50 par value Common Stock as of August 7,
2001 was 17,792,340.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Thousands, except per share data)
OPERATING REVENUES ......................................... $ 260,644 $ 247,961 $ 1,818,166 $ 880,387
----------- ----------- ----------- -----------
OPERATING EXPENSES
Gas purchases ............................................ 215,741 205,287 1,585,517 667,447
Operation and maintenance ................................ 20,961 19,862 68,192 63,188
Depreciation and amortization ............................ 8,210 7,888 24,587 23,677
Energy and other taxes ................................... 6,947 5,982 39,006 30,823
----------- ----------- ----------- -----------
Total operating expenses .................................. 251,859 239,019 1,717,302 785,135
----------- ----------- ----------- -----------
OPERATING INCOME ........................................... 8,785 8,942 100,864 95,252
Other income ............................................... 2,280 305 4,975 1,178
Interest charges, net ...................................... 4,120 4,305 15,156 14,324
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ................................. 6,945 4,942 90,683 82,106
Income tax provision ....................................... 2,633 1,826 34,285 30,978
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
4,312 3,116 56,398 51,128
Cumulative effect of a change in accounting for derivatives,
net of tax of $930 .................................. -- -- (1,347) --
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS .......................... 4,312 3,116 55,051 51,128
Income from discontinued operations, net of tax of ($572) .. -- -- -- 828
----------- ----------- ----------- -----------
NET INCOME ................................................. $ 4,312 $ 3,116 $ 55,051 $ 51,956
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE-BASIC
INCOME BEFORE ACCOUNTING CHANGE ....................... $ .24 $ .18 $ 3.18 $ 2.89
=========== =========== =========== ===========
INCOME FROM CONTINUING OPERATIONS ..................... $ .24 $ .18 $ 3.11 $ 2.89
=========== =========== =========== ===========
NET INCOME ............................................ $ .24 $ .18 $ 3.11 $ 2.93
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE-DILUTED
INCOME BEFORE ACCOUNTING CHANGE ....................... $ .24 $ .18 $ 3.16 $ 2.87
=========== =========== =========== ===========
INCOME FROM CONTINUING OPERATIONS ..................... $ .24 $ .18 $ 3.09 $ 2.87
=========== =========== =========== ===========
NET INCOME ............................................ $ .24 $ .18 $ 3.09 $ 2.91
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE ................................. $ .44 $ .43 $ 1.32 $ 1.29
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING
BASIC ................................................. 17,781 17,656 17,708 17,707
=========== =========== =========== ===========
DILUTED ............................................... 17,963 17,788 17,833 17,829
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
JUNE 30,
------------------------
(Thousands) 2001 2000
--------- ---------
CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES
Net income ...................................... $ 55,051 $ 51,956
Adjustments to reconcile net income to cash flows
Depreciation and amortization .................. 24,587 23,677
Amortization of deferred charges ............... 3,901 4,715
Deferred income taxes .......................... 15,211 6,912
Manufactured gas plant remediation costs ....... (8,739) (18,184)
Change in working capital ...................... (96,516) 43,030
Other, net ..................................... (2,619) 3,066
--------- ---------
Net cash flows (used in)/from operating activities (9,124) 115,172
--------- ---------
CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES
Proceeds from common stock ...................... 8,642 6,062
Payments of long-term debt ...................... (16,343) (3,582)
Purchases of treasury stock ..................... (2,473) (10,466)
Payments of common stock dividends .............. (23,161) (22,679)
Payments of preferred stock ..................... (102) (120)
Net change in short-term debt ................... 81,000 (44,100)
--------- ---------
Net cash flows from/(used in) financing activities 47,563 (74,885)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Expenditures for
Utility plant .................................. (31,114) (35,845)
Real estate properties and other ............... (4,302) (786)
Equity investments ............................. (2,634) (250)
Cost of removal ................................ (3,981) (3,796)
Proceeds from asset sales ....................... 4,511 831
--------- ---------
Net cash flows used in investing activities ...... (37,520) (39,846)
--------- ---------
Net change in cash and temporary investments ..... 919 441
Cash and temporary investments at September 30 ... 1,904 2,123
--------- ---------
Cash and temporary investments at June 30 ........ $ 2,823 $ 2,564
========= =========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ..................................... $ (1,917) $ (44,885)
Construction fund ............................... 4,000 4,500
Inventories ..................................... 18,211 13,294
Deferred gas costs .............................. (28,781) 16,774
Purchased gas ................................... (52,502) 49,865
Prepaid and accrued taxes, net .................. 4,177 4,282
Customers' credit balances and deposits ......... (7,798) (6,322)
Accounts payable & other ........................ (22,569) 3,527
Other, net ...................................... (9,337) 1,995
--------- ---------
Total ............................................ $ (96,516) $ 43,030
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) ........... $ 15,306 $ 15,308
Income taxes .................................... $ 4,604 $ 15,965
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
2001 2000 2000
(unaudited) (unaudited)
----------- ----------- -----------
(Thousands)
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost .................. $ 1,004,642 $ 981,601 $ 976,084
Real estate properties and other, at cost 31,892 28,016 26,725
----------- ----------- -----------
1,036,534 1,009,617 1,002,809
Accumulated depreciation and amortization (294,151) (279,033) (280,077)
----------- ----------- -----------
Property, plant and equipment, net ..... 742,383 730,584 722,732
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments .......... 2,823 1,904 2,564
Construction fund ....................... 3,600 7,600 7,600
Customer accounts receivable ............ 110,984 106,807 130,255
Allowance for doubtful accounts ......... (4,813) (2,555) (3,101)
Gas in storage, at average cost ......... 46,165 63,799 22,335
Materials and supplies, at average cost . 2,972 3,549 3,806
Prepaid state taxes ..................... 20,120 12,836 8,904
Underrecovered gas costs ................ 41,485 12,436 --
Derivatives ............................. 30,614 -- --
Other ................................... 23,504 5,599 7,278
----------- ----------- -----------
Total current assets ................ 277,454 211,975 179,641
----------- ----------- -----------
DEFERRED CHARGES AND OTHER
Equity investments ...................... 20,588 35,271 26,972
Regulatory assets ....................... 119,455 87,291 79,483
Derivatives ............................. 10,270 -- --
Other ................................... 9,545 17,190 18,497
----------- ----------- -----------
Total deferred charges and other ....... 159,858 139,752 124,952
----------- ----------- -----------
Total assets ........................ $ 1,179,695 $ 1,082,311 $ 1,027,325
=========== =========== ===========
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
JUNE 30, SEPTEMBER 30, JUNE 30,
2001 2000 2000
(unaudited) (unaudited)
---------- ---------- ----------
(Thousands)
CAPITALIZATION
Common stock equity ....................... $ 371,622 $ 328,128 $ 335,836
Redeemable preferred stock ................ 298 400 400
Long-term debt ............................ 325,185 291,528 283,980
---------- ---------- ----------
Total capitalization ..................... 697,105 620,056 620,216
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt ...... 495 495 20,479
Short-term debt ........................... 74,300 43,300 17,600
Purchased gas ............................. 100,957 153,459 128,513
Accounts payable and other ................ 31,647 54,216 41,086
Dividends payable ......................... 7,828 7,595 7,590
Accrued taxes ............................. 20,326 5,964 14,514
Overrecovered gas costs ................... -- -- 3,677
Derivatives ............................... 31,619 -- --
Customers' credit balances and deposits ... 8,488 16,286 9,148
---------- ---------- ----------
Total current liabilities ................ 275,660 281,315 242,607
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes ..................... 108,042 90,980 74,447
Deferred investment tax credits ........... 9,584 9,845 9,932
Deferred revenue .......................... 19,538 21,009 21,511
Derivatives ............................... 7,411 -- --
Manufactured gas plant remediation ........ 45,219 45,219 45,219
Other ..................................... 17,136 13,887 13,393
---------- ---------- ----------
Total deferred credits ................... 206,930 180,940 164,502
---------- ---------- ----------
Total capitalization and liabilities $1,179,695 $1,082,311 $1,027,325
========== ========== ==========
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The preceding financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). The September 30, 2000 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 2000 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
Services Company (Energy Services), formerly a wholly-owned subsidiary of NJR
Energy Holdings Corporation (Energy Holdings), NJR Retail Holdings Corporation
(Retail Holdings), NJR Capital Corporation (Capital), formerly NJR Development
Corporation, and NJR Service Corporation (Service Corp.).
NJR Home Services Company (Home Services), NJR Natural Energy Company
(Natural Energy), formerly New Jersey Natural Energy Company and a wholly-owned
subsidiary of Energy Holdings, and NJR Power Services Company (Power Services),
are wholly-owned subsidiaries of Retail Holdings.
Commercial Realty & Resources Corp. (CR&R), NJR Investment Corporation, and
Energy Holdings, formerly a sub-holding company of the Company, which includes
NJR Energy Corporation (NJR Energy), New Jersey Natural Resources Company
(NJNR), and NJNR Pipeline Company (Pipeline), are wholly-owned subsidiaries of
Capital. Significant intercompany accounts and transactions have been
eliminated.
In December 2000, the BPU approved the transfer of NJNG's appliance service
business to Home Services. The Company commenced accounting for these operations
in Home Services, effective October 1, 2000.
3. Derivative Activities
Through September 30, 2000, the Company accounted for the results of its
derivative activities for hedging purposes utilizing the settlement method. The
settlement method provides for recognizing the gains or losses from derivatives
when the related physical transaction has been completed. Derivatives that were
not for hedging purposes were valued at fair value utilizing quoted market
prices. Changes in fair value were recorded in net income.
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Effective October 1, 2000, the Company has adopted Statement of Financial
Accounting Standards No.133 "Accounting for Derivative Investments and Hedging
Activities" (SFAS 133), under which the Company records the fair value of
derivatives held as assets and liabilities. The changes in net value of the
effective portion of derivatives qualifying as cash flow hedges are recorded,
net of tax, in Other comprehensive income, a component of Common stock equity.
Under SFAS 133, the Company also has certain derivative instruments that do not
qualify as cash flow hedges. The changes in net value of these derivatives are
recorded in net income. In addition, the changes in net value of the ineffective
portion of derivatives qualifying for hedge accounting are recorded as an
increase or decrease in gas costs or interest expense, as applicable, based on
the nature of the derivatives. NJNG utilizes derivatives to hedge its gas
purchasing activities which are recoverable through its Levelized Gas Adjustment
Clause (LGA). Accordingly, the offset to the change in fair value of these
derivatives are specified as a regulatory asset or liability. The Company has
not designated any derivatives as fair value hedges.
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 utilizes
mathematical models based on current and historical data.
4. Capitalized and Deferred Interest
The Company's capitalized interest totaled $195,000 and $272,000 for the
three months ended June 30, 2001 and 2000, respectively, and $728,000 and
$813,000 for the nine months ended June 30, 2001 and 2000, respectively.
Pursuant to a New Jersey Board of Public Utilities (BPU) order, NJNG
recovers carrying costs on uncollected balances related to its manufactured gas
plant remediation expenses (see Note 5c. Manufactured Gas Plant Remediation) and
underrecovered gas costs (see Note 5b. LGA and Other Adjustment Clauses).
Accordingly, Other income included $1.7 million and $3.3 million of deferred
interest related to remediation and underrecovered gas costs for the three and
nine months ended June 30, 2001, respectively.
5. Legal and Regulatory Proceedings
a. Energy Deregulation Legislation
In February 1999, the Electric Discount and Energy Competition Act (Act),
which provides the framework for the restructuring of New Jersey's energy
markets, became law. In March 2001, the (BPU), issued a written order which
approved a stipulation agreement among various parties to fully open NJNG's
residential markets to competition, restructure its rates to segregate its Basic
Gas Supply Service (BGSS) and Delivery (i.e., transportation) service prices as
required by the Act, and expand an incentive for residential and small
commercial customers to switch to transportation service.
The Act allows continuation of each utility's role as a gas supplier at
least until December 31, 2002. The BPU must determine the ongoing role of each
utility in providing BGSS service by January 1, 2002. In June 2001, the BPU
initiated a proceeding regarding the provision of BGSS. The Act also allows
natural gas utilities to provide competitive services (e.g., appliance
services).
In December 2000, the BPU issued a written Order resolving a customer
account service proceeding and approving the transfer of NJNG's existing
appliance service business to Home Services, a newly formed unregulated
subsidiary of the Company. The Order also continues NJNG's current third-party
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billing policies and delays until January 2003, absent a significant
breakthrough in metering technology, any further decision on meter reading and
other potentially competitive services.
b. LGA and Other Adjustment Clauses
In July 2000, NJNG amended a September 1999 LGA filing in response to a
significant increase in the wholesale cost of gas. The amended filing requested
an approximate 16 percent increase in rates for firm sales customers through an
increase in the Gas Cost Recovery (GCR) and Remediation Adjustment (RA) factors,
to be slightly offset by a decrease in the Prior Gas Cost Adjustment (PGCA) and
Transportation Education and Implementation (TEI) factors. The filing proposed
that the Demand Side Management (DSM) and Weather Normalization Clause (WNC)
factors remain the same. The rates for transportation customers would remain
relatively stable as a result of the changes requested in the filing. The filing
also requested that the monthly and annual limits of a Flexible Pricing
Mechanism (FPM), which allows NJNG to make additional pricing adjustments on a
monthly basis to reflect market changes, be expanded. In November 2000, the BPU
approved a 16 percent increase to the GCR and also authorized FPM increases of
approximately 2 percent for each of December 2000 and January 2001. The BPU
subsequently approved price increases of approximately 2 percent per month for
February 2001 through July 2001 which NJNG has implemented. The FPM also allows
NJNG to decrease rates if market conditions allow. The BPU decision also
provided for the recovery of underrecovered gas costs, which will be accumulated
as of October 31, 2001, over a three-year period including carrying costs on the
principal balance.
c. Manufactured Gas Plant 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 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.
NJNG had been sharing the cost of environmental investigations and remedial
actions at ten of the former MGP sites with the former owner. In September 2000,
a revised agreement was executed whereby NJNG is responsible for two of the
sites, while the former owner is responsible for the remaining eight sites. Also
in September 2000, NJNG purchased a 20-year cost containment insurance policy
for these two sites. NJNG continues to participate in the investigation and
remedial action for one MGP site that was not originally shared.
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, will be reviewed annually and recovered over rolling seven-year
periods, subject to BPU approval. In September 1999, NJNG filed for recovery of
expenditures
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incurred through June 30, 1999 and a BPU decision is anticipated by December 31,
2001. In January 2001, NJNG filed for recovery of expenditures incurred through
June 30, 2000, and currently the parties are reviewing the details of this
filing.
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 MGP 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 has filed a more definite statement of its
claims, and NJDEP has renewed its motion to dismiss the amended complaint. In
its motion, NJDEP alleges, among other things, that it has not acted upon SBA's
applications for permits to recycle the tar emulsion/sand and gravel mixture
because SBA has not submitted completed applications for these permits. This
allegation is denied by SBA. NJDEP's motion to dismiss is pending in the
Superior Court and it is not known when the Court will make a decision. 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
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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 incremental shares required for inclusion in the denominator for the
diluted EPS calculation were 172,429 and 132,078 for the three months ended June
30, 2001 and 2000, respectively, and 115,542 and 121,931 for the nine months
ended June 30, 2001 and 2000, 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 calculation was income from
continuing operations and net income, respectively.
Consolidated income from continuing operations and net income for the nine
months ended June 30, 2001 includes a charge of $1.3 million, or $.08 per share,
resulting from the cumulative effect of a change in accounting for derivatives
under SFAS 133.
Consolidated net income for the nine months ended June 30, 2000 includes
$828,000, or $.05 per share, of income from discontinued operations representing
the final true-up of the Company's reserve established in 1995 in conjunction
with exiting the natural gas and oil exploration and production business. This
income represents the excess of proceeds received from the sale of the assets
and the costs incurred, net of insurance recoveries which were received in
January 2000, compared with the estimates made in 1995.
7. Construction Fund and Long-Term Debt
In January 2001, the Company closed on a $285 million revolving credit
agreement with several banks. The Company facility consists of $135 million with
a three-year term and the NJNG facility consists of $50 million with a 364-day
term and $100 million with a three-year term. The Company also has a separate
$20 million facility which will expire on December 31, 2001. The Company
facilities are
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used to finance unregulated operations. The NJNG facility is used to support its
commercial paper borrowings. Consistent with management's intent to maintain its
commercial paper borrowings on a long-term basis, and as supported by its
long-term revolving credit facility, at June 30, 2001, the Company included $50
million of commercial paper borrowings as Long-term debt on the Consolidated
Balance Sheet.
In April 1998, NJNG entered into a loan agreement whereby the New Jersey
Economic Development Authority (EDA) loaned NJNG the proceeds from its $18
million Natural Gas Facilities Revenue Bonds, Series 1998C, which were deposited
into a construction fund. NJNG may draw down these funds in reimbursement for
certain qualified expenditures. In May 2001, NJNG drew down $4 million from the
construction fund and issued a like amount of Series GG Bonds. NJNG drew down
$4.5 million and $3.9 million from the construction fund and issued a like
amount of its Series GG Bonds in 2000 and 1999, respectively.
8. Segment Reporting
The segment data has been reclassified to reflect the new business segments
that are discussed in Note 2: Principles of Consolidation. The Natural gas
distribution segment consists of the regulated energy and the off-system and
capacity management operations. The Energy Services segment consists primarily
of unregulated fuel capacity management and other wholesale marketing services.
The Retail Holdings segment consists primarily of appliance service repair and
contract services and unregulated retail marketing. The NJR Capital and Other
segment consists of operations of the Company, as the parent company, CR&R,
which develops commercial real estate, NJR Energy, which invests in
energy-related ventures and NJR Investment Company, which makes energy-related
equity investments. It also includes Service Corp., which provides shared
administrative services for the Company and all of its subsidiaries.
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Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Thousands)
Operating Revenues
Natural Gas Distribution $ 140,216 $ 145,882 $ 885,820 $ 610,095
Energy Services 116,560 99,067 920,059 259,826
Retail Holdings 3,415 4,508 14,097 19,359
NJR Capital and Other 726 643 2,181 2,059
----------- ----------- ----------- -----------
Subtotal 260,917 250,100 1,822,157 891,339
Intersegment revenues (273) (2,139) (3,991) (10,952)
----------- ----------- ----------- -----------
Total $ 260,644 $ 247,961 $ 1,818,166 $ 880,387
=========== =========== =========== ===========
Operating Income
Natural Gas Distribution $ 7,522 $ 7,877 $ 91,796 $ 89,167
Energy Services 58 75 5,564 3,105
Retail Holdings (306) (410) (833) (655)
NJR Capital and Other 1,511 1,400 4,337 3,635
----------- ----------- ----------- -----------
Total $ 8,785 $ 8,942 $ 100,864 $ 95,252
=========== =========== =========== ===========
As of As of As of
June 30, 2001 September 30, 2000 June 30, 2000
---------- ---------- ----------
(Thousands)
Assets
Natural Gas Distribution $1,060,937 $ 940,725 $ 922,836
Energy Services 56,610 63,775 47,183
Retail Holdings 4,828 1,982 2,171
NJR Capital and Other 57,320 75,829 55,135
---------- ---------- ----------
Total $1,179,695 $1,082,311 $1,027,325
========== ========== ==========
9. Investments
Equity investments, which were purchased as long-term investments, are
classified as available for sale and are carried at their estimated fair value
with any unrealized gains or losses included in Other comprehensive income, a
component of Common stock equity. Joint ventures and investments in which the
Company can exercise a significant influence over operations and management are
accounted for under the equity method. For investments in which significant
influence does not exist, the cost method of accounting is applied. Included in
Equity investments on the Consolidated Balance Sheet is the Company's less than
1 percent ownership interest in the Capstone Turbine Corporation, a developer of
microturbines, which completed its initial public offering in June 2000. Other
comprehensive income for the nine months ended June 30, 2001, includes an
after-tax unrealized loss of $10.1 million associated with the Capstone
investment. Through June 30, 2001, accumulated other comprehensive income
includes an after-tax unrealized gain of $3.3 million related to Capstone.
On July 24, 2001, the Company entered into a five-year zero-premium collar
to hedge changes in the value of 100,000 shares of its investment in Capstone.
The collar consists of purchasing a put option at
11
13
$9.97 per share and selling a call option at $24.16 per share, for 100,000
shares. The Company has entered into this transaction to hedge its anticipated
sale of 100,000 shares of Capstone at the settlement date in 2006 and,
accordingly, will account for the transaction as a cash flow hedge with
subsequent changes in the market value of the collar recorded as Other
comprehensive income.
10. Comprehensive Income
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Net income $ 4,312 $ 3,116 $ 55,051 $ 51,956
-------- -------- -------- --------
Other comprehensive income:
Change in fair value of equity investments, net of
tax of $(811), $5,497, $(6,749) and $5,639 (1,175) 7,960 (9,774) 8,129
Change in fair value of derivatives, net of tax of (15,318) -- (5,660) --
$(10,578) and $(3,907)
Cumulative effect of a change in accounting for
derivatives, net of tax of $14,177 -- -- 20,530 --
-------- -------- -------- --------
Total Other comprehensive income $(16,493) $ 7,960 $ 5,096 $ 8,129
-------- -------- -------- --------
Comprehensive income $(12,181) $ 11,076 $ 60,147 $ 60,085
======== ======== ======== ========
11. Change in accounting
Effective October 1, 2000, the Company adopted SFAS 133. (See Note 3: Derivative
Activities)
At October 1, 2000, the effect of adopting SFAS 133 was as follows:
(Thousands)
Increase/
(Decrease)
----------
Fair value of derivative assets $ 56,963
Fair value of derivative liabilities $ 17,657
Regulatory liability $ 6,834
Cumulative effect on net income from a change in
accounting, net of tax of $930 $ (1,347)
Cumulative effect of a change in accounting for
derivatives in other comprehensive income, net of tax
of $14,177 $ 20,530
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The cumulative effect on net income from a change in accounting resulted
from derivatives that do not qualify for hedge accounting.
The amounts included in Other comprehensive income related to natural gas
instruments will reduce or be charged to gas costs as the related transaction
occurs. Based on the amount recorded to Other comprehensive income on the
October 1, 2000 transition date, $9.8 million is expected to be recorded as a
reduction in gas costs in 2001. For the three and nine months ended June 30,
2001, $7.8 million and $7.5 million pre-tax were charged to gas costs,
respectively. Those amounts related to interest rate instruments will reduce or
be charged to interest expense as the future transaction occurs. There are no
amounts in Other comprehensive income related to interest rate instruments.
The cash flow hedges described above cover various periods of time ranging
from July 2001 to October 2010.
12. Other
At June 30, 2001, there were 17,779,464 shares of common stock outstanding
and the book value per share was $20.90.
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 AND NINE MONTHS ENDED JUNE 30, 2001
A. RESULTS OF OPERATIONS
Consolidated income from continuing operations for the quarter ended June
30, 2001 increased 39 percent to $4.3 million, compared with $3.1 million for
the same period last year. Basic and diluted EPS from continuing operations
increased 33 percent to $.24, compared with $.18 last year.
Consolidated income from continuing operations for the nine months ended
June 30, 2001 increased 7.8 percent to $55.1 million, compared with $51.1
million for the same period last year. Basic EPS from continuing operations
increased 7.6 percent to $3.11, compared with $2.89 last year. Diluted EPS from
continuing operations increased 7.7 percent to $3.09, compared with $2.87 last
year.
The increase in consolidated earnings from continuing operations in both
the three and nine months ended June 30, 2001 were attributed primarily to
continued profitable customer growth and lower net interest costs at the
Company's principal subsidiary, NJNG, and improved wholesale natural gas
marketing results.
Consolidated income from continuing operations and net income for the nine
months ended June 30, 2001 includes a charge of $1.3 million, or $.08 per share,
resulting from the cumulative effect of a change in accounting for derivatives
under SFAS 133.
Consolidated net income for the nine months ended June 30, 2000 includes
$828,000, or $.05 per share, of income from discontinued operations representing
the final true-up of the Company's reserve established in 1995 in conjunction
with exiting the natural gas and oil exploration and production business. This
income represents the excess of proceeds received from the sale of the assets
and the costs incurred, net of insurance recoveries which were received in
January 2000, compared with the estimates made in 1995.
NJNG OPERATIONS
NJNG's financial results are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Gross margin
Residential and commercial $ 29,401 $ 26,671 $148,458 $137,559
Firm transportation 3,992 6,182 24,345 27,768
-------- -------- -------- --------
Total firm margin 33,393 32,853 172,803 165,327
Off-system and capacity management 1,100 1,294 4,583 4,136
Interruptible 226 219 586 637
-------- -------- -------- --------
Total gross margin $ 34,719 $ 34,366 $177,972 $170,100
======== ======== ======== ========
Operating income $ 7,522 $ 7,877 $ 91,796 $ 89,167
======== ======== ======== ========
Net income $ 3,349 $ 2,736 $ 51,396 $ 48,349
======== ======== ======== ========
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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 allows NJNG to recover gas
costs that exceed the level reflected in its base rates. Sales tax is calculated
at 6 percent 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.
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 percent 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 affected by
customers switching between sales service and 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, while all customers who
purchase gas from another supplier continue to utilize NJNG for transportation
service.
Total firm margin increased by 1.6 percent and 4.5 percent for the three
and nine months ended June 30, 2001, respectively, compared with the same
periods last year, reflecting customer growth and higher average customer usage.
The weather for the nine months ended June 30, 2001 was 5 percent colder
than normal, which, in accordance with the WNC, resulted in $1.7 million of
gross margin being deferred for future refunds to customers. At June 30, 2001,
NJNG also had $7.1 million in accrued WNC margins to be collected from its
customers in fiscal 2001 and 2002, due to warmer weather in prior fiscal years.
Gross margin from sales to firm customers increased $2.7 million, or 10.1
percent, and $10.9 million, or 7.9 percent, for the three and nine months ended
June 30, 2001, respectively, compared with the same periods last year. Sales to
firm customers were 7.3 billion cubic feet (Bcf) and 47.4 Bcf for the three and
nine months ended June 30, 2001, compared with 6.8 Bcf and 39.9 Bcf for the same
periods last year. The increases in gross margin and sales were due primarily to
the impact of 12,941 customer additions during the twelve months ended June 30,
2001, colder weather and firm transportation customers switching back to firm
sales.
Gross margin from firm transportation decreased $2.2 million, or 35.4
percent, and $3.4 million, or 12.3 percent, for the three and nine months ended
June 30, 2001, respectively, compared with the same periods last year. NJNG
transported .7 Bcf and 8.6 Bcf for the three and nine months ended June 30,
2001, respectively, compared with 1.5 Bcf and 9.5 Bcf, in the same periods last
year. The decrease in
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17
margin was due primarily to customers switching back to sales service, which
more than offset the colder weather.
NJNG had 17,252 and 31,120 residential customers and 3,127 and 4,108
commercial customers using transportation service at June 30, 2001 and 2000,
respectively. The decrease in the number of transportation customers was due
primarily to higher wholesale commodity prices, which resulted in customers
returning to sales service from transportation service.
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 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.
Effective October 1, 1998 through December 31, 2002, NJNG retains 15 percent of
the gross margin from these sales, with the balance credited to firm sales
customers through the LGA.
A new incentive mechanism designed to reduce the fixed cost of NJNG's gas
supply portfolio became effective October 1, 1998. Any savings achieved through
the permanent reduction or replacement of capacity or other services will be
shared between customers and shareowners. Under this program, NJNG retains 40
percent of the savings for the first 12 months following any transaction and
retains 15 percent for the remaining period through December 31, 2002, with the
balance credited to firm sales customers through the LGA.
NJNG's off-system and capacity management programs totaled 12.1 Bcf and
generated $1.1 million of gross margin, and 66.7 Bcf and $4.6 million of gross
margin, for the three and nine months ended June 30, 2001, respectively,
compared with 34.9 Bcf and $1.3 million of gross margin, and 103.2 Bcf and $4.1
million of gross margin for the respective periods last year. The increase for
the nine month period was due primarily to the Financial Risk Management (FRM)
Program which is designed to provide price stability to NJNG's system supply
portfolio. The FRM program also includes an incentive mechanism designed to
encourage the use of financial instruments to hedge NJNG's gas costs, with an
80/20 percent sharing of the costs and results between customers and
shareowners, respectively.
Interruptible
NJNG services 54 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 5.9 percent and 4.4 percent
of total therm throughput in the nine months ended June 30, 2001 and 2000,
respectively, they accounted for less than 1 percent 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 percent of the gross margin from
the interruptible sales and 5 percent of the gross margin from transportation
sales, with the balance credited to firm sales customers through the LGA.
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18
Operating Income
Operating income decreased $355,000, or 4.5 percent, and increased $2.6
million, or 2.9 percent, for the three and nine months ended June 30, 2001,
respectively, compared with the same periods last year. The increase for the
nine month period was due primarily to the increase in gross margin described
above, which more than offset increased operation and maintenance (O&M)
expenses. The decrease for the three month period was primarily due to increased
O&M expenses. For the three and nine months ended June 30, 2001, O&M expenses
increased by $531,000 and $4.4 million, respectively, compared with the same
periods last year. A higher provision for bad debts associated with higher
revenue increased O&M by $90,000 and $935,000 for the three and nine months
ended June 30, 2001, respectively. The nine month increase includes $1.1 million
of costs associated with an early retirement program, which is expected to
generate annual savings of approximately $600,000.
Net Income
Net income increased $613,000, or 22 percent, to $3.3 million, and $3
million, or 6.3 percent, to $51.4 million, for the three and nine months ended
June 30, 2001, respectively, compared with the same periods last year. The
increase for the nine-month period was due primarily to the higher operating
income discussed above and the recovery of carrying costs on deferred regulatory
assets (see Note 4. Capitalized and Deferred Interest) which is included in
Other income. The increase in the three-month period was primarily due to the
recovery of the carrying costs which more than offset lower operating income.
ENERGY SERVICES OPERATIONS
Energy Services' provides unregulated fuel and capacity management and
wholesale marketing services.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Revenues $116,560 $ 99,067 $920,059 $259,826
======== ======== ======== ========
Operating income $ 58 $ 75 $ 5,564 $ 3,105
======== ======== ======== ========
Other income $ 129 $ 129 $ 605 $ 234
======== ======== ======== ========
Net income $ 661 $ 403 $ 3,766 $ 2,484
======== ======== ======== ========
Energy Services revenues and net income increased significantly for the
three and nine months ended June 30, 2001, compared to the same periods last
year, reflecting primarily increased storage management activity, greater
volatility of natural gas prices and increased volumes sold and managed, which
generated higher margins. The increases in net income were also due to higher
interest income, which is included in Other income and resulted from the
favorable timing of cash flows from storage transactions.
Energy Services gas sales and managed gas totaled 24.6 Bcf and 139.3 Bcf
for the three and nine months ended June 30, 2001, respectively, compared with
29.6 Bcf and 85 Bcf for the respective periods last year. The increase was due
to additional volumes from pipeline storage arrangements and additional
wholesale customer requirements.
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RETAIL HOLDINGS OPERATIONS
Retail Holdings consist of Home Services, which provides appliance service
repair and contract services, Natural Energy, which participates in unregulated
retail marketing of natural gas, and Power Services, which is involved in the
distribution of alternative sources of energy. Retail Holdings consolidated
financial results are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands)
Revenues $ 3,415 $ 4,508 $ 14,097 $ 19,359
======== ======== ======== ========
Operating loss $ (306) $ (410) $ (833) $ (655)
======== ======== ======== ========
Net loss $ (202) $ (178) $ (433) $ (81)
======== ======== ======== ========
Retail Holdings' revenues have decreased due primarily to a reduction in
the number of retail and interruptible customers, which was partially offset by
increased revenue at Home Services. The net loss increased due primarily to
lower margins experienced by Natural Energys' retail sales.
Home Services provides home-appliance repair and contract warranty services
to approximately 131,000 customers. Natural Energy currently serves
approximately 6,000 residential customers.
Retail Holdings' retail gas sales totaled .3 Bcf and 1.3 Bcf for the three
and nine months ended June 30, 2001, respectively, compared with .7 Bcf and 3.1
Bcf, for the same periods last year, reflecting the reduction in customers
mentioned above.
NJR CAPITAL AND OTHER OPERATIONS
NJR Capital and Other operations include Capital, formerly NJR Development
Corporation, which consists of CR&R, which develops commercial real estate, NJR
Energy, an investor in energy-related ventures, which consist primarily of its
equity investments in the Capstone Turbine Corporation (Capstone) and the
Iroquois Gas Transmission System, L.P. (Iroquois), NJR Investment Company, which
makes certain energy-related equity investments, and Service Corp., which
provides shared administrative services for the Company and all of its
subsidiaries.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
(Thousands)
Revenues $ 726 $ 643 $2,181 $2,059
====== ====== ====== ======
Other income $ 265 $ 241 $1,052 $ 721
====== ====== ====== ======
Income before accounting change $ 504 $ 155 $ 706 $ 376
====== ====== ====== ======
Income from continuing operations $ 504 $ 155 $ 322 $ 376
====== ====== ====== ======
Net income $ 504 $ 155 $ 322 $1,204
====== ====== ====== ======
NJR Capital and Other results for the three and nine months ended June 30,
2001 included higher interest and dividend income associated with its
investments. NJR Energy's income from continuing
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operations for the nine months ended June 30, 2001 decreased due to a $384,000
charge resulting from the cumulative effect of a change in accounting for
derivatives under SFAS 133.
NJR Energy's results include interest expense related to debt remaining
after the discontinuance of the oil and natural gas exploration and production
business in 1995. The Company plans to reduce such debt from cash flow generated
by its equity investments. NJR Energy's net income for nine months ended June
30, 2000 includes $828,000, or $.05 per share, of income from discontinued
operations representing the final true-up of the Company's reserve established
in 1995 in conjunction with exiting this business.
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 over 25 years, the term of the lease. 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.
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 several banks
totaling $155 million. At June 30, 2001, there was $27 million outstanding under
these agreements. NJNG satisfies its debt needs by issuing short-term and
long-term debt based upon its own financial profile. The 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, MGP
remediation expenditures and energy tax payments, through the issuance of
commercial paper and short-term bank loans. To support the issuance of
commercial paper, NJNG maintains a committed credit facility totaling $150
million, consisting of $50 million with a 364-day term and $100 million with a
three-year term.
Remaining fiscal 2001 construction expenditures are estimated at $16
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 incurred $8.7 million remediating its former manufactured gas
plants during the nine months ended June 30, 2001 and estimates additional
expenditures of approximately $9 million, exclusive of any insurance recoveries,
for the remaining three months of fiscal 2001.
NJNG expects to finance these expenditures through the issuance of
short-term debt and a sale leaseback transaction during the fourth quarter. The
timing and mix of these issuances will be geared toward maintaining a common
equity ratio of at least 50 percent, which is consistent with maintaining its
current short-term and long-term credit ratings.
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ENERGY SERVICES
Energy Services does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2001.
RETAIL HOLDINGS
Retail Holdings does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2001.
NJR CAPITAL AND OTHER
In July 2001, CR&R sold a building and adjacent undeveloped acreage for
$5.2 million, which generated a pre-tax gain of approximately $100,000. On May
4, 2001, Pipeline invested $1.3 million to increase its ownership interest in
Iroquois from 2.8 percent to 3.28 percent. No significant capital expenditures
or external financing requirements are expected in the fourth quarter.
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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, NJNG utilizes futures, options and
swaps through its financial risk management program. Second, Energy Services has
hedged its commitments to purchase natural gas for sale to retail marketers,
purchases and sales of storage gas and fixed price sales to wholesale customers.
Finally, NJR Energy has entered into swap agreements to hedge a long-term,
fixed-price contract to sell approximately 21.5 Bcf of natural gas to a gas
marketing company at prices ranging from $2.87 to $4.41 per 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 notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
Summary of commodity derivatives as of June 30, 2001:
Amounts included in
Volume Price per Derivatives
in Bcf Mmbtu in Thousands
------ ----- ------------
NJNG
Futures 10.2 $3.525-$5.82 $(12,715)
Swaps 40.7 $1,338
Options 2.1 $4.00-$10.00 $(13,017)
Energy Services
Futures .6 $2.461-$5.95 $ 12,735
Swaps 9.5 $ 9,991
NJR Energy
Swaps 25.4 $ 3,521
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23
NJR Energy has hedged both its price and physical delivery risks associated
with its 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
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.
With respect to the 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, therefore, the
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.
Summary of effects of theoretical 10 percent change in market value:
June 30,
------------------------------
2001 2000
------ -------
(Thousands)
Futures $7,818 $ 8,432
Swaps $8,373 $ 6,396
Options $3,829 $ 1,224
However, any such additional changes in value of the futures contracts, swap
agreements and options would be substantially offset by a corresponding change
on the related underlying contracts that are being hedged.
Interest Rate Risk
NJNG has total variable rate debt of $147 million, of which $56 million has
been hedged by the purchase of a 6.5 percent 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 percent 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 $91 million of variable rate debt, NJNG's interest expense, net of
tax, would change by $537,000. The Company also has variable rate debt of $27
million and according to the Company's sensitivity analysis, if interest rates
were to change by 100 basis points annual interest expense, net of tax, would
change by $159,000.
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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, those with respect to expected disposition of legal and regulatory
proceedings, effect of new accounting standards, expected capital expenditures
and external financing requirements are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can also be identified by the use of forward-looking terminology such
as "may," "intend," "expect," or "continue" or comparable terminology and 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
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, fiscal 2001 and thereafter include many factors that are beyond
the Company's ability to control or estimate precisely, such as estimates of
future market conditions, the behavior of other market participants and changes
in interest rates. 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,
changes due to legislation at the federal and state levels, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2001.
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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: August 9, 2001 /s/ Glenn C. Lockwood
------------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
25