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 March 31, 2002 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 (I.R.S. Employer
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 May 2,
2002 was 26,951,369.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share data)
OPERATING REVENUES ................................................. $ 525,780 $ 890,035 $ 921,611 $1,557,522
---------- ---------- ---------- ----------
OPERATING EXPENSES
Gas purchases .................................................... 419,883 784,119 738,363 1,369,776
Operation and maintenance ........................................ 23,531 23,313 46,603 47,231
Depreciation and amortization .................................... 7,538 8,154 15,969 16,377
Energy and other taxes ........................................... 15,528 18,635 26,606 32,059
---------- ---------- ---------- ----------
Total operating expenses .......................................... 466,480 834,221 827,541 1,465,443
---------- ---------- ---------- ----------
OPERATING INCOME ................................................... 59,300 55,814 94,070 92,079
Other income ....................................................... 998 2,102 2,250 2,695
Interest charges, net .............................................. 4,070 5,367 8,455 11,036
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ......................................... 56,228 52,549 87,865 83,738
Income tax provision ............................................... 21,298 19,519 33,254 31,652
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
................................................................... 34,930 33,030 54,611 52,086
Cumulative effect of a change in accounting for
derivatives, net of tax of $930 .................................... -- -- -- (1,347)
---------- ---------- ---------- ----------
NET INCOME ......................................................... $ 34,930 $ 33,030 $ 54,611 $ 50,739
========== ========== ========== ==========
EARNINGS PER COMMON SHARE-BASIC
INCOME BEFORE ACCOUNTING CHANGE ............................... $ 1.30 $ 1.24 $ 2.04 $ 1.96
========== ========== ========== ==========
NET INCOME .................................................... $ 1.30 $ 1.24 $ 2.04 $ 1.91
========== ========== ========== ==========
EARNINGS PER COMMON SHARE-DILUTED
INCOME BEFORE ACCOUNTING CHANGE ............................... $ 1.29 $ 1.24 $ 2.01 $ 1.95
========== ========== ========== ==========
NET INCOME .................................................... $ 1.29 $ 1.24 $ 2.01 $ 1.90
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE ......................................... $ .30 $ .29 $ .60 $ .59
========== ========== ========== ==========
AVERAGE SHARES OUTSTANDING
BASIC ......................................................... 26,863 26,574 26,800 26,508
========== ========== ========== ==========
DILUTED ....................................................... 27,163 26,727 27,108 26,673
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
1
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31,
(Thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................................. $ 54,611 $ 50,739
Adjustments to reconcile net income to cash flows
Depreciation and amortization .......................................................... 15,969 16,377
Amortization of deferred charges ....................................................... 2,816 3,382
Deferred income taxes .................................................................. 2,315 8,261
Manufactured gas plant remediation costs ............................................... (6,197) (5,457)
Change in working capital .............................................................. (42,366) (24,801)
Other, net ............................................................................. (383) 1,629
--------- ---------
Net cash flows from operating activities ................................................. 26,765 50,130
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock .............................................................. 6,639 6,549
Proceeds from long-term debt ............................................................ 89,231 --
Payments of long-term debt .............................................................. (815) (43,343)
Purchases of treasury stock ............................................................. (1,676) (1,983)
Payments of common stock dividends ...................................................... (15,867) (15,357)
Net change in short-term debt ........................................................... (80,600) 39,700
--------- ---------
Net cash flows from financing activities ................................................. (3,088) (14,434)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for
Utility plant .......................................................................... (20,368) (19,936)
Real estate properties and other ....................................................... (318) (3,099)
Equity investments ..................................................................... -- (278)
Cost of removal ........................................................................ (1,854) (1,364)
Proceeds from asset sales ............................................................... 1,014 4,161
--------- ---------
Net cash flows from investing activities ................................................. (21,526) (20,516)
--------- ---------
Net change in cash and temporary investments ............................................. 2,151 15,180
Cash and temporary investments at September 30 ........................................... 4,044 1,904
--------- ---------
Cash and temporary investments at March 31 ............................................... $ 6,195 $ 17,084
========= =========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ............................................................................. $(128,669) $(191,607)
Inventories ............................................................................. 27,752 51,019
Deferred gas costs ...................................................................... 12,672 (16,233)
Purchased gas ........................................................................... 48,814 119,256
Prepaid and accrued taxes, net .......................................................... 34,751 38,029
Customers' credit balances and deposits ................................................. (3,791) (9,806)
Accounts payable & other ................................................................ (6,638) (8,800)
Broker margin accounts .................................................................. (15,571) (6,589)
Other, net .............................................................................. (11,686) (70)
--------- ---------
Total .................................................................................... $ (42,366) $ (24,801)
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) ................................................... $ 7,288 $ 9,818
Income taxes ............................................................................ $ 27,428 $ 3,440
See Notes to Consolidated Financial Statements
2
CONSOLIDATED BALANCE SHEETS
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30, MARCH 31,
2002 2001 2001
(unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands)
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost ............................................. $ 1,034,225 $ 1,016,911 $ 994,935
Real estate properties and other, at cost .......................... 27,075 26,759 29,730
----------- ----------- -----------
1,061,300 1,043,670 1,024,665
Accumulated depreciation and amortization .......................... (312,262) (299,721) (289,015)
----------- ----------- -----------
Property, plant and equipment, net ................................ 749,038 743,949 735,650
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments ..................................... 6,195 4,044 17,084
Construction fund .................................................. 3,600 3,600 7,600
Customer accounts receivable ....................................... 200,099 82,150 285,482
Unbilled revenues .................................................. 15,600 3,941 14,385
Allowance for doubtful accounts .................................... (3,775) (3,026) (4,025)
Gas in storage, at average cost .................................... 42,544 70,019 13,209
Materials and supplies, at average cost ............................ 2,726 3,003 3,120
Prepaid state taxes ................................................ -- 8,268 --
Underrecovered gas costs ........................................... 18,888 15,335 28,937
Derivatives ........................................................ 10,645 24,698 51,471
Broker margin accounts ............................................. 44,469 28,898 --
Other .............................................................. 28,840 20,822 14,237
----------- ----------- -----------
Total current assets .............................................. 369,831 261,752 431,500
----------- ----------- -----------
DEFERRED CHARGES AND OTHER
Equity investments ................................................. 14,316 15,468 20,433
Regulatory assets .................................................. 81,398 98,753 96,465
Underrecovered gas costs ........................................... 16,781 33,006 --
Derivatives ........................................................ 9,222 14,428 13,750
Other .............................................................. 28,658 24,836 9,285
----------- ----------- -----------
Total deferred charges and other .................................. 150,375 186,491 139,933
----------- ----------- -----------
Total assets ................................................ $ 1,269,244 $ 1,192,192 $ 1,307,083
=========== =========== ===========
See Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30, MARCH 31,
2002 2001 2001
(unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands)
CAPITALIZATION
Common stock equity .................................................. $ 372,839 $ 352,069 $ 390,001
Redeemable preferred stock ........................................... 298 298 400
Long-term debt ....................................................... 415,822 353,799 298,185
---------- ---------- ----------
Total capitalization ................................................ 788,959 706,166 688,586
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt ................................. 26,922 529 495
Short-term debt ...................................................... 5,200 85,800 33,000
Purchased gas ........................................................ 134,140 85,326 272,715
Accounts payable and other ........................................... 31,528 38,166 31,611
Dividends payable .................................................... 8,069 7,837 7,804
Accrued taxes ........................................................ 45,717 15,771 33,103
Derivatives .......................................................... 35,337 35,431 10,569
Broker margin accounts ............................................... -- -- 7,216
Customers' credit balances and deposits .............................. 10,632 14,423 6,480
---------- ---------- ----------
Total current liabilities ........................................... 297,545 283,283 402,993
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes ................................................ 77,067 95,182 113,234
Deferred investment tax credits ...................................... 9,323 9,497 9,671
Deferred revenue ..................................................... 15,820 19,046 20,027
Derivatives .......................................................... 5,307 9,209 8,212
Manufactured gas plant remediation ................................... 53,840 53,840 45,219
Other ................................................................ 21,383 15,969 19,141
---------- ---------- ----------
Total deferred credits .............................................. 182,740 202,743 215,504
---------- ---------- ----------
Total capitalization and liabilities .......................... $1,269,244 $1,192,192 $1,307,083
========== ========== ==========
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). The
September 30, 2001 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 2001 Annual Report on Form 10-K.
In the opinion of management, the information furnished reflects all
adjustments necessary for a fair statement of the results of the interim
periods. Because of the seasonal nature of the Company'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), NJR Retail Holdings Corporation (Retail Holdings),
NJR Capital Services Corporation (Capital) and NJR Service Corporation.
The Retail and Other segment includes Retail Holdings and its four
wholly-owned subsidiaries, NJR Home Services Company (Home Services), NJR
Natural Energy Company (Natural Energy), NJR Power Services Company and NJR
Plumbing Services Company. Retail and Other also includes Capital and its
wholly-owned subsidiaries, Commercial Realty & Resources Corp. (CR&R), NJR
Investment Company and NJR Energy Corporation (NJR Energy).
3. Capitalized and Deferred Interest
The Company's capitalized interest totaled $106,000 and $267,000 for the
three months ended March 31, 2002 and 2001, respectively, and $228,000 and
$533,000 for the six months ended March 31, 2002 and 2001, 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 (MGP) remediation expenditures (see Note 4c. Manufactured Gas Plant
Remediation) and underrecovered gas costs (see Note 4b. LGA and Other Adjustment
Clauses). Accordingly, Other income included deferred interest of $658,000 and
$1.1 million for the three months ended March 31, 2002 and 2001, respectively,
and $1.5 million and $1.1 million for the six months ended March 31, 2002 and
2001, respectively, related to remediation and underrecovered gas costs.
5
4. 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 that 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. In June 2001, the BPU initiated a proceeding to
review issues related to the potential of making the BGSS competitive. In July
2001, NJNG submitted a BGSS proposal that provides for additional customer
choices and includes a request to develop new incentive mechanisms. In January
2002, the BPU issued an order which stated that BGSS could be provided by
suppliers other than state gas utilities, but at this time it should be provided
by the state's natural gas utilities. The parties are currently discussing
NJNG's July 2001 proposal and no assurance can be made as to the timing or terms
of any resolution to such proposal.
b. LGA and Other Adjustment Clauses
In fiscal 2001, the BPU approved price increases of approximately 2
percent per month for a period from December 2000 through July 2001 under a
Flexible Pricing Mechanism (FPM). The BPU ordered, based on the extraordinary
circumstances prevailing at the time, that NJNG could accrue interest at the
rate of 5.5 percent per year on its underrecovered gas costs commencing on April
1, 2001 and continuing through October 31, 2001. The BPU also directed NJNG to
establish a Gas Cost Underrecovery Adjustment (GCUA) surcharge to collect the
underrecovered gas costs and accrue interest at a rate of 5.75 percent per year,
commencing December 1, 2001 until November 30, 2004.
On November 15, 2001, NJNG filed with the BPU for the establishment of the
GCUA to collect $29.9 million in underrecovered gas costs and sought to reduce
the current gas cost recovery rate. The combined effect of the two changes
resulted in an approximate 10.8 percent price decrease effective December 1,
2001. The filing also contained a proposal to extend the existing margin-sharing
mechanisms related to NJNG's off-system sales and capacity management programs
for two years beyond their currently scheduled expiration of December 31, 2002.
On January 21, 2002, NJNG filed with the BPU for an additional 3 percent
price decrease as a result of lower projected gas costs. The BPU approved this
filing on February 6, 2002 and the decrease became effective immediately.
c. Manufactured Gas Plant Remediation
NJNG has identified eleven former 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
6
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.
With respect to ten of the MGP sites, until September 2000 most of the
cost of such studies and investigations had been shared under an agreement with
the former owner and operator of such ten MGP sites. In September 2000, a
revised agreement was executed pursuant to which 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 subject to the original
cost-sharing agreement. 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 discussed in Note 4: Capitalized and Deferred
Interest), will be reviewed annually and recovered over rolling seven-year
periods, subject to BPU approval. In September 1999, NJNG filed for recovery of
expenditures incurred through June 30, 1999. In January 2001, NJNG filed for
recovery of expenditures incurred through June 30, 2000, and the parties are
currently reviewing the details of these filings.
In March 1995, NJNG instituted an action for declaratory relief against 24
separate insurance companies in the Superior Court of New Jersey. These
insurance carriers provided comprehensive general liability coverage to NJNG
from 1951 through 1985. Prior to the institution of the suit, NJNG requested the
insurance carriers to defend and indemnify it with respect to the environmental
liability created by the former manufactured gas plants. The insurance carriers
all denied coverage claiming that various terms in the policy preclude coverage.
In 2001, settlements were reached with several of the excess carriers, while
other carriers were dismissed without prejudice when it was determined that the
state's allocation method would not have assessed any liability to the
particular carrier. In September 2001, NJNG reached a favorable settlement with
the insurance carrier that provided the majority of NJNG's coverage. This
settlement involves a significant cash payment to NJNG that will be tendered in
four annual installments. One carrier remains and NJNG is optimistic that a
settlement can be reached in that matter. No assurance can be made as to the
timing or terms of such settlement.
d. South Brunswick Asphalt, L.P.
NJNG was named as a defendant in a civil action commenced in New Jersey
Superior Court (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. The case proceeded to trial in April 2002 and on May 2, 2002, a
verdict on liability was entered in favor of SBA. Prior to a decision on the
amount of liability, the parties entered into a settlement agreement. NJNG
believes that the settlement costs are recoverable through the ratemaking
process (See Management's discussion in Item 2 (MD&A) under the heading Critical
Accounting Policies, Environmental Items) and therefore does not believe that
the ultimate resolution of this matter will have a material adverse effect on
its financial condition or results of operations. No assurance can be given as
to the timing or extent of the ultimate recovery of such costs.
7
e. Combe Fill South Landfill
NJNG was 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
(District Court) by the U.S. Environmental Protection Agency and the 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 the Comprehensive Environmental Response,
Compensation and Liability Act, the New Jersey Spill Act and declaratory relief
holding each third-party defendant strictly liable, and contribution and
indemnification under the common law of the United States and New Jersey. The
case has recently been settled with respect to NJNG and a number of other de
micromis parties (defined as disposing of less than 0.1% of the waste into the
site), and a court order confirming the settlement was entered on May 9, 2002.
The settlement provides for release of NJNG from all claims, including future
claims and natural resource damages. The third-party plaintiffs retained the
right to seek to reopen the settlement if future developments result in a change
in NJNG's status as a de micromis party. NJNG determined that the amount of the
settlement was immaterial and, based on the required change in the amount of the
waste at the site before the settlement could be reopened, NJNG currently
believes that its status should not change. No assurance can be given as to the
possibility that NJNG's status as a de micromis party will not change in the
future.
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.
5. Earnings Per Share (EPS)
On January 22, 2002 the Board of Directors approved a three-for-two split
of its outstanding shares of common stock and on March 4, 2002, the Company
began trading on a post-split basis. All share and per share amounts have been
adjusted to reflect this split.
The incremental shares required for inclusion in the denominator for the
diluted EPS calculation were 300,635 and 138,318 for the three months ended
March 31, 2002 and 2001, respectively and 308,252 and 149,945 for the six months
ended March 31, 2002 and 2001, 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 before cumulative effect of a change in accounting and net income,
respectively.
Net income for the six months ended March 31, 2001 included a charge of
$1.3 million, or $.05 per share, resulting from the cumulative effect of a
change in accounting for derivatives under SFAS 133.
8
6. Construction Fund and Long-Term Debt
The Company has $335-million in revolving credit agreements with several
banks. The Company portion of the facility consists of $135 million with a
three-year term and the NJNG portion of the facility consists of $100 million
with a 364-day term and $100 million with a three-year term. The Company
facilities are used to finance unregulated operations. The NJNG facility is used
to support its commercial paper borrowings. Consistent with management's intent
to maintain a portion of its commercial paper borrowings on a long-term basis,
and as supported by its long-term revolving credit facility, the Company
included $50 million of commercial paper borrowings as Long-term debt on the
Consolidated Balance Sheet at March 31, 2002, September 30, 2001 and March 31,
2001.
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. NJNG has drawn down $14.4 million of these funds
through March 31, 2002 and the remaining $3.6 million was drawn down on May 8,
2002.
7. 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 regulated energy and off-system and
capacity management operations. The Energy Services segment consists of
unregulated fuel and capacity management operations. The Retail and Other
segment consists of appliance service, commercial real estate development,
retail marketing, investment and other corporate activities.
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
---------------------------------------------------------
(Thousands)
Operating Revenues
Natural Gas Distribution $ 289,609 $ 420,805 $ 509,557 $ 745,604
Energy Services 231,581 465,155 402,469 803,499
Retail and Other 4,612 5,808 9,705 12,137
--------- --------- --------- -----------
Subtotal 525,802 891,768 921,731 1,561,240
Intersegment revenues (22) (1,733) (120) (3,718)
--------- --------- --------- -----------
Total $ 525,780 $ 890,035 $ 921,611 $ 1,557,522
========= ========= ========= ===========
Operating Income
Natural Gas Distribution $ 53,002 $ 53,081 $ 83,000 $ 84,274
Energy Services 5,222 1,435 8,747 5,506
Retail and Other 1,076 1,298 2,323 2,299
--------- --------- --------- -----------
Total $ 59,300 $ 55,814 $ 94,070 $ 92,079
========= ========= ========= ===========
9
The Company's assets for the various business segments are detailed below:
As of As of As of
March 31, 2002 September 30, 2001 March 31, 2001
------------------------------------------------------
(Thousands)
Assets
Natural Gas Distribution $1,054,556 $1,065,748 $1,072,934
Energy Services 162,972 78,042 148,791
Retail and Other 51,716 48,402 85,358
---------- ---------- ----------
Total $1,269,244 $1,192,192 $1,307,083
========== ========== ==========
8. Investments
Included in Equity investments on the Consolidated Balance Sheet is the
Company's less-than-1-percent ownership interest in the Capstone Turbine
Corporation (Capstone), a developer of microturbines, which completed its
initial public offering in June 2000. In July 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 a purchased put option with a
strike price of $9.97 per share and a sold call option with a strike price of
$24.16 per share for 100,000 shares. The Company entered into this transaction
to hedge its anticipated sale of 100,000 shares of Capstone at the settlement
date in 2006 and, accordingly, accounts for the transaction as a cash flow
hedge. The change in Other comprehensive income for the six months ended March
31, 2002 is a $94,000 unrealized gain related to this collar. Through March 31,
2002, accumulated other comprehensive income includes a $546,000 unrealized gain
related to this collar.
9. Comprehensive Income
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
---------------------------------------------------------
(Thousands)
Net income $ 34,930 $ 33,030 $ 54,611 $ 50,739
-------- -------- -------- --------
Other comprehensive income:
Change in fair value of equity investments, net $ (819) $ 50 $ (218) $ (8,599)
Change in fair value of derivatives, net (18,186) (2,182) (25,010) 9,658
Cumulative effect of a change in accounting for
derivatives, net -- -- -- 20,530
-------- -------- -------- --------
Total Other comprehensive income $(19,005) $ (2,132) $(25,228) $ 21,589
-------- -------- -------- --------
Comprehensive income $ 15,925 $ 30,898 $ 29,383 $ 72,328
======== ======== ======== ========
Accumulated Other Comprehensive Income, included in Stockholders equity on
the Consolidated Balance Sheets, was a negative $15.6 million at March 31, 2002,
$9.6 million at September 30, 2001 and $35.1 million at March 31, 2001.
10
10. 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 $ (1,347)
Cumulative effect of a change in accounting
for derivatives in other comprehensive
income, net $ 20,530
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 accumulated other comprehensive income
at March 31, 2002, $5.3 million is expected to be recorded as an increase to gas
costs in 2002. For the three months ended March 31, 2002 and 2001, $16 million
was credited and $100,000 was charged to gas costs, and for the six months ended
March 31, 2002 and 2001, $31.3 million was credited and $1 million was charged
to gas costs, respectively.
The cash flow hedges described above cover various periods of time ranging
from April 2002 to October 2010.
11. Commitments and contingent liabilities
Energy Services has entered into a marketing and management agreement for
the Stagecoach storage project. Stagecoach is a 12 billion cubic feet (Bcf)
high-injection/high-withdrawal facility in New York State with interstate
pipeline connections to the Northeast markets which is expected to begin
operations in the third quarter of fiscal 2002.
Energy Services is the exclusive agent for marketing Stagecoach services
for a 10-year period, subject to standard termination rights, ending March 31,
2012. During this period, Energy Services has agreed to arrange contracts for,
or purchase at fixed prices, sufficient services to provide Stagecoach with
revenues of $18 million for the period from April 1, 2002 to March 31, 2003 and
$22 million annually from April 1, 2003 to March 31, 2012. Stagecoach can
require Energy Services to make the foregoing purchases only if Stagecoach is
capable of providing the underlying services. In addition, Energy Services
believes that the price at which it would be required to purchase these services
is currently below market. Energy
11
Services has reached three-year agreements with two third parties for the
purchase of over 35 percent of the required level of services from Stagecoach.
Due to the attractive pricing available to Energy Services, as compared with
current market prices, and the current and expected level of third-party
contracts, the Company believes that the potential purchase obligation in the
Stagecoach agreement will not result in any future losses.
Additionally, under the Stagecoach agreement, Energy Services is required
to provide to, and maintain at, the Stagecoach facility 2 Bcf of firm base gas,
and to manage up to 3 Bcf of interruptible base gas for the term of the
agreement.
12. Other
At March 31, 2002, there were 26,892,062 shares of common stock
outstanding and the book value per share was $13.86.
Certain reclassifications have been made of previously reported amounts to
conform with current year classifications.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED MARCH 31, 2002
A. RESULTS OF OPERATIONS
Consolidated net income for the quarter ended March 31, 2002 increased 5.8
percent to $34.9 million, compared with $33 million for the same period last
year. Basic EPS increased 4.8 percent to $1.30, compared with $1.24 last year.
Diluted EPS increased 4 percent to $1.29, compared with $1.24 last year.
Consolidated net income for the six months ended March 31, 2002 increased
7.7 percent to $54.6 million, compared with $50.7 million for the same period
last year. Basic EPS increased 6.8 percent to $2.04, compared with $1.91 last
year. Diluted EPS increased 5.8 percent to $2.01, compared with $1.90 last year.
The increase in consolidated net income in both the three and six months
ended March 31, 2002 was attributable primarily to continued profitable customer
growth at the Company's principal subsidiary, NJNG, reduced operation and
maintenance expenses, lower net interest charges and higher results in NJRES and
Home Services, which more than offset the impact of record warm weather.
Consolidated net income for the six months ended March 31, 2001 included a
charge of $1.3 million, or $.05 per share, resulting from the cumulative effect
of a change in accounting for derivatives under SFAS 133.
NATURAL GAS DISTRIBUTION OPERATIONS
NJNG's financial results are summarized as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
-------------------------------------------------------
(Thousands)
Revenue $289,609 $420,805 $509,557 $ 745,604
======== ======== ======== =========
Gross margin
Residential and commercial $ 71,528 $ 69,700 $121,480 $ 119,057
Transportation 7,643 10,803 13,726 20,353
-------- -------- -------- ---------
Total firm margin 79,171 80,503 135,206 139,410
Off-system and capacity management 1,241 2,158 2,876 3,483
Interruptible 210 168 422 360
-------- -------- -------- ---------
Total gross margin $ 80,622 $ 82,829 $138,504 $ 143,253
======== ======== ======== =========
Operation and maintenance expense $ 19,142 $ 21,058 $ 38,736 $ 41,546
======== ======== ======== =========
Operating income $ 53,002 $ 53,081 $ 83,000 $ 84,274
======== ======== ======== =========
Other income $ 463 $ 1,285 $ 1,564 $ 1,337
======== ======== ======== =========
Cumulative effect of a change in
accounting -- -- -- $ (275)
======== ======== ======== =========
Net income $ 31,219 $ 31,596 $ 48,353 $ 48,047
======== ======== ======== =========
13
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 Levelized Gas Adjustment
Clause (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
sales to other utilities, off-system sales 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 gross margin is subject to a Weather
Normalization Clause (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 through May) is billed or
credited to customers in subsequent periods. This mechanism reduces the
variability of both customer bills and NJNG's gross margin due to weather
fluctuations.
The components of gross margin from residential and commercial customers
are affected by customers switching between sales service and transportation
service. NJNG's total gross margin is not affected negatively by customers who
utilize its transportation service and purchase their gas from another supplier
because its tariff is designed such that no profit is earned on the commodity
portion of sales to firm customers. All customers who purchase gas from another
supplier continue to utilize NJNG for transportation service.
Total firm margin decreased $1.3 million, or 1.7 percent, and $4.2
million, or 3 percent, for the three and six months ended March 31, 2002,
respectively, compared with the same periods last year, due primarily to 18
percent and 24 percent warmer weather as compared with the three and six month
periods last year, respectively. This record warm weather resulted in lower
average customer usage, which more than offset the impact of customer growth and
the WNC.
The weather for the six months ended March 31, 2002 was 18 percent warmer
than normal, which, in accordance with the WNC, resulted in the accrual of $14.8
million of gross margin for recovery from its customers in the future. The
weather for the six months ended March 31, 2002 was the warmest in NJNG's
history. At March 31, 2002, NJNG also had $8.3 million in accrued WNC margins to
be collected from its customers in fiscal 2002 due to the impact of weather in
prior fiscal years. NJNG estimates that for the six months ended March 31, 2002,
the record warm weather resulted in $6 million of lost margin beyond the amount
captured in the WNC.
Gross margin from sales to residential and commercial customers increased
$1.8 million, or 3 percent, and $2.4 million, or 2 percent, for the three and
six months ended March 31, 2002, compared with the same periods last year. The
increase in gross margin was due primarily to the impact of 11,485 customer
additions during the twelve months ended March 31, 2002, the impact of the WNC
and firm transportation customers switching back to firm sales service, which
more than offset the decrease in sales due to the warm weather. Sales to
residential and commercial customers were 20.6 Bcf and 33.7 Bcf for the three
and six months ended March 31, 2002, compared with 23.3 Bcf and 40.1 Bcf for the
same periods last year.
14
Gross margin from transportation service decreased $3.2 million, or 29
percent, and $6.6 million, or 33 percent, for the three and six months ended
March 31, 2002, compared with the same periods last year. The decrease in margin
was due primarily to customers switching back to sales service. NJNG transported
3 Bcf and 5.1 Bcf for the three and six months ended March 31, 2002,
respectively, compared with 4.3 Bcf and 7.9 Bcf, in the same periods last year.
NJNG had 10,035 and 22,063 residential customers and 3,476 and 3,233
commercial customers using transportation service at March 31, 2002 and 2001,
respectively. The decrease in the number of transportation customers was due
primarily to changes in market conditions, which resulted in customers returning
to sales service from transportation service.
Off-System and Capacity Management
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 85 percent credited to firm customers through the
LGA.
An incentive mechanism designed to reduce the fixed cost of NJNG's gas
supply portfolio also became effective October 1, 1998. Any savings achieved
through the permanent reduction or replacement of capacity or other services is
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 60
percent and 85 percent, respectively, credited to firm sales customers through
the LGA.
NJNG also has a Financial Risk Management (FRM) program, which is designed
to provide price stability to it's system supply portfolio. The FRM program
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, through
December 31, 2002.
NJNG has requested an extension of these incentives through December 31,
2004.
NJNG's off-system sales, capacity management and FRM programs totaled 30.2
Bcf and generated $1.2 million of gross margin, and 56.4 Bcf and $2.9 million of
gross margin, for the three and six months ended March 31, 2002, compared with
25.4 Bcf and $2.2 million of gross margin, and 54.6 Bcf and $3.5 million of
gross margin for the respective periods last year. The decrease in margin was
due primarily to lower results from the FRM program.
Interruptible
NJNG serves 49 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 4.7 percent and 3.9 percent of total
throughput for the six months ended March 31, 2002 and 2001, respectively, they
accounted for less than 1 percent of the total gross margin in each period due
to the margin-sharing formulas that govern these sales. Under these
15
formulas, NJNG retains 10 percent of the gross margin from interruptible sales
and 5 percent of the gross margin from transportation sales, with 90 percent and
95 percent, respectively, credited to firm sales customers through the LGA.
Interruptible sales were .1 Bcf and .3 Bcf for the six months ended March 31,
2002 and 2001, respectively. In addition, NJNG transported 4.6 Bcf and 3.9 Bcf
for the six months ended March 31, 2002 and 2001, respectively, for its
interruptible customers.
Operation & Maintenance (O&M) Expense
O&M expense decreased $1.9 million, or 9 percent, and $2.8 million, or 6.8
percent, for the three and six months ended March 31, 2002, respectively,
compared with the same periods last year. The reduction in O&M expense was due
primarily to the benefits of an early retirement program initiated last year, a
reduction in bad debt expense associated with lower revenue, lower regulatory
rider expenses due to lower sales and general cost control efforts.
Operating Income
Operating income decreased $79,000, or less than one percent, and $1.3
million, or 1.5 percent, for the three and six months ended March 31, 2002,
compared with the same periods last year. The decreases were due primarily to
the decrease in total gross margin described above, which was partially offset
by a reduction in O&M and depreciation expenses. The decrease in depreciation
expense was due primarily to components of NJNG's computer software becoming
fully depreciated. NJNG installed the software between 1995 and 1997. NJNG
currently does not anticipate any significant capital expenditures to replace or
upgrade the software in the near future.
Net Income
Net income decreased $377,000, or 1.2 percent, and increased $306,000, or
less than one percent, for the three and six months ended March 31, 2002,
compared with the same periods last year. The six month increase was due
primarily to lower interest costs, resulting primarily from lower interest
rates, and increased recovery of carrying costs on deferred regulatory assets,
which is included in Other income (see Note 3. Capitalized and Deferred
Interest), more than offsetting the lower operating income.
Net income for the six months ended March 31, 2001 included a charge of
$275,000 resulting from the cumulative effect of a change in accounting for
derivatives under SFAS 133.
16
ENERGY SERVICES OPERATIONS
Energy Services' provides unregulated fuel and capacity management and
wholesale marketing services.
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
----------------------------------------------------------
(Thousands)
Revenues $ 231,581 $ 465,155 $ 402,469 $ 803,499
========= ========= ========= =========
Gross margin $ 6,325 $ 2,016 $ 10,745 $ 6,817
========= ========= ========= =========
Operating income $ 5,222 $ 1,435 $ 8,747 $ 5,506
========= ========= ========= =========
Other income $ 50 $ 221 $ 105 $ 476
========= ========= ========= =========
Cumulative effect of a change in
accounting -- -- -- $ (688)
========= ========= ========= =========
Net income $ 3,035 $ 1,168 $ 5,171 $ 3,105
========= ========= ========= =========
Energy Services' revenues decreased due primarily to significantly lower
wholesale natural gas prices prevailing during the three and six months ended
March 31, 2002, which more than offset higher sales. Energy Services' gross
margin and operating income increased for the three and six months ended March
31, 2002, compared to the same periods last year, as a result of higher margins
from pipeline and storage transactions and daily and term wholesale capacity and
commodity marketing. Net income for the six months ended March 31, 2001 included
a charge of $688,000 resulting from the cumulative effect of a change in
accounting for derivatives under SFAS 133.
Energy deliveries totaled 86.9 Bcf and 147.8 Bcf for the three and six
months ended March 31, 2002, respectively, compared with 59 Bcf and 114.7 Bcf
for the same periods last year. The increase was due primarily to additional
volumes from pipeline, storage and capacity transactions, and additional sales
to wholesale customers.
RETAIL AND OTHER OPERATIONS
Retail and Other consists primarily of Home Services, which provides
appliance and installation services to approximately 131,000 customers, Natural
Energy, which has participated in the unregulated retail marketing of natural
gas, CR&R, which develops commercial real estate, and NJR Energy, which consists
primarily of equity investments in Capstone and the Iroquois Gas Transmission
System, L.P. (Iroquois). The consolidated financial results of Retail and Other
are summarized as follows:
17
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
---------------------------------------------------
(Thousands)
Revenues $ 4,612 $ 5,808 $ 9,705 $ 12,137
======== ======== ======== ========
Other income $ 485 $ 601 $ 581 $ 893
======== ======== ======== ========
Cumulative effect of a change in accounting -- -- -- $ (384)
======== ======== ======== ========
Net income (loss) $ 676 $ 266 $ 1,087 $ (413)
======== ======== ======== ========
Retail and Other revenues for the three and six months ended March 31,
2002 decreased due primarily to the expiration of Natural Energy's residential
contracts, which more than offset increased revenue at Home Services resulting
from the formation of the installation service business in July 2001 and price
increases on appliance service contracts. Other income for the three and six
months ended March 31, 2002 decreased due primarily to lower interest income and
dividends.
Net income for the three and six months ended March 31, 2002 increased due
primarily to revenue growth and cost containment efforts at Home Services, and
last year's results included a charge of $384,000 resulting from the cumulative
effect of a change in accounting for derivatives under SFAS 133.
In 1996, CR&R entered into a sale-leaseback transaction that generated a
pre-tax gain of $17.8 million, which is included in Deferred revenue and is
being amortized to Other income over the 25-year term of the lease. The primary
tenant of the facility, NJNG, is leasing the building under a long-term master
lease agreement 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 $135 million. At March 31, 2002, there was $124.5 million outstanding
under these agreements. NJNG satisfies its debt needs by issuing short- and
long-term debt based upon its own financial profile. The Company meets its
common equity requirements, 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.
18
The following table is a summary of contractual cash obligations and their
applicable payment due dates.
Payments Due by Period
Less
than 1 1-3 4-5 After 5
Contractual Obligations Total Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------
(Thousands)
Long-Term Debt $ 392,345 $ 25,000 $199,500 -- $167,845
Capital Lease Obligations 50,399 1,922 6,229 $ 2,298 39,950
Operating Leases 5,753 1,783 3,034 452 484
Commercial Paper 5,200 5,200 -- -- --
Potential Storage Obligations 187,246 6,777 25,731 42,925 111,813
Gas Supply Purchase Obligations 404,455 110,885 176,154 56,100 61,316
---------- -------- -------- -------- --------
Total Contractual Cash Obligations $1,045,398 $151,567 $410,648 $101,775 $381,408
========== ======== ======== ======== ========
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 $200
million, consisting of $100 million with a 364-day term and $100 million with a
three-year term.
Remaining fiscal 2002 construction expenditures are estimated at $29
million. These expenditures will be incurred for services, mains and meters to
support NJNG's continued customer growth, and general system renewals and
improvements. In addition, NJNG incurred $6.1 million remediating its former
manufactured gas plants during the six months ended March 31, 2002 and estimates
additional expenditures of approximately $13.4 million, net of insurance
recoveries, for the remaining six months of fiscal 2002.
NJNG expects to finance these expenditures through internal generation,
the issuance of short-term debt and the draw down of $3.6 million remaining in
its EDA construction fund. 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- and long-term credit ratings.
ENERGY SERVICES
Energy Services does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2002. Energy Services
meets its working capital requirements through loans from the Company.
19
RETAIL AND OTHER
Retail and Other does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2002.
CRITICAL ACCOUNTING POLICIES
The following is a description of the most important Generally Accepted
Accounting Policies (GAAP) that are used by the Company. The use of estimates by
management is a critical element in applying GAAP. The consolidated financial
statements of the Company include estimates and actual results in the future may
differ from such estimates.
The Company's largest subsidiary, NJNG, maintains its accounts in
accordance with the Uniform System of Accounts as prescribed by the BPU. As a
result of the ratemaking process, NJNG is required to follow Statement of
Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of
Certain Types of Regulation and, as a result, the accounting principles applied
by NJNG differ in certain respects from those applied by unregulated businesses.
Regulatory Assets & Liabilities
NJNG is required under SFAS No. 71 to record the impact of regulatory
decisions on its financial statements. NJNG's LGA requires it to project its gas
costs over the subsequent 12 months and recover the excess, if any, of such
projected costs over those included in its base rates through levelized charges
to customers. Any under- or over-recoveries are treated as a Regulatory asset or
liability and reflected in the LGA in subsequent years. NJNG also enters into
derivatives that are used to hedge gas purchases and the offset to the resulting
derivative assets or liabilities are recorded as a Regulatory asset or
liability.
In addition to the LGA, other Regulatory assets include the remediation
costs associated with manufactured gas plant (MGP) sites, which are discussed
below under Environmental Items, and the WNC, which is discussed in the Natural
Gas Distribution segment of the MD&A. If there are changes in future regulatory
positions that indicate the recovery of such regulatory assets is not probable,
the related cost would be charged to income.
Energy Trading Activity
Derivative activities are recorded in accordance with Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities," as amended (SFAS 133), under which the Company records
the fair value of derivatives held as assets and liabilities. The changes in the
fair 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 change in fair value of
these derivatives is recorded in net income. In addition, the changes in the
fair 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. The derivatives
that NJNG utilizes to hedge its gas purchasing activities are recoverable
through its LGA. Accordingly, the offset to the change in fair value of these
derivatives is recorded as a regulatory asset or liability. The Company has not
designated any derivatives as fair value hedges as of December 31, 2001.
20
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. The effect on earnings
of valuations from our mathematical models is immaterial.
Environmental Items
NJNG periodically updates the environmental review of its MGP sites,
including a review of its potential liability for investigation and remedial
action, based on assistance from an outside consulting firm. On the basis of
such review, NJNG will estimate expenditures to remediate and monitor these MGP
sites, exclusive of any insurance recoveries. NJNG's estimate of these
liabilities are based upon currently available facts, existing technology and
presently enacted laws and regulations. Where available information is
sufficient to estimate the amount of the liability, it is NJNG's policy to
accrue the full amount of such estimate. Where the information is sufficient
only to establish a range of probable liability and no point within the range is
more likely than any other, it is NJNG's policy to accrue the lower end of the
range. Since NJNG expects to recover these expenditures through the regulatory
process, in accordance with SFAS 71, it has recorded a Regulatory asset
corresponding to the accrued liability, which is included in Other deferred
credits on the Consolidated Balance Sheet. The actual costs to be incurred by
NJNG are dependent upon several factors, including final determination of
remedial action, changing technologies and governmental regulations, the
ultimate ability of other responsible parties to pay and any insurance
recoveries. If there are changes in future regulatory positions that indicate
the recovery of such regulatory asset is not probable, the related cost would be
charged to income. As of March 31, 2002, $78.4 million of previously incurred
and accrued remediation costs is included in Regulatory assets on the
Consolidated Balance Sheet.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
Natural gas is a nationally traded commodity, and its prices are
determined effectively by the New York Mercantile Exchange (NYMEX) and
over-the-counter markets. The 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.
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. To manage these instruments, the Company has
well-defined risk management policies and procedures, which include daily
monitoring of volumetric limits and monetary guidelines. 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,
which utilizes futures, options and swaps to hedge against price fluctuations.
Second, using futures and swaps, Energy Services hedges purchases and sales of
storage gas and transactions with wholesale customers. Finally, NJR Energy has
entered into several swap transactions to hedge an 18-year fixed-price contract
to sell approximately 20.9 Bcf of natural gas (Gas Sale Contract) to a gas
marketing company.
NJR Energy has hedged both its price and physical delivery risks
associated with the Gas Sale Contract. To hedge its price risk, NJR Energy
entered into two swap agreements effective November 1995. Under the terms of
these swap agreements, NJR Energy will pay to its swap counterparties the
identical fixed price it receives from the gas marketing company in exchange for
the payment by such swap counterparties of a floating price based on an index
price plus a spread per Mmbtu for the total volumes under the Gas Sale Contract.
In order to hedge its physical delivery risk, NJR Energy entered into a purchase
contract with a second gas marketing company for the identical volumes that it
is obligated to sell under the Gas Sale Contract, under which it pays the
identical floating price it receives under the swap agreements mentioned above.
The following table reflects the changes in the fair market value of
commodity derivatives from September 30, 2001 to March 31, 2002.
Balance Increase Balance
September 30, (decrease) in Fair Amounts March 31,
2001 Market Value Settled 2002
- --------------------------------------------------------------------------------
(Thousands)
NJNG $(20,978) $ (1,795) $(27,296) $ 4,523
Energy Services 15,355 (12,523) 31,571 (28,739)
NJR Energy (343) 2,451 (786) 2,894
-------- -------- -------- --------
Total $ (5,966) $(11,867) $ 3,489 $(21,322)
======== ======== ======== ========
22
There were no contracts originated and valued at fair market value and no
changes in methods of valuations during the six months ended March 31, 2002.
The following is a summary of fair market value of commodity derivatives
at March 31, 2002 by method of valuation and by maturity.
Current Next Fiscal Next Three In excess of Total
Fiscal Year Year Fiscal Years 5 years Fair Value
------------------------------------------------------------------------
(Thousands)
Price based
on NYMEX $(4,802) $(23,178) $(5,011) $ 220 $(32,771)
Price based on
over-the-counter
published quotations $ 472 $ 3,778 $ 5,761 $ 730 $ 10,742
Price based upon models $ 100 $ 188 $ 186 $ 232 $ 706
The following is a summary of commodity derivatives by type as of March
31, 2002:
Amounts included in
Volume Price per Derivatives
(Bcf) (Mmbtu) (Thousands)
- --------------------------------------------------------------------------------
NJNG
Futures 0.5 $2.48 - 3.155 $529
Swaps 38.8 $ (1,472)
Options 1.3 $2.00 - 4.70 $ 5,466
Energy Services
Futures 2.7 $2.225 - 4.63 $(30,235)
Swaps 8.6 $ 1,496
NJR Energy
Swaps 21.9 $ 2,894
The Company uses a value-at-risk (VAR) model to assess the market risk of
its net futures, swaps and options positions. The VAR at March 31, 2002, using
the variance-covariance method with a 95 percent confidence level and a one-day
holding period, was $324,000. The calculated VAR represents an estimate of the
potential change in the value of the net positions. These estimates may not be
indicative of actual results since actual market fluctuations may differ from
forecasted fluctuations.
23
Interest Rate Risk - Long-Term Debt
As of March 31, 2002, the Company (excluding NJNG) had variable rate debt
of $124.5 million. 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 $735,000.
At March 31, 2002, NJNG had total variable-rate debt outstanding 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 $1.2 million, net of tax, at March 31, 2002. If interest rates
were to change by 100 basis points on the remaining $91 million of variable rate
debt, NJNG's annual interest expense, net of tax, would change by $537,000 at
March 31, 2002.
24
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, exposure under the Stagecoach agreement, a need to replace or
upgrade NJNG's computer software, 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," "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 that form the
basis for forward-looking statements with respect to, or that may impact
earnings for, fiscal 2002 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 and economic conditions, demographic changes in NJNG's
service territory, fluctuations in energy commodity prices, energy 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 Canadian 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.
25
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
10-1 Amended and Restated Natural Gas Storage Marketing and Management
Agreement between NJR Energy Services Company and eCORP Marketing,
LLC, dated as of January 9, 2002 (the "Marketing and Management
Agreement") (Sections marked with "***" are redacted pursuant to a
request for confidential treatment filed with the Securities and
Exchange Commission)
10-2 Base Gas Lease Agreement between NJR Energy Services Company and
Central New York Oil and Gas Company, LLC, dated as of January 9,
2002
10-3 Transportation Capacity Release Agreement between NJR Energy
Services Company and eCORP Marketing, LLC, dated January 9, 2002
(Sections marked with "***" are redacted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission)
10-4 Letter Agreement between NJR Energy Services Company and eCORP
Marketing, LLC, dated January 9, 2002 with respect to the Marketing
and Management Agreement
(b) Reports on Form 8-K
On January 10, January 23 and May 6, 2002 reports on Form 8-K were filed
by the Company furnishing under Item 9 information disclosed pursuant to
Regulation FD.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION
Date: May 14, 2002 /s/ Glenn C. Lockwood
---------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
27
EXHIBIT INDEX
10-1 Amended and Restated Natural Gas Storage Marketing and Management
Agreement between NJR Energy Services Company and eCORP Marketing,
LLC, dated as of January 9, 2002 (the "Marketing and Management
Agreement") (Sections marked with "***" are redacted pursuant to a
request for confidential treatment filed with the Securities and
Exchange Commission)
10-2 Base Gas Lease Agreement between NJR Energy Services Company and
Central New York Oil and Gas Company, LLC, dated as of January 9,
2002
10-3 Transportation Capacity Release Agreement between NJR Energy
Services Company and eCORP Marketing, LLC, dated January 9, 2002
(Sections marked with "***" are redacted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission)
10-4 Letter Agreement between NJR Energy Services Company and eCORP
Marketing, LLC, dated January 9, 2002 with respect to the Marketing
and Management Agreement