FINANCIAL STATEMENTS
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATISTICS 30
OPERATING STATISTICS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS 32
CONSOLIDATED STATEMENTS OF INCOME 39
CONSOLIDATED STATEMENTS OF CASH FLOWS 40
CONSOLIDATED BALANCE SHEETS 41
CONSOLIDATED STATEMENTS OF CAPITALIZATION 42
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY 43
INDEPENDENT AUDITORS' REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 44
New Jersey Resources Corporation 2002 Annual Report 29
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Consolidated Financial Statistics
(Thousands, except per share data)
Fiscal years ended September 30, 2002 2001 2000 1999 1998 1997
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SELECTED FINANCIAL DATA
Operating Revenues $1,830,754 $2,048,408 $1,164,549 $ 904,268 $ 710,342 $ 696,544
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Operating Expenses
Gas purchases 1,565,717 1,782,840 919,903 669,835 483,715 465,552
Operation and maintenance 92,022 89,455 84,895 80,970 77,990 79,408
Depreciation and amortization 31,844 32,530 30,997 29,455 27,835 25,797
Energy and other taxes 36,792 43,770 34,842 36,071 36,758 43,240
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Total operating expenses 1,726,375 1,948,595 1,070,637 816,331 626,298 613,997
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Operating Income 104,379 99,813 93,912 87,937 84,044 82,547
Other income (loss) 4,945 6,446 1,921 3,681 2,034 (771)
Interest charges, net 16,556 19,705 18,750 19,977 19,633 20,513
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Income before Income Taxes 92,768 86,554 77,083 71,641 66,445 61,263
Income tax provision 35,924 32,891 29,147 26,835 24,688 21,339
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Income before Accounting Change 56,844 53,663 47,936 44,806 41,757 39,924
Cumulative effect of a change in accounting, net -- (1,347) -- -- -- --
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Income from Continuing Operations 56,844 52,316 47,936 44,806 41,757 39,924
Income from discontinued operations, net -- -- 828 -- -- --
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Net Income $ 56,844 $ 52,316 $ 48,764 $ 44,806 $ 41,757 $ 39,924
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Capitalization
Common stock equity $ 361,453 $ 352,069 $ 328,128 $ 302,169 $ 290,804 $ 278,436
Redeemable preferred stock 295 298 400 520 20,640 20,760
Long-term debt 370,628 353,799 291,528 287,723 326,741 291,407
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Total Capitalization $ 732,376 $ 706,166 $ 620,056 $ 590,412 $ 638,185 $ 590,603
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Property, Plant and Equipment
Utility plant $1,053,086 $1,016,911 $ 981,601 $ 941,490 $ 895,321 $ 855,375
Accumulated depreciation (316,758) (295,074) (274,964) (258,666) (237,150) (216,302)
Real estate properties and other 25,144 26,759 28,016 26,326 25,838 24,024
Accumulated depreciation (5,075) (4,647) (4,069) (3,706) (3,535) (3,282)
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Property, Plant and Equipment, Net $ 756,397 $ 743,949 $ 730,584 $ 705,444 $ 680,474 $ 659,815
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Capital Expenditures
Utility plant $ 42,314 $ 44,176 $ 48,826 $ 48,196 $ 42,847 $ 46,193
Real estate properties and other 910 4,595 2,067 676 1,830 967
Equity investments -- 2,946 250 -- 9,498 7,242
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Total Capital Expenditures $ 43,224 $ 51,717 $ 51,143 $ 48,872 $ 54,175 $ 54,402
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Total Assets $1,319,304 $1,192,192 $1,082,311 $ 960,012 $ 943,018 $ 879,061
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COMMON STOCK DATA
Earnings per share from continuing operations - Basic $ 2.12 $ 1.97 $ 1.81 $ 1.67 $ 1.56 $ 1.48
Earnings per share from continuing operations - Diluted $ 2.09 $ 1.95 $ 1.79 $ 1.67 $ 1.56 $ 1.47
Earnings per share - Basic $ 2.12 $ 1.97 $ 1.84 $ 1.67 $ 1.56 $ 1.48
Earnings per share - Diluted $ 2.09 $ 1.95 $ 1.82 $ 1.67 $ 1.56 $ 1.47
Dividends declared per share $ 1.20 $ 1.17 $ 1.15 $ 1.13 $ 1.09 $ 1.07
Payout ratio(a) 57% 59% 64% 68% 70% 72%
Market price at year end $ 32.90 $ 29.47 $ 27.09 $ 26.67 $ 23.75 $ 21.59
Dividend yield at year end 3.6% 4.0% 4.2% 4.2% 4.6% 5.0%
Price-earnings ratio 16 15 15 16 15 15
Book value per share $ 13.43 $ 13.20 $ 12.43 $ 11.35 $ 10.88 $ 10.38
Market-to-book ratio at year end 2.5 2.2 2.2 2.3 2.2 2.1
Shares outstanding at year end 26,917 26,664 26,391 26,612 26,717 26,820
Average shares outstanding - Basic 26,860 26,598 26,547 26,778 26,697 27,002
Average shares outstanding - Diluted 27,168 26,801 26,733 26,976 26,841 27,078
Return on average equity(a) (b) 15.3% 15.3% 14.8% 14.5% 14.2% 13.9%
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(a) Continuing operations
(b) Excluding accumulated other comprehensive income
All common share and earnings-per-share data have been restated for a 3-for-2
stock split, which became effective in March 2002.
New Jersey Resources Corporation 2002 Annual Report 30
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Operating Statistics
Fiscal years ended September 30, 2002 2001 2000 1999 1998 1997
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Operating Revenues (Thousands)
Residential $ 359,022 $ 413,174 $ 302,736 $ 303,884 $ 307,994 $ 317,500
Commercial and other 84,449 90,883 64,623 60,954 60,746 70,315
Firm transportation 24,455 31,292 37,101 33,319 19,500 15,586
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Total residential and commercial 467,926 535,349 404,460 398,157 388,240 403,401
Interruptible 12,608 11,788 7,775 7,558 8,360 7,996
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Total system 480,534 547,137 412,235 405,715 396,600 411,397
Off-system 294,007 462,340 324,676 228,849 169,903 141,481
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Total Operating Revenues(1) $ 774,541 $1,009,477 $ 736,911 $ 634,564 $ 566,503 $ 552,878
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Throughput (Bcf)
Residential 35.8 41.9 35.6 34.2 35.2 37.0
Commercial and other 8.2 9.6 8.0 7.3 7.4 8.7
Firm transportation 7.0 9.3 10.6 9.4 6.6 5.5
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Total residential and commercial 51.0 60.8 54.2 50.9 49.2 51.2
Interruptible 11.1 11.7 9.6 9.8 10.6 9.7
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Total system 62.1 72.5 63.8 60.7 59.8 60.9
Off-system and capacity management 96.5 88.4 132.2 143.7 104.9 83.2
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Total Throughput 158.6 160.9 196.0 204.4 164.7 144.1
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Customers at Year End
Residential 391,133 379,233 351,415 338,984 346,605 343,520
Commercial and other 25,112 24,987 23,751 22,379 22,088 22,650
Firm transportation 17,811 18,879 34,573 35,900 16,495 7,647
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Total residential and commercial 434,056 423,099 409,739 397,263 385,188 373,817
Interruptible 51 53 52 51 49 45
Off-system and capacity management 34 30 26 28 43 53
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Total Customers at Year End 434,141 423,182 409,817 397,342 385,280 373,915
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Interest Coverage Ratio 6.18 5.23 5.12 4.89 4.16 3.90
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Average Therm Use per Customer
Residential 908 1,132 1,022 1,002 998 1,064
Commercial and other 4,837 5,718 5,484 5,169 5,145 5,475
Degree Days 3,964 5,070 4,564 4,470 4,354 4,787
Weather as a Percent of Normal 83% 105% 94% 92% 89% 97%
Number of Employees 547(2) 542(2) 728 739 755 789
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(1) Excludes appliance service revenue
(2) Reflects transfer of employees to NJR Home Services and NJR Service Corp.
[NJR LOGO]
Two-Year Stock History
The range of high and low sales prices as reported in The Wall Street Journal
and dividends paid per share were as follows:
2002 2001 Dividends Paid
Fiscal Quarter High Low High Low 2002 2001
First $32.53 $28.97 $29.75 $25.00 $.29 $.29
Second $32.00 $29.23 $28.83 $24.84 $.30 $.29
Third $32.90 $28.45 $30.67 $26.80 $.30 $.29
Fourth $33.29 $24.35 $30.54 $27.33 $.30 $.29
All common share and earnings-per-share data have been restated for a 3-for-2
stock split, which became effective in March 2002.
New Jersey Resources Corporation 2002 Annual Report 31
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations
RESULTS OF OPERATIONS
CONSOLIDATED
Net income increased 8.6 percent to $56.8 million in 2002, compared with $52.3
million in 2001 and $48.8 million in 2000. The increase each year was
attributable to continued profitable customer growth in New Jersey Natural Gas
Company (NJNG), the principal subsidiary of New Jersey Resources Corporation
(the Company), and higher wholesale marketing results in NJR Energy Services
Company (Energy Services).
Basic earnings per share from net income increased 7.6 percent to $2.12 in 2002,
compared with $1.97 in 2001 and $1.84 in 2000. Diluted earnings per share from
net income were $2.09, $1.95 and $1.82 in 2002, 2001 and 2000, respectively.
Consolidated income from continuing operations and net income in 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 Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended (SFAS 133) (See Note 1: Summary of Significant
Accounting Policies, Derivative Activities). Net income in 2000 included a gain
of $828,000, or $.03 per share, from discontinued operations. The gain was due
to the excess of proceeds received from the sale of the assets over the costs
incurred, net of insurance recoveries received in January 2000, in conjunction
with exiting the oil and natural gas production business in 1995.
Dividends declared per share increased 2.6 percent to $1.20 in 2002, compared
with $1.17 in 2001 and $1.15 in 2000.
CRITICAL ACCOUNTING POLICIES
The following is a description of the most important accounting principles
generally accepted in the United States of America that are used by the Company.
Management believes that it exercises good judgment in selecting and applying
accounting principles. The consolidated financial statements of the Company
include estimates. Actual results in the future may differ from such estimates.
The Company's Critical Accounting Policies are described below.
REGULATORY ASSETS & LIABILITIES
The Company's largest subsidiary, NJNG, maintains its accounts in accordance
with the Uniform System of Accounts as prescribed by the New Jersey Board of
Public Utilities (BPU). As a result of the ratemaking process, NJNG is required
to follow SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) and, as a result, the accounting principles applied by
NJNG differ in certain respects from those applied by unregulated businesses.
NJNG is required under SFAS 71 to record the impact of regulatory decisions on
its financial statements. NJNG's Basic Gas Supply Service (BGSS), formerly known
as the Levelized Gas Adjustment clause, requires it to project its gas costs
over the subsequent 12 months and recover the difference, if any, of such
projected costs compared with those included in rates through a BGSS charge to
customers. Any under- or over-recoveries are treated as a Regulatory asset or
liability and reflected in the BGSS 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 BGSS, other regulatory assets include the remediation costs
associated with Manufactured Gas Plant (MGP) sites, which are discussed below
under Environmental Items, and the Weather-Normalization Clause (WNC), which is
discussed in Natural Gas Distribution Operations below. If there are changes in
future regulatory positions that indicate the recovery of such regulatory assets
is not probable, the related cost would be charged to income.
DERIVATIVES
Derivative activities are recorded in accordance with SFAS 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 BGSS. 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 September
30, 2002.
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 annual earnings of
valuations from our mathematical models is expected to be immaterial.
In providing its unregulated fuel and capacity management and wholesale
marketing services, Energy Services enters into physical contracts to buy and
sell natural gas. These contracts qualify as normal purchases and sales under
SFAS 133 in that they provide for the purchase or sale of natural gas that will
be delivered in quantities expected to be used or sold by Energy Services over a
reasonable period in the normal course of business. Accordingly, Energy Services
accounts for these contracts under settlement accounting.
ENVIRONMENTAL ITEMS
NJNG periodically updates the environmental review of its MGP sites (See Note
12: Commitments and Contingent Liabilities), including a review of its potential
liability for investigation and remedial action, based on assistance from an
outside consulting firm. On the basis of such review, NJNG estimates
expenditures to remediate and monitor these MGP sites, exclusive of any
insurance recoveries. NJNG's estimate of these liabilities is 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.
New Jersey Resources Corporation 2002 Annual Report 32
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, as well as related litigation costs, through the
regulatory process, in accordance with SFAS 71, it has recorded a Regulatory
asset corresponding to the accrued liability. The actual costs to be incurred by
NJNG are dependent upon several factors, including final determination of
remedial action, changing technologies and governmental regulations, the
ultimate ability of other responsible parties to pay and any insurance
recoveries. If there are changes in future regulatory positions that indicate
the recovery of such regulatory asset is not probable, the related cost would be
charged to income. As of September 30, 2002, $108 million of previously incurred
and accrued remediation costs, net of insurance recoveries, is included in
Regulatory assets on the Consolidated Balance Sheet.
NATURAL GAS DISTRIBUTION OPERATIONS
NJNG is a local natural gas distribution company that provides regulated energy
services to more than 434,000 residential and commercial customers in central
and northern New Jersey, and participates in the off-system sales and capacity
release markets. In 2001, NJNG transferred its appliance service business to NJR
Home Services Company (Home Services), an unregulated subsidiary of the Company.
All previously reported segment information has been reclassified to reflect
this transfer.
In February 1999, the Electric Discount and Energy Competition Act (EDECA),
which provides the framework for the restructuring of New Jersey's energy
markets, became law. In March 2001, the BPU issued an order to fully open NJNG's
residential markets to competition, restructure its rates to segregate its BGSS
and Delivery (i.e., transportation) service prices as required by EDECA, and
expand an incentive for residential and small commercial customers to switch to
transportation service. In January 2002, the BPU issued an order which stated
that BGSS could be provided by suppliers other than the state's natural gas
utilities, but at this time it should be provided by the state's natural gas
utilities.
NJNG's financial results are summarized as follows:
(Thousands) 2002 2001 2000
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Gross margin
Residential and
commercial $167,697 $167,354 $155,534
Transportation 22,498 28,065 32,938
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Total firm margin 190,195 195,419 188,472
Off-system and
capacity management 4,708 5,322 4,917
Interruptible 916 912 812
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Total gross margin $195,819 $201,653 $194,201
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Operation and maintenance
expense $ 73,505 $ 77,946 $ 73,588
Operating income $ 88,883 $ 89,248 $ 87,241
Other income $ 3,281 $ 4,346 $ 279
Net income $ 48,401 $ 47,767 $ 45,149
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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. 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 and off-system sales.
FIRM MARGIN
Residential and commercial (i.e., firm) gross margin is subject to a 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 earnings due to weather fluctuations. The components of gross margin from
firm customers are affected by customers switching between sales service and
transportation service.
NJNG'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 $5.2 million, or 3 percent, in 2002 due primarily to
22 percent warmer weather compared with 2001, which more than offset customer
growth and the impact of the WNC. In 2001, total firm margin increased $6.9
million, or 4 percent, due primarily to customer growth.
NJNG added 11,282 and 12,522 new customers and converted the heating systems of
another 979 and 1,302 existing customers in 2002 and 2001, respectively. This
customer growth represents an annual increase of approximately 2.2 billion cubic
feet (Bcf) in sales to firm customers, assuming normal weather.
Sales to residential and commercial customers were 44 Bcf in 2002, compared with
51.5 Bcf in 2001 and 43.6 Bcf in 2000. Gross margin from sales to residential
and commercial customers increased $343,000, or less than 1 percent, in 2002 and
$11.8 million, or 8 percent, in 2001. The margin increase in 2002 was due
primarily to customer additions, 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. The increase in 2001 was due primarily to the
impact of 12,522 customer additions, colder weather and firm transportation
customers switching back to firm sales service.
New Jersey Resources Corporation 2002 Annual Report 33
Gross margin from transportation service decreased $5.6 million, or 20 percent,
in 2002 and $4.8 million, or 15 percent, in 2001. The decrease in both years was
due primarily to customers switching back to sales service. NJNG transported 7
Bcf for its firm customers in 2002, compared with 9.3 Bcf in 2001 and 10.6 Bcf
in 2000.
NJNG had 13,621 and 15,637 residential customers and 4,190 and 3,243 commercial
customers using its transportation service at September 30, 2002 and 2001,
respectively. The decrease in the number of residential transportation customers
was due primarily to changes in market conditions, which resulted in customers
returning to NJNG's regulated sales service. The increase in commercial
transportation customers was due primarily to increased activity by third-party
suppliers.
The weather in 2002 was 17 percent warmer than normal, which in accordance with
the WNC, resulted in the accrual of $16.4 million of gross margin for recovery
from customers in the future. NJNG estimates that in 2002, the warm weather
resulted in $7.6 million of lost margin beyond the amount captured in the WNC.
In 2001, colder-than-normal weather resulted in $1.7 million of gross margin
being deferred for future refund to customers. In 2000, warmer-than- normal
weather resulted in $7.9 million of gross margin being accrued and recovered
from customers in the future. At September 30, 2002, NJNG had a net balance of
$14.9 million in accrued WNC margins to be collected from its customers in 2003
and 2004.
In 2003 and 2004, NJNG currently expects to add 12,000 and 12,500 new customers,
respectively, and convert an additional 950 existing customers each year to
natural gas heat. Achieving these expectations would represent an annual
customer growth rate of approximately 3 percent and result in a sales increase
of approximately 2.2 Bcf annually, assuming normal weather and average use. It
is believed that this growth would increase gross margin under present base
rates by approximately $6.6 million annually.
These growth expectations are based upon management's review of county and
municipal planning board activities, builder surveys and studies of population
growth rates in NJNG's service territory. However, future sales will be affected
by the weather, economic conditions in NJNG's service territory, conversion and
conservation activity, the impact of changing from a regulated to a competitive
environment and other marketing efforts, as has been the case in prior years.
NJNG's goal is to manage its growth without increasing its base rates in order
to remain competitive as the energy industry transitions to a more market-based
environment.
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
BGSS.
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 BGSS.
The Financial Risk Management (FRM) program is designed to provide price
stability to NJNG'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.
On October 30, 2002, the BPU approved an agreement whereby the existing
margin-sharing between customers and shareowners for off- system sales, capacity
release and FRM transactions was extended through October 31, 2003. As part of
this agreement, the portfolio- enhancing programs, which include the permanent
reduction of the cost of capacity, would continue to receive 60/40 sharing
treatment between customers and shareowners for transactions completed on or
before December 31, 2002.
NJNG's off-system sales, capacity management and FRM programs totaled 96.5 Bcf
and generated $4.7 million of gross margin in 2002, compared with 88.4 Bcf and
$5.3 million of gross margin in 2001 and 132.2 Bcf and $4.9 million of gross
margin in 2000. The decrease in margin in 2002 was due primarily to lower
results from the FRM program.
INTERRUPTIBLE
NJNG serves 51 customers through interruptible sales and/or transportation
tariffs. Sales made under the interruptible sales tariff are priced on
market-sensitive oil and gas parity rates. Although therms sold and transported
to interruptible customers represented 7 percent of total throughput in 2002 and
2001, and 5 percent in 2000, they accounted for less than 1 percent of the total
gross margin in each year due to the margin-sharing formulas that govern these
sales. Under these formulas, NJNG retains 10 percent of the gross margin from
interruptible sales and 5 percent of the gross margin from transportation sales,
with 90 percent and 95 percent, respectively, credited to firm sales customers
through the BGSS. Interruptible sales were 2.1 Bcf, 1.6 Bcf and 1 Bcf in 2002,
2001 and 2000, respectively. In addition, NJNG transported 9 Bcf, 10.1 Bcf and
8.6 Bcf in 2002, 2001 and 2000, respectively, for its interruptible customers.
OPERATION & MAINTENANCE (O&M) EXPENSE
O&M expense decreased 5.7 percent in 2002, compared with last year, 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. O&M in 2001
increased 6 percent compared with the prior year due primarily to costs
associated with the early retirement program, bad debt expense associated with
higher revenue and higher regulatory rider expenses.
New Jersey Resources Corporation 2002 Annual Report 34
OPERATING INCOME
Operating income decreased less than 1 percent in 2002 and increased 2 percent
in 2001. The decrease in 2002 was due primarily to the decrease in gross margin,
partially offset by a reduction in O&M, described earlier, and lower
depreciation expense. 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 and currently does not anticipate
any significant capital expenditures to replace or upgrade the software in the
near future. The increase in 2001 was due primarily to higher firm gross margin,
which more than offset higher operating expenses, described earlier, and
depreciation.
NET INCOME
Net income increased 1 percent to $48.4 million in 2002 and 6 percent to $47.8
million in 2001. The increase in 2002 was due primarily to lower interest costs,
resulting primarily from lower interest rates, which more than offset lower
operating income. The increase in 2001 was the result of increased operating
income and the recovery of carrying costs on deferred regulatory assets.
Net income in 2001 included a charge of $275,000 resulting from the cumulative
effect of a change in accounting for derivatives under SFAS 133. There was no
comparable charge in the current period.
ENERGY SERVICES OPERATIONS
The financial results of Energy Services, consisting of unregulated fuel and
capacity management and wholesale marketing services, are summarized as follows:
(Thousands) 2002 2001 2000
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Revenues $1,036,667 $1,022,734 $ 413,348
Gross margin $ 17,090 $ 8,782 $ 5,859
Operating income $ 11,430 $ 5,638 $ 2,996
Other income $ 215 $ 655 $ 518
Net income $ 6,383 $ 4,094 $ 2,945
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Energy Services' revenues increased in 2002 due primarily to higher sales from
the utilization of significantly greater transportation and storage assets,
which offset lower wholesale natural gas prices prevailing during the first six
months of the fiscal year. Revenues increased in 2001 as a result of significant
increases in gas prices and the growth in wholesale activities. Energy
deliveries increased to 332.6 Bcf in 2002, compared with 173.5 Bcf in 2001and
119.8 Bcf in 2000. The increases in 2002 were due primarily to additional
volumes from pipeline, storage and capacity assets resulting in additional
sales, while the increases in 2001 were due primarily to additional volumes from
pipeline and storage assets.
Energy Services' gross margin, operating income and net income were higher in
2002 and 2001 due primarily to higher margins from pipeline and storage
transactions and daily and term wholesale capacity and commodity marketing. In
recognition of increased potential counterparty credit risk in the wholesale
energy market, Energy Services made additional provisions for doubtful accounts
in 2002 and 2001.
Net income in 2001 included a charge of $688,000 resulting from the cumulative
effect of a change in accounting for derivatives under SFAS 133. There was no
comparable charge in the current period. Future results are subject to Energy
Services' ability to expand its wholesale marketing activities, and are
contingent upon many other factors including an adequate number of appropriate
counterparties, sufficient liquidity in the energy trading market and continued
access to the capital markets.
RETAIL AND OTHER OPERATIONS
The financial results of Retail and Other consist primarily of NJR Home Services
Company (Home Services), which provides appliance and installation services to
approximately 131,000 customers; Commercial Realty & Resources Corp. (CR&R),
which develops commercial real estate; and NJR Energy Corporation (NJR Energy),
which consists primarily of equity investments in Capstone Turbine Corporation
(Capstone) and Iroquois Gas Transmission System, L.P. (Iroquois). The
consolidated financial results of Retail and Other are summarized as follows:
(Thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Revenues $ 19,711 $ 21,474 $ 26,638
Other income $ 1,449 $ 1,445 $ 1,124
Income from continuing
operations $ 2,060 $ 455 $ (158)
Net income $ 2,060 $ 455 $ 670
================================================================================
Retail and Other revenues decreased in 2002 and 2001 due primarily to the
Company no longer participating in the unregulated retail natural gas market,
which was partially offset by increased revenue at Home Services. Revenue in
Home Services increased due primarily to the formation of the installation
service business in July 2001 and price increases on appliance service
contracts.
Other income in 2002 included an $885,000 pre-tax gain associated with the sale
of a 20,000-square-foot building by CR&R and a $761,000 pre-tax loss associated
with the sale of Capstone stock. Other income in 2001 included higher interest
and dividend income associated with NJR Energy's investments.
Net income increased in 2002, due primarily to revenue growth and cost
containment efforts at Home Services and improved results from Iroquois.
Income from continuing operations increased in 2001 due primarily to NJR
Energy's investments mentioned above. Income from continuing operations in 2001
included a charge of $384,000 resulting from the cumulative effect of a change
in accounting for derivatives under SFAS 133. There was no comparable charge in
the current period.
Net income in 2000 included $828,000, or $.03 per share, of income from
discontinued operations representing the final true-up of NJR Energy's reserve
established in 1995 in conjunction with exiting the oil and natural gas
production business.
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.
New Jersey Resources Corporation 2002 Annual Report 35
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED
The Company obtains its external common equity requirements, if any, through
issuances of its common stock, including the proceeds from its Automatic
Dividend Reinvestment Plan (DRP). The DRP allows the Company, at its option, to
use shares purchased on the open market or newly issued shares to satisfy its
funding requirements.
In September 1996, the Company adopted a 1 million share repurchase plan that
was expanded to 1.5 million shares in 1999 and to 2 million shares in 2002. The
Company has repurchased 1,531,153 shares through September 30, 2002.
The Company provides the debt requirements for its unregulated companies, while
NJNG satisfies its debt needs by issuing short- and long-term debt based upon
its own financial profile. In order to meet the working capital and external
debt financing requirements of the unregulated companies, and to meet its own
working capital needs, the Company has a $135 million revolving credit agreement
with several banks that has a 3-year term expiring in January 2004. The Company
has also entered into a $10 million demand loan agreement and a $15 million loan
agreement with banks, both of which expire in December 2002. The Company had
borrowings of $115.3 million and $55.9 million at September 30, 2002 and 2001,
respectively, to fund the debt requirements of its unregulated subsidiaries and
its working capital and investment activity.
Financial covenants contained in these credit facilities include a maximum debt
to total capitalization of 65 percent and a minimum interest coverage of 2.5
times. At September 30, 2002, the debt to total capitalization was 56 percent
and for the year ended September 30, 2002, the interest coverage was 8.5 times.
The following table is a summary of contractual cash obligations and their
applicable payment due dates:
Payments Due by Period
Up to 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
(Millions)
Long-term debt $ 348.1 $ 25.0 $155.3 -- $ 167.8
Capital lease obligations 49.4 1.9 6.5 $ 2.4 38.6
Operating leases 8.2 2.3 4.5 .5 .9
Short-term debt 59.9 59.9 -- -- --
Potential storage obligations 159.4 -- 36.7 44.0 78.7
Gas supply purchase obligations 949.5 163.3 428.5 158.4 199.3
- --------------------------------------------------------------------------------
Total contractual cash obligations $1,574.5 $252.4 $631.5 $205.3 $ 485.3
================================================================================
At September 30, 2002, the Company recorded an additional minimum pension
liability of $14.8 million, which is included in Postretirement employee benefit
liability on the Consolidated Balance Sheet. This minimum liability resulted
from a decrease in the fair value of plan assets, which was due primarily to
declining stock market values, and a decrease in the discount rate and expected
asset return assumptions. The Company is required to make minimum pension
funding contributions of approximately $2.4 million during fiscal 2003.
It is the Company's objective to maintain a consolidated capital structure that
reflects the different characteristics of each business segment and provides
adequate financial flexibility for accessing capital markets as required. Based
upon its existing mix of investments, it is the Company's goal to maintain a
common equity ratio of approximately 50 percent, excluding short-term debt,
which is consistent with maintaining its current short- and long-term credit
ratings.
At September 30, the Company's consolidated capital structure was as
follows:
2002 2001
- --------------------------------------------------------------------------------
Common stock equity 49% 50%
Long-term debt 51 50
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
NATURAL GAS DISTRIBUTION
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 and gas 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 expiring in January 2004.
As of September 30, 2002, these facilities supported $74.9 million of commercial
paper borrowings.
CAPITAL REQUIREMENTS
NJNG's capital requirements for 2000 through 2002 and projected amounts through
2004 are as follows:
Maturities and Redemption
Capital Redemption of of Preferred
(Thousands) Expenditures Long-Term Debt Stock Total
- --------------------------------------------------------------------------------
2000 $48,826 $ 318 $120 $49,264
2001 $44,176 $ 495 $102 $44,773
2002 $42,314 $ 1,764 $ 3 $44,081
2003 $51,400 $26,980 $301 $78,681
2004 $53,400 $ 2,093 -- $55,493
================================================================================
The level of capital expenditures results primarily from the need for services,
mains and meters to support NJNG's continued customer growth and general system
improvements. In November 2002, NJNG redeemed the remaining 2,954 shares of its
$100 par 5.65 percent redeemable preferred stock at a price of $102 per share
plus accrued dividends.
In addition, NJNG expects to spend $15.7 million, $8 million and $1 million for
MGP remediation, net of insurance recoveries, in 2003, 2004 and 2005,
respectively.
New Jersey Resources Corporation 2002 Annual Report 36
FINANCING
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Cash flow $100,840 $81,387 $ 98,119
Asset sales $ 20,631 $ 2,395 --
External financing
Long-term debt -- -- --
Capital lease $ 20,631 -- --
Short-term debt $(60,900) $92,500 $(18,400)
================================================================================
Cash flow is defined as net income adjusted for depreciation, amortization of
deferred charges and the change in deferred income taxes, and represents the
cash generated from operations available for capital expenditures, dividends,
working capital and other requirements. Cash flow in 2002 increased due
primarily to higher deferred tax benefits and higher earnings. Cash flow in 2001
decreased due primarily to lower deferred tax benefits, which more than offset
higher earnings.
In 2002, NJNG entered into an agreement with a financing company whereby NJNG
received $20.6 million related to the sale and leaseback of a portion of its
meters.
NJNG currently anticipates that its financing requirements in 2003 and 2004 will
be met through internal generation and the issuance of short- and long-term
debt. In 2003, NJNG will refinance its $25 million, 7.5 percent Series V First
Mortgage Bonds and expects to issue $12 million of New Jersey Economic
Development Authority (EDA) Bonds, which are expected to be drawn down at $4
million annually. NJNG also plans to continue its meter sale-leaseback program
at approximately $5 million annually. The timing and mix of any external
financings will be geared toward achieving a common equity ratio that is
consistent with maintaining its current short- and long-term credit ratings.
ENERGY SERVICES
Energy Services' capital requirements and financing activity for 2000 through
2002 were as follows:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Capital expenditures $ 195 $ 112 $ 532
Cash flow $ 6,790 $ 4,598 $ 3,248
Change in intercompany debt $69,712 $23,689 $(28,415)
================================================================================
The increase in cash flow in 2002 was due primarily to higher earnings. The
increase in 2001 was due primarily to higher earnings and deferred tax benefits.
The increase in intercompany debt in 2002 and 2001 was due primarily to the
purchase of gas inventory, prepaid capacity and other working capital
requirements associated with the wholesale marketing operations.
Energy Services does not currently anticipate any significant capital
expenditures in 2003, however, the use of high-injection/high- withdrawal
storage facilities and pipeline park and loan arrangements combined with the
related hedging activities in the volatile natural gas market may create
significant short-term cash requirements which are funded by the Company.
RETAIL AND OTHER
Retail and Other capital requirements and financing activity for 2000 through
2002 were as follows:
(Thousands) 2002 2001 2000
Capital expenditures and
equity investments $ 715 $ 7,429 $ 1,785
Cash flow $ 3,710 $ 622 $ 2,664
Asset sales $ 4,505 $ 7,308 $ 831
Change in intercompany debt $(2,536) $(6,205) $(8,115)
Capital expenditures each year were primarily made by CR&R in connection with
investments made to preserve the value of real estate holdings. In June 2002,
CR&R sold a 20,000-square-foot building which generated $3.3 million in proceeds
and resulted in an $885,000 pre-tax gain. CR&R's capital expenditures increased
in 2001 due primarily to the construction of a 35,000-square-foot office
building which, in addition to adjacent undeveloped acreage, was sold in July
2001 for $5.2 million and generated a pre-tax gain of $100,000. At September 30,
2002, CR&R owned 172 acres of undeveloped land and a 4,000-square-foot building.
In 2001, NJR Energy invested $1.3 million to increase its ownership interest in
Iroquois from 2.8 percent to 3.3 percent.
Cash flow increased in 2002 due primarily to higher earnings and deferred tax
benefits. Cash flow in 2001 decreased due primarily to lower earnings and
deferred tax benefits. Proceeds from asset sales and the DRP have been used to
reduce intercompany debt.
Retail and Other does not currently anticipate any significant capital
expenditures or external financing requirements in 2003.
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
BGSS, 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 18.9 Bcf of natural gas (Gas Sale
Contract) to an energy marketing company.
New Jersey Resources Corporation 2002 Annual Report 37
NJR Energy has hedged both the 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 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 September 30, 2002:
Balance Increase Less Balance
September 30, (Decrease) in Fair Amounts September 30,
(Thousands) 2001 Market Value Settled 2002
- --------------------------------------------------------------------------------
NJNG $(20,978) $(6,512) $(24,926) $ (2,564)
Energy Services 15,355 4,028 34,072 (14,689)
NJR Energy (343) 3,791 86 3,362
- --------------------------------------------------------------------------------
Total $ (5,966) $ 1,307 $ 9,232 $(13,891)
================================================================================
There were no contracts originated and valued at fair market value and no
changes in methods of valuations during the year ended September 30, 2002.
The following is a summary of fair market value of commodity derivatives at
September 30, 2002, by method of valuation and by maturity:
After Total
(Thousands) 2003 2004-2006 2006 Fair Value
- --------------------------------------------------------------------------------
Price based
on NYMEX $(18,892) $(11,263) $2,027 $(28,128)
Price based on
over-the-counter
published
quotations 5,034 6,857 154 12,045
Price based
upon models 189 187 1,816 2,192
- --------------------------------------------------------------------------------
Total $(13,669) $ (4,219) $3,997 $(13,891)
================================================================================
The following is a summary of commodity derivatives by type as of September 30,
2002:
Net Amount included
Volume Price per in Derivatives
(Bcf) Mmbtu (Thousands)
- --------------------------------------------------------------------------------
NJNG
Futures 0.0 $ 3.11 - 3.49 $ (175)
Options 2.1 $3.00 - 10.00 (2,319)
Swaps 36.5 (68)
Energy Services
Futures 2.7 $ 2.85 - 4.43 (15,050)
Options 1.6 $ 2.75 - 3.75 76
Swaps 39.8 283
NJR Energy
Swaps 18.9 3,362
- --------------------------------------------------------------------------------
Total $ (13,891)
================================================================================
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 September 30, 2002, using
the variance-covariance method with a 95 percent confidence level and a one-day
holding period, was $145,400. The VAR with a 99 percent confidence level and a
10-day holding period was $649,300. The calculated VAR models represent 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.
INTEREST RATE RISK - LONG-TERM DEBT
As of September 30, 2002, the Company, excluding NJNG, had variable rate debt of
$105.3 million. According to the Company's sensitivity analysis, if interest
rates were to change by 1 percent, annual interest expense, net of tax, would
change by $621,000.
At September 30, 2002, NJNG had total variable-rate debt outstanding of $122.1
million, of which $97.1 million is tax-exempt EDA debt which has been hedged by
a 3.25-percent interest rate cap, which expires in July 2004. According to the
Company's sensitivity analysis, at September 30, 2002, NJNG's annual interest
rate exposure of the $97.1 million, based on the difference between current
average rates and the 3.25 percent interest rate cap, is limited to $167,000,
net of tax. If interest rates were to change by 1 percent on the remaining $25
million of variable-rate debt at September 30, 2002, NJNG's annual interest
expense, net of tax, would change by $148,000.
EFFECTS OF NEW ACCOUNTING STANDARDS
See Note 1 to the Consolidated Financial Statements for a discussion of new
accounting standards.
EFFECTS OF INFLATION
Although inflation rates have been relatively low to moderate in recent years,
any change in price levels has an effect on operating results due to the
capital-intensive and regulated nature of the Company's principal subsidiary.
The Company attempts to minimize the effects of inflation through cost control,
productivity improvements and regulatory actions where appropriate.
New Jersey Resources Corporation 2002 Annual Report 38
Consolidated Statements of Income
(Thousands, except per share data)
Fiscal years ended September 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 1,830,754 $ 2,048,408 $ 1,164,549
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Gas purchases 1,565,717 1,782,840 919,903
Operation and maintenance 92,022 89,455 84,895
Depreciation and amortization 31,844 32,530 30,997
Energy and other taxes 36,792 43,770 34,842
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,726,375 1,948,595 1,070,637
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 104,379 99,813 93,912
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 4,945 6,446 1,921
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Charges, Net
Long-term debt 14,095 15,314 15,862
Short-term debt and other 2,461 4,391 2,888
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest charges, net 16,556 19,705 18,750
- ------------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 92,768 86,554 77,083
Income tax provision 35,924 32,891 29,147
- ------------------------------------------------------------------------------------------------------------------------------------
Income before Cumulative Effect of a Change in Accounting 56,844 53,663 47,936
Cumulative effect of a change in accounting for derivatives, net of tax of $930 -- (1,347) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 56,844 52,316 47,936
Income from discontinued operations, net of tax of ($572) -- -- 828
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 56,844 $ 52,316 $ 48,764
====================================================================================================================================
Earnings per Share - Basic
Income before Accounting Change $ 2.12 $ 2.02 $ 1.81
Income from Continuing Operations $ 2.12 $ 1.97 $ 1.81
Net Income $ 2.12 $ 1.97 $ 1.84
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted
Income before Accounting Change $ 2.09 $ 2.00 $ 1.79
Income from Continuing Operations $ 2.09 $ 1.95 $ 1.79
Net Income $ 2.09 $ 1.95 $ 1.82
====================================================================================================================================
Dividends per Common Share $ 1.20 $ 1.17 $ 1.15
====================================================================================================================================
Average Shares Outstanding - Basic 26,860 26,598 26,547
Average Shares Outstanding - Diluted 27,168 26,801 26,733
====================================================================================================================================
The accompanying notes are an integral part of these statements.
All common share and earnings-per-share data have been restated for a 3-for-2
stock split, which became effective in March 2002.
New Jersey Resources Corporation 2002 Annual Report 39
Consolidated Statements of Cash Flows
(Thousands)
Fiscal years ended September 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 56,844 $ 52,316 $ 48,764
Adjustments to reconcile net income to cash flows
Depreciation and amortization 31,844 32,530 30,997
Amortization of deferred charges 3,893 4,158 5,663
Deferred income taxes 18,759 (2,397) 18,607
Manufactured gas plant remediation costs (23,363) (15,145) (26,249)
Changes in working capital (21,019) (107,191) 45,402
Other, net (17,193) 5,544 3,257
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 49,765 (30,185) 126,441
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from long-term debt 49,375 12,800 --
Proceeds from common stock 11,729 11,620 8,490
Payments of long-term debt (1,764) (495) (16,018)
Payments of preferred stock (3) (102) (120)
Purchases of treasury stock (6,135) (5,366) (14,630)
Payments of common stock dividends (32,012) (30,989) (30,269)
Net change in short-term debt (50,900) 92,500 (18,400)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (29,710) 79,968 (70,947)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for
Utility plant (42,314) (44,176) (48,826)
Real estate properties and other (924) (4,595) (2,067)
Equity investments -- (2,946) (250)
Cost of removal (4,715) (5,629) (5,401)
Proceeds from sale of assets 25,136 9,703 831
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (22,817) (47,643) (55,713)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in cash and temporary investments (2,762) 2,140 (219)
Cash and temporary investments at beginning of the year 4,044 1,904 2,123
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and temporary investments at end of the year $ 1,282 $ 4,044 $ 1,904
====================================================================================================================================
Changes in Components of Working Capital
Construction fund $ 3,600 $ 4,000 $ 4,500
Receivables (85,715) 21,136 (21,974)
Inventories (16,100) (5,674) (27,913)
Deferred gas costs (689) (35,637) (6,419)
Purchased gas 83,456 (68,133) 74,720
Accrued and prepaid taxes, net (8,006) 23,016 (6,281)
Accounts payable and other current liabilities 1,518 (2,245) 11,912
Broker margin accounts (10,045) (42,703) 19,221
Other, net 10,962 (951) (2,364)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (21,019) $(107,191) $ 45,402
====================================================================================================================================
Supplemental Disclosures of Cash Flows Information
Cash paid during the year for
Interest (net of amounts capitalized) $ 14,516 $ 19,031 $ 17,612
Income taxes $ 31,410 $ 10,033 $ 15,996
====================================================================================================================================
The accompanying notes are an integral part of these statements.
New Jersey Resources Corporation 2002 Annual Report 40
Consolidated Balance Sheets
(Thousands)
September 30, 2002 2001
- --------------------------------------------------------------------------------
Assets
Property, Plant and Equipment
Utility plant, at cost $ 1,053,086 $ 1,016,911
Real estate properties and other, at cost 25,144 26,759
- --------------------------------------------------------------------------------
1,078,230 1,043,670
Accumulated depreciation and amortization (321,833) (299,721)
- --------------------------------------------------------------------------------
Property, plant and equipment, net 756,397 743,949
- --------------------------------------------------------------------------------
Current Assets
Cash and temporary investments 1,282 4,044
Construction fund -- 3,600
Customer accounts receivable 168,652 78,367
Unbilled revenues 4,679 7,724
Allowance for doubtful accounts (4,395) (3,026)
Gas in storage, at average cost 86,340 70,019
Materials and supplies, at average cost 2,782 3,003
Prepaid state taxes 10,973 8,268
Underrecovered gas costs 33,912 15,335
Derivatives 8,136 24,698
Broker margin accounts 38,943 28,898
Other 14,654 20,822
- --------------------------------------------------------------------------------
Total current assets 356,958 261,752
- --------------------------------------------------------------------------------
Deferred Charges and Other
Equity investments 14,302 15,468
Regulatory assets 119,419 98,753
Underrecovered gas costs 15,118 33,006
Derivatives 10,952 14,428
Other 37,158 24,836
- --------------------------------------------------------------------------------
Total deferred charges and other 196,949 186,491
- --------------------------------------------------------------------------------
Total Assets $ 1,319,304 $ 1,192,192
================================================================================
Capitalization and Liabilities
Capitalization
Common stock equity $ 361,453 $ 352,069
Redeemable preferred stock 295 298
Long-term debt 370,628 353,799
- --------------------------------------------------------------------------------
Total capitalization 732,376 706,166
- --------------------------------------------------------------------------------
Current Liabilities
Current maturities of long-term debt 26,942 529
Short-term debt 59,900 85,800
Purchased gas 168,782 85,326
Accounts payable and other 39,684 38,166
Dividends payable 8,072 7,837
Accrued taxes 15,025 15,771
Derivatives 25,397 35,431
Customers' credit balances and deposits 23,642 14,423
- --------------------------------------------------------------------------------
Total current liabilities 367,444 283,283
- --------------------------------------------------------------------------------
Deferred Credits
Deferred income taxes 92,435 95,182
Deferred investment tax credits 9,148 9,497
Deferred revenue 15,019 19,046
Derivatives 6,612 9,209
Manufactured gas plant remediation 65,830 53,840
Postretirement employee benefit liability 19,950 --
Other 10,490 15,969
- --------------------------------------------------------------------------------
Total deferred credits 219,484 202,743
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 12)
Total Capitalization and Liabilities $ 1,319,304 $ 1,192,192
================================================================================
The accompanying notes are an integral part of these statements.
New Jersey Resources Corporation 2002 Annual Report 41
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands)
September 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock, $2.50 par value, authorized 50,000,000 shares;
issued shares 2002 - 27,667,001;(1) 2001 - 18,610,586 $ 69,168 $ 46,526
Premium on common stock 207,197 227,532
Accumulated other comprehensive income, net of tax (12,374) 9,626
Treasury stock at cost and other; shares 2002 - 750,179; 2001 - 834,763 (25,108) (29,623)
Retained earnings 122,570 98,008
- ------------------------------------------------------------------------------------------------------------------------------------
Total common stock equity 361,453 352,069
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock
New Jersey Natural Gas Company
$100 par value, cumulative; authorized shares
2002 - 312,954; 2001 - 312,977; outstanding shares
5.65% series - 2002 - 2,954; 2001 - 2,977 295 298
- ------------------------------------------------------------------------------------------------------------------------------------
Total redeemable preferred stock 295 298
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt
New Jersey Natural Gas Company
First mortgage bonds Maturity date
-------------------- -------------
7.50% Series V December 1, 2002 25,000 25,000
5.38% Series W August 1, 2023 10,300 10,300
6.27% Series X November 1, 2008 30,000 30,000
6.25% Series Y August 1, 2024 10,500 10,500
8.25% Series Z October 1, 2004 25,000 25,000
Variable Series AA August 1, 2030 25,000 25,000
Variable Series BB August 1, 2030 16,000 16,000
6.88% Series CC October 1, 2010 20,000 20,000
Variable Series DD September 1, 2027 13,500 13,500
Variable Series EE January 1, 2028 9,545 9,545
Variable Series FF January 1, 2028 15,000 15,000
Variable Series GG April 1, 2033 18,000 18,000
Revolving credit agreement, at variable rates January 5, 2004 25,000 50,000
Capital lease obligation - building June 1, 2021 30,054 30,583
Capital lease obligation - meters October 1, 2012 19,396 --
Less: current maturities of long-term debt (26,942) (529)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 265,353 297,899
- ------------------------------------------------------------------------------------------------------------------------------------
New Jersey Resources Corporation
Revolving credit agreement, at floating rates January 5, 2004 105,275 55,900
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 370,628 353,799
- ------------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $732,376 $706,166
====================================================================================================================================
The accompanying notes are an integral part of these statements.
(1) All common share and earnings-per-share data have been restated for a
3-for-2 stock split, which became effective in March 2002.
New Jersey Resources Corporation 2002 Annual Report 42
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
(Thousands)
Accumulated
Other
Number of Common Premium on Comprehensive Treasury Stock Retained
Shares Stock Common Stock Income and Other Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 17,741 $ 46,177 $ 221,703 $ 37 $(24,306) $ 58,558
Net income 48,764
Unrealized gain on equity investments, net 13,477
Common stock issued under stock plans 231 72 1,553 7,176
Cash dividends declared (30,399)
Treasury stock and other (378) (14,684)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 17,594 46,249 223,256 13,514 (31,814) 76,923
Net income 52,316
Cumulative effect of a change in accounting
for derivatives, net 20,530
Unrealized loss on equity investments, net (13,219)
Unrealized loss on derivatives, net (11,199)
Common stock issued under stock plans 308 277 3,849 7,472
Tax benefit from stock plans 427
Cash dividends declared (31,231)
Treasury stock and other (126) (5,281)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 17,776 46,526 227,532 9,626 (29,623) 98,008
Net income 56,844
Unrealized gain on equity investments, net 296
Unrealized loss on derivatives, net (13,669)
Common stock issued under stock plans 374 262 1,626 10,217
Stock dividend 8,952 22,380 (22,380)
Tax benefits from stock plans 419
Minimum pension liability adjustment, net (8,627)
Cash dividends declared (32,282)
Treasury stock and other (185) (5,702)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 26,917 $69,168 $207,197 $(12,374) $(25,108) $122,570
===================================================================================================================================
The accompanying notes are an integral part of these statements.
INDEPENDENT AUDITORS' REPORT [LOGO DELOITTE & TOUCHE]
To the Shareowners and Board of Directors of New Jersey Resources Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of New Jersey Resources Corporation and its
subsidiaries (the Company) as of September 30, 2002 and 2001 and the related
consolidated statements of income, common stock equity and cash flows for each
of the three years in the period ended September 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2002
and 2001 and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Notes 1 and 10 to the consolidated financial statements, on
October 1, 2000, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, under which the Company records the fair value of derivatives held as
assets and liabilities.
We have also previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets and
consolidated statements of capitalization as of September 30, 2000, 1999, 1998
and 1997, and the related consolidated statements of income, common stock equity
and cash flows for each of the years ended September 30, 1999, 1998 and 1997
(none of which are presented herein) and we expressed unqualified opinions on
those consolidated financial statements. In our opinion, the information set
forth in the Selected Financial Data for each of the six years in the period
ended September 30, 2002 for the Company, presented on page 30, is fairly stated
in all material respects, in relation to the consolidated financial statements
from which it has been derived.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 29, 2002
New Jersey Resources Corporation 2002 Annual Report 43
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
New Jersey Resources Corporation (the Company) is an energy services holding
company providing retail and wholesale natural gas and related energy services
to customers from the Gulf Coast to New England and Canada. Its principal
subsidiary, New Jersey Natural Gas Company (NJNG), provides regulated natural
gas service in central and northern New Jersey and participates in the
off-system sales and capacity release markets. Other operating subsidiaries
include NJR Energy Services Company (Energy Services), which provides
unregulated fuel and capacity management and wholesale marketing services; NJR
Home Services Company (Home Services), which was transferred from NJNG in fiscal
2001 and provides appliance and installation services; NJR Energy Corporation
(NJR Energy), an investor in energy-related ventures; Commercial Realty and
Resources Corp. (CR&R), a commercial real estate developer; NJR Service
Corporation (Service Corp.), which provides shared administrative services; and
NJR Investment Company, which makes energy-related equity investments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
REGULATORY ACCOUNTING
The Company's largest subsidiary, NJNG, maintains its accounts in accordance
with the Uniform System of Accounts as prescribed by the New Jersey Board of
Public Utilities (BPU). 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" (SFAS 71) and, as a result, the
accounting principles applied by NJNG differ in certain respects from those
applied by unregulated businesses.
UTILITY PLANT AND DEPRECIATION
Depreciation is computed on a straight-line basis for financial statement
purposes, using rates based on the estimated average lives of the various
classes of depreciable property. The composite rate of depreciation was 3.21
percent of average depreciable property in 2002, 3.37 percent in 2001 and 3.38
percent in 2000. When depreciable properties are retired, the original cost
thereof, plus cost of removal less salvage, is charged to accumulated
depreciation.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying amount of an asset for possible impairment
whenever events or changes in circumstances indicate that such amount may not be
recoverable. For the years ended September 30, 2002, 2001 and 2000, no such
circumstances were identified.
UTILITY REVENUE
Customers are billed through monthly cycle billings on the basis of actual or
estimated usage. NJNG accrues estimated revenue for gas delivered to the end of
the accounting period but not billed to customers.
GAS PURCHASES
NJNG's tariff includes a Basic Gas Supply Service (BGSS), formerly known as the
Levelized Gas Adjustment clause, which is normally revised on an annual basis.
Under BGSS, NJNG projects its cost of natural gas, net of supplier refunds, the
impact of hedging activities and credits from non-firm sales and transportation
activities, over the subsequent 12 months and recovers the difference, if any,
of such projected costs compared with those included in rates through levelized
charges to customers. Any under- or over-recoveries are deferred and reflected
in BGSS in subsequent years.
INCOME TAXES
Deferred income taxes are calculated in conformance with SFAS No. 109,
"Accounting for Income Taxes" (See Note 7: Income Taxes).
Investment tax credits have been deferred and are being amortized as a reduction
to the tax provision over the average lives of the related property.
CAPITALIZED AND DEFERRED INTEREST
The Company's capitalized interest totaled $367,000 in 2002, $875,000 in 2001
and $1.1 million in 2000.
Pursuant to a BPU order, NJNG recovers carrying costs on uncollected balances
related to underrecovered gas costs incurred through October 31, 2001 and its
manufactured gas plant (MGP) remediation expenditures. (See Note 8: Regulatory
Issues). Accordingly, Other income included $3 million and $4.5 million of
deferred interest related to remediation and underrecovered gas costs in 2002
and 2001, respectively. There was no deferred interest in 2000.
EQUITY INVESTMENTS
Equity investments purchased as long-term investments are classified as
available for sale and are carried at their estimated fair value with any
changes in unrealized gains or losses included in other comprehensive income, a
component of stockholders' 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.
New Jersey Resources Corporation 2002 Annual Report 44
REGULATORY ASSETS
Regulatory assets at September 30, 2002 and 2001, consisted of the following
items:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Remediation costs (Note 12)
Expended, net $ 65,687 $ 42,041
Liability for future expenditures, net 42,330 30,340
Derivatives (Note 1) 2,562 22,371
Postretirement costs (Note 9) 3,322 3,762
Weather-normalization clause (WNC) 14,919 6,293
Other 660 239
Less: current portion of WNC (10,061) (6,293)
- --------------------------------------------------------------------------------
Total $ 119,419 $ 98,753
================================================================================
Underrecovered gas costs - current $ 33,912 $ 15,335
Underrecovered gas costs - deferred $ 15,118 $ 33,006
================================================================================
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, all temporary investments with maturities
of three months or less are considered cash equivalents.
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 provided for recognizing the gains or losses from derivatives
when the related physical transaction was completed. Derivatives that were not
used for hedging purposes were valued at fair value utilizing quoted market
prices. Changes in fair value were recorded in net income.
Effective October 1, 2000, the Company adopted SFAS 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 BGSS. 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.
The fair value of the 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 (See Note 10: Financial
Instruments and Risk Management).
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets," which must be adopted in fiscal
2003. Based on its analysis, the Company does not expect this statement to have
a material effect on its financial position, results of operations or cash
flows.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which must be adopted in fiscal 2003. SFAS
143 applies to the legal obligation associated with the retirement of long-lived
tangible assets that result from acquisition, construction, development and
normal operations. The Company has completed its assessment of SFAS 143 and
based on its analysis, the Company does not expect this statement to have a
material effect on its financial position, results of operations or cash flows.
The Company recovers certain asset retirement costs through rates charged to
customers as a portion of its depreciation expense. When depreciable properties
are retired, the original cost thereof, plus cost of removal less salvage, is
charged to accumulated depreciation. As of September 30, 2002, the Company had
excess costs recovered over costs incurred totaling $67.7 million, which will be
reclassified from accumulated depreciation to a regulatory liability for the
reporting periods beginning after October 1, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144), which must be adopted by fiscal 2003.
SFAS 144 requires that one accounting model be used for long-lived assets to be
disposed of and the broadening of the presentation of discontinued operations to
include more disposal transactions. Based on its analysis, the Company does not
expect this statement to have a material effect on its financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities" (SFAS 146), which must be adopted for exit or
disposal activities that are initiated after December 31, 2002. Based on its
analysis, the Company does not expect this statement to have a material effect
on its financial position, results of operations or cash flows.
CHANGE IN ACCOUNTING POLICY
The Company will begin to expense the cost of stock options granted beginning in
fiscal 2003. Any future stock options will be expensed over the life of the
stock option vesting period in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
reporting.
USE OF ESTIMATES
The consolidated financial statements of the Company include estimates and
assumptions of certain assets, liabilities, revenues and expenses and the
disclosure of certain contingent assets and liabilities. Actual results in the
future may differ from such estimates.
New Jersey Resources Corporation 2002 Annual Report 45
2. DISCONTINUED OPERATIONS
In May 1995, the Company adopted a plan to exit the oil and natural gas
production business and pursue the sale of the reserves and related assets of
NJR Energy and its subsidiary, New Jersey Natural Resources Company.
Accordingly, the Company accounted for this segment as a discontinued operation.
In 1995, based on estimates of the anticipated loss from operations until the
assets were sold, the estimated loss on the sale of the remaining reserves, as
well as other costs related to the closing of its offices, the Company recorded
an after-tax charge of $8.7 million, or $.33 per share. Based upon actual
proceeds received from the sale of the assets and costs incurred, net of
insurance recoveries received in January 2000, the Company closed out its
reserve balance and reported income from discontinued operations of $828,000, or
$.03 per share, in the quarter ended March 31, 2000.
3. COMMON STOCK
On January 22, 2002, the Board of Directors declared a three-for-two split of
its outstanding shares of common stock which was distributed on March 4, 2002,
to all owners of record as of February 8, 2002. Accordingly, all prior year
common share information has been restated to reflect the retroactive effect of
this split.
At September 30, 2002, there were 1,117,997 shares reserved for issuance under
the Company's Automatic Dividend Reinvestment and Retirement Savings Plans.
At the Company's Annual Meeting of Shareowners held on January 23, 2002,
shareowners voted to merge the Long-Term Incentive Compensation Plan (Employee
Plan) and the Restricted Stock and Stock Option Program for Outside Directors
(Directors' Program) into one plan, the Employee and Outside Director Long-Term
Incentive Compensation Plan (Plan). Shareowners also approved the increase in
the number of shares of the Company's common stock authorized for awards under
the Plan to 2,625,000 from 1,500,000 shares in the Employee Plan and 275,000
shares in the Directors' Program. On March 4, 2002, the shares remaining in the
Plan were split adjusted resulting in an additional 595,000 shares being
reserved for issuance under the Plan. Under the Plan, the Company can issue
stock options, performance units, dividend equivalent rights and service awards.
At September 30, 2002, there were 1,225,428 shares remaining for issuance or
grant under the Plan.
The Company issued 4,389, 28,950 and 20,541 performance units in 2002, 2001 and
2000, respectively. The performance units vest over a three-year period and are
subject to the Company achieving certain performance targets. The annual expense
associated with these issuances was $299,000, $625,000 and $668,000 in 2002,
2001 and 2000, respectively.
All options granted under the Plan have been non-qualified stock options. They
give the holder a right to purchase the Company's common stock at prices no less
than the closing price on the date of the grant. Generally, no option can be
exercised before one year or more than ten years from the date of each grant.
Under the Plan, each outside director receives an award of 200 shares of
restricted stock that vests over four years and is granted 5,000 options upon
joining the Board, and receives an annual grant of 1,500 options. In 2002, no
shares were issued or forfeited.
As permitted by SFAS 123, the Company continued to apply Accounting Principles
Board Opinion No. 25 and its related interpretations in accounting for its
stock-based plans and provides the pro forma disclosures required by SFAS 123.
No compensation expense has been recognized for its stock-based plans except for
performance-based awards. If compensation expense had been determined based on
the fair value of stock options at the date of grant consistent with the
methodology of SFAS 123, the Company's net income would have been reduced by
approximately $623,000 ($.03 per share - Basic and $.02 per share - Diluted) in
2002; $358,000 ($.02 per share - Basic and Diluted) in 2001; and $331,000 ($.02
per share - Basic and Diluted) in 2000.
The following table summarizes the assumptions used in the Black-Scholes option
pricing model and the resulting weighted average fair value of the stock options
for the past three years:
2002 2001 2000
- --------------------------------------------------------------------------------
Dividend yield 3.6% 4.0% 4.2%
Volatility 16.47% 18.82% 19.04%
Expected life (years) 7.9 8.0 8.2
Weighted average fair value $ 3.52 $ 3.03 $ 2.89
================================================================================
The following table summarizes the stock option activity for the past three
years:
Weighted
Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
September 30, 1999 1,029,863 $21.75
================================================================================
Granted 219,270 $26.02
Exercised (24,825) $18.93
Forfeited (25,632) $23.75
- --------------------------------------------------------------------------------
Outstanding at
September 30, 2000 1,198,676 $22.55
================================================================================
Granted 641,034 $27.35
Exercised (176,450) $20.51
Forfeited (2,067) $26.44
- --------------------------------------------------------------------------------
Outstanding at
September 30, 2001 1,661,193 $22.55
================================================================================
Granted 47,964 $30.22
Exercised (123,157) $20.75
Forfeited (1,859) $27.30
- --------------------------------------------------------------------------------
Outstanding at
September 30, 2002 1,584,141 $25.06
================================================================================
Exercisable at
September 30, 2002 799,976 $23.32
================================================================================
New Jersey Resources Corporation 2002 Annual Report 46
The following table summarizes stock options outstanding and exercisable at
September 30, 2002:
Outstanding Exercisable
--------------------------------- ----------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life(a) Price Options Price
- --------------------------------------------------------------------------------
$13.00-$16.00 53,757 2.5 $ 15.59 53,757 $ 15.59
$16.25-$19.50 170,354 3.1 $ 18.48 170,354 $ 18.48
$19.50-$22.75 21,542 5.1 $ 21.36 20,042 $ 21.25
$22.75-$26.00 599,857 6.6 $ 24.94 346,078 $ 24.60
$26.00-$29.25 690,246 8.1 $ 27.29 205,245 $ 27.26
$29.25-$32.50 48,385 9.3 $ 30.33 4,500 $ 29.33
- --------------------------------------------------------------------------------
Total 1,584,141 6.8 $ 25.06 799,976 $ 23.32
================================================================================
(a) Average contractual life remaining in years
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share," which
established standards for computing and presenting basic and diluted earnings
per share (EPS). The incremental shares required for inclusion in the
denominator for the diluted EPS calculation were 307,883 in 2002, 202,599 in
2001 and 186,066 in 2000. 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.
In 1996, the Board of Directors authorized the repurchase of up to 1 million of
the Company's common shares. In 1999 and 2002, the repurchase plan was expanded
to 1.5 million shares and 2 million shares, respectively. As of September 30,
2002, the Company has repurchased 1,531,153 shares of its common stock at a cost
of $54.5 million.
4. SHAREHOLDER RIGHTS PLAN
In July 1996, the Board of Directors adopted a shareholder rights plan that
provides for the distribution of one right for each share of common stock
outstanding on or after August 15, 1996. Each right entitles its holder to
purchase 1/1500 of one share of the Series A Stock, as defined below, at an
exercise price of $36.67.
The shareholder rights plan provides that, after a person or group acquires 10
percent or more of the Company's common stock, each of the rights, except for
those held by the 10 percent holder (which become void once the holder reaches
the 10 percent threshold) becomes the right to acquire shares of the Company's
common stock having a market value equal to twice the exercise price. If a
person or group acquires at least 10 percent, but less than 50 percent, the
board of directors may exchange each right for one share of the Company's common
stock. The rights may be redeemed for $.01 per right at any time prior to the
first public announcement or communication to the Company that a person or group
has crossed the 10 percent threshold.
The Company has 400,000 shares of authorized and unissued $100 par value
preferred stock. The Company has created and reserved for issuance 50,000 shares
of Series A Junior Participating Cumulative Preferred Stock (Series A Stock) in
connection with the adoption of the shareholder rights plan.
5. LONG-TERM DEBT, DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Annual redemption requirements for the next five years are as follows: 2003, $27
million; 2004, $107.4 million; 2005, $27.1 million; 2006, $2.2 million; and
2007, $2.4 million.
NJNG's mortgage secures its First Mortgage Bonds and represents a lien on
substantially all of its property, including gas supply contracts. Certain
indentures supplemental to the mortgage include restrictions as to cash
dividends and other distributions on NJNG's common stock, which restrictions
apply so long as certain series of First Mortgage Bonds are outstanding. Under
the most restrictive provision, approximately $114.2 million of NJNG's retained
earnings was available for such purposes at September 30, 2002.
NJNG has entered into loan agreements with the New Jersey Economic Development
Authority (EDA) through which the EDA issues bonds to the public. To secure its
loans from the EDA, NJNG issues First Mortgage Bonds with interest rates and
maturity dates identical to the EDA Bonds. In April 1998, the EDA loaned NJNG
the proceeds from its $18 million Natural Gas Facilities Revenue Bonds, Series
1998C (1998 Bonds). The 1998 Bonds mature on April 1, 2033. The proceeds from
the 1998 Bonds were deposited into a project construction fund. NJNG may obtain
such funds in reimbursement of its qualified expenditures relating to the
project upon delivering an equivalent amount of its Adjustable Rate Series GG
First Mortgage Bonds (Series GG Bonds) to the indenture trustee. NJNG drew down
the final $3.6 million and $4 million from the construction fund and issued like
amounts of its Series GG Bonds in 2002 and 2001, respectively.
In July 2002, the EDA approved $12 million of new funds to finance NJNG's
northern division construction over the next three years.
At September 30, 2002 and 2001, NJNG had total long-term variable-rate debt
outstanding of $122.1 million. In 2002, $97 million of tax-exempt EDA debt was
hedged by a 3.25 percent interest rate cap which expires in July 2004. At
September 30, 2001, $56 million of variable-rate debt had been hedged by a 6.5
percent interest rate cap. At September 30, 2002 and 2001, the weighted average
interest rate on NJNG's variable-rate debt was 1.4 percent and 2.5 percent,
respectively.
In 2002, NJNG entered into an agreement with a financing company whereby NJNG
received $20.6 million related to the sale and leaseback of a portion of its
meters.
In December 1995, the BPU approved NJNG's petition to enter into a master lease
agreement for its headquarters building for a 25.5-year term with two 5-year
renewal options. The present value of the agreement's minimum lease payments is
reflected as both a capital lease asset and a capital lease obligation, which
are included in Utility Plant and Long-Term Debt, respectively, on the
Consolidated Balance Sheets. In accordance with its ratemaking treatment, NJNG
records rent expense as if the lease was an operating lease. Minimum annual
lease payments are $2.6 million in 2003 and 2004, $2.7 million in 2005, $2.9
million in 2006 and 2007, with $47 million over the remaining term of the lease.
Approximately 24 percent of the building, representing approximately $355,000 of
lease payments in 2002, is presently subleased to other tenants.
New Jersey Resources Corporation 2002 Annual Report 47
The Company has a $335 million revolving credit agreement with several banks.
The Company's portion of the facility consists of $135 million with a 3-year
term expiring January 2004, and the NJNG portion of the facility consists of
$100 million with a 364-day term and $100 million with a 3-year term expiring
January 2004. The Company's facility is used to finance its 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 September 30, 2002, the Company included $25 million of
commercial paper borrowings as Long-term debt on the Consolidated Balance Sheet.
At September 30, 2002 and 2001, the Company had variable-rate debt outstanding
of $105.3 million and $55.9 million, with a weighted average interest rate of
2.2 percent and 3.9 percent, respectively.
6. SHORT-TERM DEBT AND CREDIT FACILITIES
Committed credit facilities of NJNG support the issuance of commercial paper and
provide for bank loans at negotiable rates at or below the prime rate. These
credit facilities total $200 million and require commitment fees on the unused
amounts. A comparison of pertinent data follows:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Bank credit facilities $200,000 $150,000 $100,000
Maximum amount outstanding $149,750 $154,200 $111,000
Average daily amount outstanding
Notes payable to banks $ 625 $ 900 $ 2,400
Commercial paper $ 80,300 $ 90,400 $ 50,400
Weighted average interest rate
Notes payable to banks 2.51% 5.90% 6.56%
Commercial paper 2.21% 4.79% 6.04%
Amount outstanding at year end
Notes payable to banks -- $ 1,000 --
Commercial paper $ 74,900 $134,800 $ 43,300
Interest rate at year end
Notes payable to banks -- 3.94% --
Commercial paper 1.80% 3.27% 6.57%
================================================================================
The Company has also entered into a $10 million demand loan agreement and a $15
million loan agreement with banks, both of which expire on December 31, 2002. At
September 30, 2002, $10 million was outstanding under these agreements.
7. INCOME TAXES
The Company's federal income tax returns through 1998 have either been examined
by the Internal Revenue Service or the related statute of limitations has
expired, and all matters have been settled. The 1999 and 2000 federal income tax
returns have been reviewed by audit survey with no changes noted.
Income tax expense differs from the amount computed by applying the statutory
federal income tax rate of 35 percent to pre-tax income for the following
reasons:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Statutory income
tax expense $ 32,469 $ 29,497 $ 26,989
Change resulting from
State income taxes 5,597 5,052 4,797
Depreciation and
cost of removal (1,362) (1,728) (1,799)
Investment tax credits (348) (348) (448)
Other (432) (512) (392)
- --------------------------------------------------------------------------------
Income tax provision $ 35,924 $ 31,961 $ 29,147
================================================================================
The Income tax provision was composed of the following:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Current
Federal $ 9,339 $ 13,694 $ 6,512
State 3,811 10,838 4,976
Deferred
Federal 18,321 10,844 15,703
State 4,801 (3,067) 2,404
Investment tax credits (348) (348) (448)
- --------------------------------------------------------------------------------
Income tax provision $ 35,924 $ 31,961 $ 29,147
================================================================================
Charged to
Income tax provision $ 35,924 $ 32,891 $ 29,147
Cumulative effect of
a change in accounting -- (930) --
- --------------------------------------------------------------------------------
Total provision $ 35,924 $ 31,961 $ 29,147
================================================================================
The tax effects of significant temporary differences comprising the Company's
net deferred income tax liability at September 30, 2002 and 2001,were as
follows:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Current
Deferred gas costs $ 11,858 $ 5,362
Weather-normalization clause 3,521 2,203
Other (2,090) (2,225)
- --------------------------------------------------------------------------------
Current deferred tax liability, net $ 13,289 $ 5,340
================================================================================
Non-current
Property-related items $ 83,127 $ 78,357
Customer contributions (4,189) (4,336)
Capitalized overhead and interest (4,740) (3,481)
Deferred gas costs 5,287 11,542
Unamortized investment tax credits (2,906) (3,254)
Remediation costs 21,752 13,473
Weather-normalization clause and other (5,896) 2,881
- --------------------------------------------------------------------------------
Non-current deferred tax liability, net $ 92,435 $ 95,182
================================================================================
New Jersey Resources Corporation 2002 Annual Report 48
8. REGULATORY ISSUES
In July 2000, NJNG amended a September 1999 BGSS filing in response to a
significant increase in the wholesale cost of gas. The amended filing requested
an approximate 16 percent increase in prices 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
the Demand Side Management (DSM) and Weather-Normalization Clause (WNC) factors
remain the same. The prices 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.
In fiscal 2001, the BPU approved price increases of approximately 2 percent per
month for a period from December 2000 through July 2001 under the FPM. 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 its
gas cost recovery rate. The combined effect of the two changes resulted in an
approximate 10.8 percent price decrease effective December 1, 2001.
On January 21, 2002, NJNG filed with the BPU for a 3 percent price decrease in
the BGSS as a result of lower projected gas costs. The BPU approved this filing
on February 6, 2002, and the decrease became effective immediately.
On October 17, 2002, NJNG filed a BGSS request with the BPU for a 3 percent
price increase, reflecting higher projected gas costs, to be effective December
1, 2002. The filing also contemplates a January 2003 filing to update gas costs
which could lead to a price adjustment effective February 1, 2003.
NJNG's margin-sharing programs include off-system sales, capacity release and
portfolio-enhancing programs with customers and shareowners, based on a formula
which is in effect until December 2002. As part of its annual BGSS filing in
November 2001, NJNG requested from the BPU an extension of these programs
through 2004. On October 30, 2002, the BPU approved an agreement whereby the
existing margin-sharing between customers and shareowners for off-system sales,
capacity release and financial risk management transactions was extended through
October 31, 2003. As part of this agreement, the portfolio-enhancing programs,
which include the permanent reduction of the cost of capacity, would continue to
receive 60/40 sharing treatment between customers and shareowners for
transactions completed on or before December 31, 2002.
NJNG is also involved in various proceedings associated with several other
adjustment clauses (e.g., Transportation Education and Implementation (TEI) and
Comprehensive Resource Analysis (CRA) factors) which, in management's opinion,
will not have a material adverse effect on its financial condition or results of
operations.
In February 1999, the Electric Discount and Energy Competition Act (EDECA),
which provides the framework for the restructuring of New Jersey's energy
market, 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 BGSS and delivery
(i.e., transportation) prices as required by EDECA and expand an incentive for
residential and small commercial customers to switch to transportation service.
In June 2001, the BPU initiated a proceeding regarding the provision of BGSS. In
July 2001, NJNG submitted a BGSS proposal that provides for additional customer
choices 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 the state's natural 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.
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, an unregulated subsidiary of the Company. The
order also continues NJNG's current third-party billing policies and delays
until May 2003, absent a significant breakthrough in metering technology, any
further decision on meter reading and other potentially competitive services.
In March 2000, the BPU issued interim Affiliate Relations, Fair Competition and
Accounting Standards and Related Reporting Requirements. As required, NJNG filed
a compliance plan related to these standards. The BPU is required to audit the
state's energy utilities every two years. In April 2000, the audit division of
the BPU and an independent consulting firm audited the Company's compliance with
the standards. In February 2002, the BPU issued an order accepting mutually
agreed-upon recommendations. In June 2002, the BPU initiated its next compliance
audit.
9. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has two trusteed, non-contributory defined benefit retirement plans
covering regular represented and non-represented employees with more than one
year of service. All represented employees of Home Services hired on or after
October 1, 2000, are covered by an enhanced defined contribution plan instead of
the Defined Benefit Plan.
Defined Benefit Plan benefits are based on years of service and average
compensation during the highest 60 consecutive months of employment. The Company
makes annual contributions to the plans consistent with the funding requirements
of federal laws and regulations.
The Company maintains an unfunded non-qualified pension equalization plan that
was established to provide employees with the full level of benefits as stated
in the qualified plan document without reductions due to various limitations
imposed by the provisions of Federal income tax laws and regulations.
New Jersey Resources Corporation 2002 Annual Report 49
The components of the net pension cost were as follows:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Service cost $ 1,957 $ 1,622 $ 1,728
Interest cost 4,813 4,365 4,101
Expected return on plan assets (6,065) (5,996) (5,542)
Amortization of prior service cost 87 87 87
Recognized actuarial (gain) loss -- (356) (68)
Recognized net initial obligation (306) (306) (306)
Recognized acturial loss due to
special termination -- 574 --
- --------------------------------------------------------------------------------
Net periodic pension cost $ 486 $ (10) $ --
================================================================================
Plan assets consist primarily of corporate equities and obligations, U.S.
Government obligations and cash equivalents. A reconciliation of the funded
status of the plans to the amounts recognized in the Consolidated Balance Sheets
is presented below:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 65,407 $ 55,483
Service cost 1,957 1,622
Interest cost 4,813 4,365
Plan participants' contributions 62 62
Actuarial loss 8,068 6,410
Special termination benefit -- 574
Benefits paid (3,182) (3,109)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 77,125 $ 65,407
================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 51,830 $ 68,382
Actual return on plan assets (4,601) (13,505)
Plan participants' contributions 62 62
Benefits paid (3,182) (3,109)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 44,109 $ 51,830
================================================================================
Funded status $(33,017) $(13,577)
Unrecognized net loss 29,225 10,490
Unrecognized prior service cost 489 576
Unrecognized net initial obligation (525) (831)
- --------------------------------------------------------------------------------
Net amount recognized $ (3,828) $ (3,342)
================================================================================
Amounts recognized in Consolidated
Balance Sheets
Accrued benefit liability included in
Accounts payable and other $ (2,417) --
Postretirement employee benefit liability (16,211) $ (3,342)
Intangible asset 215 --
Accumulated other comprehensive income 14,585 --
- --------------------------------------------------------------------------------
Net liability recognized $ (3,828) $ (3,342)
================================================================================
The accumulated benefit obligation at September 30, 2002 and 2001, was $62.7
million and $54.1 million, respectively.
At September 30, 2002, the Company recorded an additional minimum pension
liability of $14.8 million, which is included in Postretirement employee benefit
liability on the Consolidated Balance Sheet. This minimum liability resulted
from a decrease in the fair value of plan assets, which was due primarily to
declining stock market values, and a decrease in the discount rate and expected
asset return assumptions.
The Company's funding policy is to contribute an amount in accordance with the
provisions of the Employment Retirement Income Security Act of 1974, as amended.
The Company was not required to and did not make funding contributions to its
pension plans for fiscal years ended 2002 and 2001. The Company is required to
make minimum funding contributions of approximately $2.4 million during fiscal
2003.
The weighted average assumptions are as follows:
2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.50%
Expected asset return 9.25% 9.50%
Compensation increase 4.00% 4.00%
================================================================================
OTHER POSTRETIREMENT BENEFITS
The Company also provides postretirement medical and life insurance benefits to
employees who meet the eligibility requirements. The Company's transition
obligation associated with these benefits of $8.6 million is being amortized
over 20 years.
Effective October 1, 1998, the BPU approved the recovery of $4.9 million of
deferred costs, which is included in Regulatory assets on the Consolidated
Balance Sheets, over 15 years.
The components of the net postretirement benefit cost are as follows:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Service cost $ 799 $ 615 $ 670
Interest cost 1,777 1,519 1,389
Expected return on plan assets (520) (555) (413)
Amortization of
Transition obligation 357 372 430
Prior service cost 74 84 124
Loss 335 65 45
Special termination benefit -- 168 --
- --------------------------------------------------------------------------------
Total net periodic benefit cost $ 2,822 $ 2,268 $ 2,245
================================================================================
New Jersey Resources Corporation 2002 Annual Report 50
A reconciliation of the accumulated postretirement benefit obligation (APBO) to
the amounts recognized on the Consolidated Balance Sheets at September 30, 2002
and 2001, is presented below:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 23,656 $ 20,075
Service cost 799 615
Interest cost 1,777 1,519
Plan amendments -- (1,427)
Actuarial loss 2,063 3,534
Benefits paid (989) (828)
Special termination benefit -- 168
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 27,306 $ 23,656
================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 5,458 $ 5,535
Actual return on plan assets (445) (1,116)
Employer contributions 2,242 1,867
Benefits paid (989) (828)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 6,266 $ 5,458
================================================================================
Funded status $(21,040) $(18,198)
Unrecognized transition obligation 3,955 4,312
Unrecognized prior service cost 686 760
Unrecognized net loss 10,294 7,601
- --------------------------------------------------------------------------------
Net amount recognized $ (6,105) $ (5,525)
================================================================================
Amounts recognized in Consolidated
Balance Sheets
Accounts payable and other $ (2,579) $ (2,242)
Postretirement employee benefit liability (3,526) (3,283)
- --------------------------------------------------------------------------------
Net amount recognized $ (6,105) $ (5,525)
================================================================================
Based upon certain regulatory and actuarial assumptions, the Company anticipates
making contributions of approximately $2.6 million during fiscal 2003.
The weighted average assumptions are as follows:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.50%
Expected asset return 8.75% 9.00%
Compensation increase 4.00% 4.00%
================================================================================
Effect of a 1 percentage point increase in the health care cost trend rate on:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Year-end benefit obligation $4,474 $3,406
Total of service and interest cost components $ 485 $ 444
================================================================================
Effect of a 1 percentage point decrease in the health care cost trend rate on:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Year-end benefit obligation $(3,585) $(2,720)
Total of service and interest cost components $ (375) $ (347)
================================================================================
The assumed health care cost trend rate used in measuring the APBO as of
September 30, 2002, was 9 percent, gradually declining to 4.5 percent in 2006,
and then remaining constant thereafter.
DEFINED CONTRIBUTION PLAN
The Company offers an Employees' Retirement Savings Plan (Savings Plan) to
eligible employees. The Company matches 50 percent of participants'
contributions up to 6 percent of base compensation.
For represented Home Services' employees who are not eligible for participation
in the Defined Benefit Plan, the Company contributes between 2 and 3 percent of
base compensation, depending on service, into the Savings Plan on their behalf.
The amount expensed for the matching provision of the savings plan was $959,000,
$719,000 and $678,000 in 2002, 2001 and 2000, respectively.
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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 enter into futures contracts, option agreements and
over-the-counter swap agreements. NJNG's recovery of gas costs is protected by
the BGSS, but to hedge against price fluctuations, NJNG utilizes futures,
options and swaps through its corporate financial risk management program.
Energy Services hedges purchases and sales of storage gas and transactions with
wholesale customers. NJR Energy has hedged a long-term, fixed-price contract to
sell natural gas.
The following table reflects the changes in the fair market value of commodity
derivatives from September 30, 2001, to September 30, 2002:
Balance Increase Less Balance
September 30, (Decrease) in Fair Amounts September 30,
(Thousands) 2001 Market Value Settled 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NJNG $(20,978) $ (6,512) $(24,926) $ (2,564)
Energy Services 15,355 4,028 34,072 (14,689)
NJR Energy (343) 3,791 86 3,362
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ (5,966) $ 1,307 $ 9,232 $(13,891)
===================================================================================================================================
There were no contracts originated and valued at fair market value and no
changes in methods of valuations during the year ended September 30, 2002.
New Jersey Resources Corporation 2002 Annual Report 51
The following is a summary of fair market value of commodity derivatives at
September 30, 2002, by method of valuation and by maturity:
After Total
(Thousands) 2003 2004-2006 2006 Fair Value
- --------------------------------------------------------------------------------
Price based
on NYMEX $(18,892) $(11,263) $ 2,027 $(28,128)
Price based on
over-the-counter
published
quotations 5,034 6,857 154 12,045
Price based
upon models 189 187 1,816 2,192
- --------------------------------------------------------------------------------
Total $(13,669) $ (4,219) $ 3,997 $(13,891)
================================================================================
The following is a summary of commodity derivatives by type as of September 30,
2002:
Net Amount included in
Volume Price per Derivatives
(Bcf) Mmbtu (Thousands)
- --------------------------------------------------------------------------------
NJNG
Futures 0.0 $3.11 - 3.49 $ (175)
Options 2.1 $3.00 - 10.00 (2,319)
Swaps 36.5 (68)
Energy Services
Futures 2.7 $2.85 - 4.43 (15,050)
Options 1.6 $2.75 - 3.75 76
Swaps 39.8 283
NJR Energy
Swaps 18.9 3,362
- --------------------------------------------------------------------------------
Total $(13,891)
================================================================================
In March 1992, NJR Energy entered into long-term, fixed-price contracts to sell
natural gas to an energy marketing company. In October 1994, in conjunction with
a shift in capital allocation policy, NJR Energy entered into a swap agreement
that hedged its risk for sales volumes under the contract that were in excess of
the estimated production from natural gas reserves owned at that time. NJR
Energy subsequently sold its natural gas reserves pursuant to a plan to exit the
oil and natural gas production business. To hedge its risk for sales volumes
under such contract, which would have otherwise been fulfilled by its producing
reserve base, NJR Energy entered into a second swap agreement in June 1995.
Under the terms of the swap agreements, NJR Energy pays 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
(i.e., floating price) for the total volumes under the gas sales contract. The
swap agreements were effective as of November 1995 and will expire on the same
date as the underlying gas sales contract.
To secure the physical gas supply needed to meet the delivery requirements under
its gas sales contracts, NJR Energy entered into a long-term purchase contract,
effective November 1995, with a second gas marketing company for the identical
volumes that it is obligated to sell under the above-mentioned gas sales
contract. NJR Energy has agreed to pay the supplier the identical floating price
that it is receiving under the swap agreements.
The net result of the above swap agreements and purchase contract is that NJR
Energy has hedged both its price and volume risk associated with its long-term
fixed-price sales contract. The respective obligations of NJR Energy and the
counterparties under the swap agreements are guaranteed, subject to a maximum
amount, by the Company and the respective counterparties' parent corporations.
In the event of nonperformance by the counterparties and their parent
corporations, NJR Energy's financial results would be affected by the
difference, if any, between the fixed price it is receiving under the gas sales
contract and the floating price that it is paying under the purchase contract.
However, the Company does not anticipate nonperformance by the counterparties.
The fair value of cash and temporary investments, accounts receivable, accounts
payable, commercial paper and borrowings under revolving credit facilities is
estimated to equal their carrying amounts due to the short maturity of those
instruments. The estimated fair value of long-term debt is based on quoted
market prices for similar issues. The carrying amount of long-term debt was
$348.1 million and $323.7 million, with a fair market value of $357.9 million
and $329.3 million, at September 30, 2002 and 2001, respectively.
Effective October 1, 2000, the Company adopted SFAS 133 (See Note 1: Summary of
Significant Accounting Policies -- Derivative Activities).
At October 1, 2000, the effect of adopting SFAS 133 was as follows:
(Thousands)
- --------------------------------------------------------------------------------
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 $ (1,347)
Accumulated other comprehensive
income, net of tax $ 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 that relate to natural gas
instruments will reduce or be charged to gas costs as the related transaction
occurs. Of the amount recorded to Other comprehensive income on the October 1,
2000, transition date, $20.1 million was recorded as a reduction to gas costs in
fiscal 2001. The amounts related to interest rate instruments are charged to
interest expense as the future transaction occurs.
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 Turbine
Corporation (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. Other comprehensive income for the year ended September 30, 2002,
included a $389,000 unrealized gain related to this collar. At September 30,
2002, Accumulated other comprehensive income included a $841,000 unrealized gain
related to this collar. In July 2002, the Company sold all of its unhedged
Capstone shares and realized an after-tax loss of $449,000.
The ineffective portions of derivatives qualifying for hedge accounting were
immaterial in 2002.
The cash flow hedges described above cover various periods of time ranging from
November 2002 to October 2010.
New Jersey Resources Corporation 2002 Annual Report 52
11. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Net income $ 56,844 $ 52,316 $ 48,764
- --------------------------------------------------------------------------------
Other comprehensive income:
Change in fair value of equity
investments, net 296 (13,219) 13,477
Change in fair value of derivatives, net (13,669) (11,199) --
Minimum pension liability
adjustment, net (8,627) -- --
Cumulative effect of a change in
accounting for derivatives, net -- 20,530 --
- --------------------------------------------------------------------------------
Total Other comprehensive income (22,000) (3,888) 13,477
================================================================================
Comprehensive income $ 34,844 $ 48,428 $ 62,241
================================================================================
12. COMMITMENTS AND CONTINGENT LIABILITIES
NJNG has entered into long-term contracts, expiring at various dates through
2022, for the supply, storage and delivery of natural gas. These contracts
include fixed charges of approximately $95 million annually at current contract
rates and volumes, which are recovered through the BGSS.
Capital expenditures are estimated at $52 million and $54 million in 2003 and
2004, respectively, and consist primarily of NJNG's construction program to
support its customer growth and maintain its distribution system.
Through September 2000, NJNG had been sharing the cost of environmental
investigations and remedial actions at ten 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 subject
to the original cost-sharing agreement. Through the RA approved by the BPU, NJNG
is recovering expenditures incurred through June 30, 1998, over a 7-year period.
Costs incurred subsequent to June 30, 1998, including carrying costs on the
deferred expenditures (See Note 1: Summary of Significant Accounting Policies,
Capitalized and Deferred Interest), will be reviewed and recovered over rolling
7-year periods, subject to BPU approval. In September 1999, NJNG filed for
recovery of expenditures incurred through June 30, 1999, and in January 2001,
NJNG filed for recovery of expenditures incurred through June 30, 2000. The BPU
is currently reviewing these filings. In July 2002 with the assistance of an
outside consulting firm, NJNG updated an environmental review of the sites,
including a review of its potential liability for investigation and remedial
action. On the basis of such review, NJNG estimates that, exclusive of any
insurance recoveries, total future expenditures to remediate and monitor known
MGP sites will range from $65.8 million to $83.3 million. NJNG's estimate of
these liabilities is based upon currently available facts, existing technology
and presently enacted laws and regulations, however, actual costs may differ
from these estimates. 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. Accordingly, NJNG has
recorded an MGP remediation liability of $65.8 million and a corresponding
Regulatory asset of $42.3 million, net of insurance recoveries, on the
Consolidated Balance Sheet. The actual costs to be incurred by NJNG are
dependent upon several factors, including final determination of remedial
action, changing technologies and governmental regulations, the ultimate ability
of other responsible parties to pay and any insurance recoveries. NJNG will
continue to seek recovery of such costs through the RA.
Energy Services has entered into a marketing and management agreement for the
Stagecoach storage project. Stagecoach is a high-injection/high-withdrawal
facility in New York State with 12 billion cubic feet (Bcf) of working gas
capacity and interstate pipeline connections to the Northeast markets.
Stagecoach received Federal Energy Regulatory Commission (FERC) certification
for full operations on June 27, 2002.
Energy Services is the exclusive agent for marketing Stagecoach services for a
10-year period, subject to 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
approximately $14 million for the period from July 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 Services has reached 3-year agreements with
third parties for the purchase of over 50 percent of the required level of
services from Stagecoach. On August 8, 2002, NJNG, in connection with its system
requirements, was awarded 2-year agreements for Stagecoach storage and
transportation services. These agreements were awarded pursuant to an open bid
process. The NJNG agreements represent an additional 35 percent of the required
level of services for the 2-year period. Due to the price levels of the
potential purchase obligations to Energy Services, as compared with current
market prices, and the current and expected level of contracts, the Company does
not currently believe that the potential purchase obligation in the Stagecoach
agreement will 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.
New Jersey Resources Corporation 2002 Annual Report 53
At September 2002, NJNG had $97.1 million in stand-by letters of credit (Letters
of Credit) with several banks which provide liquidity support for the Natural
Gas Facilities Refunding Revenue Bonds and Natural Gas Revenue Bonds issued by
the EDA. The Letters of Credit have various expiration dates with the latest
expiring in January 2003. The Bond issues, which are recorded as Long-term debt
on the Consolidated Balance Sheets, are being remarketed on a weekly and daily
basis. In fiscal 2003, NJNG transferred these Bonds to an auction rate mode,
thereby eliminating the need for the Letters of Credit. Auctions will take place
in 7- and 35-day periods.
The Company is a party to various claims, legal actions, complaints and
investigations 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 either the Company's financial condition or results of
operations.
13. BUSINESS SEGMENT DATA
Information related to the Company's various business segments, excluding
capital expenditures, which are presented in the Consolidated Statements of Cash
Flows, is detailed below.
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 and wholesale marketing operations. The
Retail and Other segment consists of appliance and installation services,
commercial real estate development, investment and other corporate activities.
(Thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Operating Revenues
Natural Gas Distribution $ 774,541 $ 1,009,477 $ 736,911
Energy Services 1,036,667 1,022,734 413,348
Retail and Other 19,711 21,474 26,638
- --------------------------------------------------------------------------------
Total before eliminations 1,830,919 2,053,685 1,176,897
Intersegment revenues (165) (5,277) (12,348)
- --------------------------------------------------------------------------------
Total $ 1,830,754 $ 2,048,408 $ 1,164,549
================================================================================
Depreciation and Amortization
Natural Gas Distribution $ 31,044 $ 31,676 $ 30,424
Energy Services 219 250 154
Retail and Other 581 604 419
================================================================================
Total $ 31,844 $ 32,530 $ 30,997
================================================================================
Operating Income
Natural Gas Distribution $ 88,883 $ 89,248 $ 87,241
Energy Services 11,430 5,638 2,996
Retail and Other 4,066 4,927 3,675
================================================================================
Total $ 104,379 $ 99,813 $ 93,912
================================================================================
The Company's assets for the various business segments are detailed below:
(Thousands) 2002 2001
- --------------------------------------------------------------------------------
Assets at Year End
Natural Gas Distribution $1,059,417 $1,065,748
Energy Services 207,964 78,042
Retail and Other 51,923 48,402
================================================================================
Total $1,319,304 $1,192,192
================================================================================
14. SELECTED QUARTERLY DATA (UNAUDITED)
A summary of financial data for each fiscal quarter of 2002 and 2001 follows.
Due to the seasonal nature of the Company's natural gas business, quarterly
amounts vary significantly during the year. In the opinion of management, the
information furnished reflects all adjustments necessary for a fair presentation
of the results of the interim periods.
(Thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
2002
Operating revenues $ 395,831 $ 525,780 $ 442,309 $ 466,834
Operating income $ 34,770 $ 59,300 $ 9,581 $ 728
Net income $ 19,681 $ 34,930 $ 4,764 $ (2,531)
Earnings per share
Basic $ 1.10 $ 1.30 $ .18 $ (.09)
Diluted $ 1.09 $ 1.29 $ .17 $ (.09)
================================================================================
2001
Operating revenues $ 667,487 $ 890,035 $ 260,644 $ 230,242
Operating income $ 36,265 $ 55,814 $ 8,785 $ (1,051)
Income before
accounting change $ 19,056 $ 33,030 $ 4,312 $ (2,735)
Income from
continuing operations $ 17,709 $ 33,030 $ 4,312 $ (2,735)
Net income $ 17,709 $ 33,030 $ 4,312 $ (2,735)
Earnings per share
before accounting
change
Basic $ .72 $ 1.24 $ .16 $ (.10)
Diluted $ .72 $ 1.24 $ .16 $ (.10)
Earnings per share
from continuing
operations
Basic $ .67 $ 1.24 $ .16 $ (.10)
Diluted $ .67 $ 1.24 $ .16 $ (.10)
Earnings per share
Basic $ .67 $ 1.24 $ .16 $ (.10)
Diluted $ .67 $ 1.24 $ .16 $ (.10)
================================================================================
New Jersey Resources Corporation 2002 Annual Report 54
DIRECTORS AND OFFICERS
New Jersey Resources Corporation
DIRECTORS
Nina Aversano, 57 (A,E)
President and CEO
Aversano Consulting, LLC (1998)
Lawrence R. Codey, 58 (A,D)
President &
Chief Operating Officer (retired)
Public Service Electric & Gas Company
(2000)
Leonard S. Coleman, 53 (B,C,D)
Senior Advisor
The National League of
Professional Baseball Players (1995)
Laurence M. Downes, 45 (C)
Chairman of the Board &
Chief Executive Officer
New Jersey Resources Corporation (1985)
Joe B. Foster, 68 (B,C,E)
Non-Executive Chairman
Newfield Exploration Company (1994)
Hazel S. Gluck, 68 (B,C,D)
Senior Partner
Hodes, Shaw, Bodman & Gluck (1995)
James T. Hackett, 48 (A,C,D)
Chairman, President &
Chief Executive Officer
Ocean Energy, Inc. (1999)
Dorothy K. Light, 65 (B,E)
Chairman & Chief Executive Officer
Alden Enterprises, LLC (1990)
William H. Turner, 62 (A,D)
Consultant
Summus Limited (2000)
Gary W. Wolf, 64 (A,B,C,E)
Senior Partner
Cahill, Gordon & Reindel (1996)
George R. Zoffinger, 54 (B,E)
President & Chief Executive Officer
New Jersey Sports & Exposition Authority
(1996)
Duncan Thecker, 87
President
Duncan Thecker Associates
Director Emeritus (1982)
OFFICERS
Laurence M. Downes, 45 (C)
Chairman of the Board &
Chief Executive Officer (1985)
Oleta J. Harden, 53
Senior Vice President,
General Counsel & Secretary (1984)
Glenn C. Lockwood, 41
Senior Vice President &
Chief Financial Officer (1988)
(A) Member of Audit Committee
(B) Member of Corporate Governance Committee
(C) Member of Executive Committee
(D) Member of Financial Policy Committee
(E) Member of Management Development & Compensation Committee
Date represents year of affiliation with an NJR company.
New Jersey Resources Corporation 2002 Annual Report 55
DIRECTORS AND OFFICERS
New Jersey Resources Corporation Subsidiaries
NEW JERSEY NATURAL GAS COMPANY
Directors
Laurence M. Downes, 45 (1985)
Hazel S. Gluck, 68 (1995)
Gary W. Wolf, 64 (1996)
George R. Zoffinger, 54 (1996)
Officers
Laurence M. Downes, 45
Chairman of the Board &
Chief Executive Officer
(1985)
Gary A. Edinger, 52
Senior Vice President
Energy Delivery (1972)
Oleta J. Harden, 53
Senior Vice President,
General Counsel & Secretary (1984)
Timothy C. Hearne Jr., 46
Senior Vice President &
Treasurer (1985)
Thomas J. Kononowitz, 60
Senior Vice President
Marketing Services (1963)
Kevin A. Moss, 52
Senior Vice President
Regulatory Affairs (1990)
Joseph P. Shields, 45
Senior Vice President
Energy Services (1983)
Barbara C. Roma, 56
Vice President
Customer Services (1967)
NJR SERVICE CORPORATION
Laurence M. Downes, 45
President &
Chief Executive Officer (1985)
Oleta J. Harden, 53
Senior Vice President,
General Counsel & Secretary (1984)
Timothy C. Hearne Jr., 46
Senior Vice President & Treasurer (1985)
Glenn C. Lockwood, 41
Senior Vice President &
Chief Financial Officer (1988)
Hugo C. Bottino, 51
Vice President
Human Resources (1981)
Deborah G. Zilai, 49
Vice President
Business Transformation &
Technology (1996)
NJR ENERGY SERVICES COMPANY
Laurence M. Downes, 45
President &
Chief Executive Officer (1985)
Glenn C. Lockwood, 41
Senior Vice President &
Chief Financial Officer (1988)
Oleta J. Harden, 53
Secretary (1984)
Joseph P. Shields, 45
Senior Vice President (1983)
NJR HOME SERVICES COMPANY
Wayne K. Tarney, 61
President (1996)
Oleta J. Harden, 53
Secretary (1984)
COMMERCIAL REALTY & RESOURCES CORP.
John Lishak Jr., 62
President (1981)
Glenn C. Lockwood, 41
Senior Vice President &
Chief Financial Officer (1988)
Oleta J. Harden, 53
Secretary (1984)
Date represents year of affiliation with an NJR company.
New Jersey Resources Corporation 2002 Annual Report 56