SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002 Commission file number 1-8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2376465
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1415 WYCKOFF ROAD, WALL, NEW JERSEY - 07719 732-938-1480
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: |X| NO: | |
The number of shares outstanding of $2.50 par value Common Stock as of February
3, 2003 was 27,031,026.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report including, without
limitation, those with respect to expected disposition of legal and regulatory
proceedings, exposure under the Stagecoach agreement, a need to replace or
upgrade NJNG's computer software, expected capital expenditures, external
financing requirements, the impact of changes in market rates of interest,
matters relating to the remediation of Manufactured Gas Plant (MGP) sites and
the recovery of related costs, and the impact of changes in market prices of
commodities are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can also be
identified by the use of forward-looking terminology such as "may," "intend,"
"expect," "continue," or comparable terminology and are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management.
The Company wishes to caution readers that the assumptions that form the
basis for forward-looking statements with respect to, or that may impact
earnings for, fiscal 2003 and thereafter include many factors that are beyond
the Company's ability to control or estimate precisely, such as estimates of
future market conditions, the behavior of other market participants and changes
in interest rates. Among the factors that could cause actual results to differ
materially from estimates reflected in such forward-looking statements are
weather conditions and economic conditions, demographic changes in NJNG's
service territory, fluctuations in energy commodity prices, energy conversion
activity and other marketing efforts, the conservation efforts of NJNG's
customers, the pace of deregulation of retail gas markets, access to adequate
supplies of natural gas, the regulatory and pricing policies of federal and
state regulatory agencies, changes due to legislation at the federal and state
level, the continued recoverability of environmental remediation expenditures,
and other regulatory and economic policy changes.
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and financial
condition in connection with its preparation of management's discussion and
analysis of results of operations and financial condition contained in its
quarterly and annual reports, the Company does not, by including this statement,
assume any obligation to review or revise any particular forward-looking
statement referenced herein in light of future events.
1
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED
DECEMBER 31,
2002 2001
-------- --------
(Thousands, except per share data)
OPERATING REVENUES ........................... $668,779 $395,831
-------- --------
OPERATING EXPENSES
Gas purchases .............................. 580,145 318,480
Operation and maintenance .................. 25,654 23,072
Depreciation and amortization .............. 8,081 8,431
Energy and other taxes ..................... 13,024 11,078
-------- --------
Total operating expenses ..................... 626,904 361,061
-------- --------
OPERATING INCOME ............................. 41,875 34,770
Other income ................................. 719 1,252
Interest charges, net ........................ 4,329 4,385
-------- --------
INCOME BEFORE INCOME TAXES ................... 38,265 31,637
Income tax provision ......................... 14,942 11,956
-------- --------
NET INCOME ................................... $ 23,323 $ 19,681
======== ========
EARNINGS PER COMMON SHARE-BASIC
NET INCOME .............................. $ .86 $ .74
======== ========
EARNINGS PER COMMON SHARE-DILUTED
NET INCOME .............................. $ .85 $ .73
======== ========
DIVIDENDS PER COMMON SHARE ................... $ .31 $ .30
======== ========
AVERAGE SHARES OUTSTANDING
BASIC ................................... 26,983 26,736
======== ========
DILUTED ................................. 27,325 27,080
======== ========
The December 31, 2001, common share and earnings-per-share data have been
restated for a 3-for-2 stock split, which became effective in March 2002.
See Notes to Consolidated Financial Statements
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
DECEMBER 31,
(Thousands) 2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................... $ 23,323 $ 19,681
Adjustments to reconcile net income to cash flows
Depreciation and amortization ..................... 8,081 8,431
Amortization of deferred charges .................. 1,358 1,223
Deferred income taxes ............................. 6,044 953
Manufactured gas plant remediation costs .......... (3,595) (2,794)
Change in working capital ......................... (52,695) (53,508)
Other, net ........................................ (6,279) (176)
--------- ---------
Net cash flows from operating activities ............ (23,763) (26,190)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock ......................... 2,523 2,615
Proceeds from long-term debt ....................... -- 42,950
Proceeds from sale-leaseback transaction ........... 5,294 20,631
Payments of long-term debt ......................... (50,622) (220)
Purchases of treasury stock ........................ -- (590)
Payments of common stock dividends ................. (8,072) (7,837)
Redemption of preferred stock ...................... (295) --
Net change in short-term debt ...................... 86,750 (19,600)
--------- ---------
Net cash flows from financing activities ............ 35,578 37,949
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for
Utility plant ..................................... (10,142) (11,298)
Real estate properties and other .................. (216) (53)
Cost of removal ................................... (711) (957)
Proceeds from asset sales .......................... 267 1,014
--------- ---------
Net cash flows from investing activities ............ (10,802) (11,294)
--------- ---------
Net change in cash and temporary investments ........ 1,013 465
Cash and temporary investments at September 30 ...... 1,282 4,044
--------- ---------
Cash and temporary investments at December 31 ....... $ 2,295 $ 4,509
========= =========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ........................................ $(118,793) $(110,248)
Inventories ........................................ (29,770) 3,801
Deferred gas costs ................................. 2,496 10,194
Purchased gas ...................................... 65,313 38,147
Prepaid and accrued taxes, net ..................... 20,253 12,176
Customers' credit balances and deposits ............ (6,359) 8,310
Accounts payable & other ........................... 6,115 (7,287)
Broker margin accounts ............................. 7,910 2,769
Other, net ......................................... 140 (11,370)
--------- ---------
Total ............................................... $ (52,695) $ (53,508)
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) .............. $ 5,474 $ 5,201
Income taxes ....................................... $ 3 $ 9,691
See Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2002 2002 2001
(unaudited) (unaudited)
------------ ------------- ------------
(Thousands)
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost ...................... $ 1,062,632 $ 1,053,086 $ 1,025,775
Real estate properties and other, at cost ... 25,358 25,144 26,808
1,087,990 1,078,230 1,052,583
----------- ----------- -----------
Accumulated depreciation and amortization ... (328,602) (321,833) (305,846)
----------- ----------- -----------
Property, plant and equipment, net ......... 759,388 756,397 746,737
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments .............. 2,295 1,282 4,509
Construction fund ........................... -- -- 3,600
Customer accounts receivable ................ 241,244 158,591 143,704
Unbilled revenues ........................... 41,821 4,679 43,005
Allowance for doubtful accounts ............. (5,298) (4,395) (3,236)
Regulatory assets ........................... 44,807 43,973 27,278
Gas in storage, at average cost ............. 116,099 86,340 66,384
Prepaid state taxes ......................... 450 10,973 --
Derivatives ................................. 12,303 8,136 4,734
Broker margin accounts ...................... 31,033 38,943 26,129
Other ....................................... 21,856 17,436 20,462
----------- ----------- -----------
Total current assets ....................... 506,610 365,958 336,569
=========== =========== ===========
DEFERRED CHARGES AND OTHER
Equity investments .......................... 14,132 14,302 14,572
Regulatory assets ........................... 126,873 134,537 101,676
Derivatives ................................. 6,341 10,952 14,557
Other ....................................... 29,857 37,158 38,980
----------- ----------- -----------
Total deferred charges and other ........... 177,203 196,949 169,785
----------- ----------- -----------
Total assets ......................... $ 1,443,201 $ 1,319,304 $ 1,253,091
=========== =========== ===========
See Notes to Consolidated Financial Statements
4
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2002 2002 2001
(unaudited) (unaudited)
------------ ------------- ------------
(Thousands)
CAPITALIZATION
Common stock equity ............................ $ 385,210 $ 361,453 $ 361,790
Redeemable preferred stock ..................... -- 295 298
Long-term debt ................................. 344,892 370,628 390,803
---------- ---------- ----------
Total capitalization ......................... 730,102 732,376 752,891
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt ........... 2,350 26,942 26,886
Short-term debt ................................ 151,650 59,900 66,200
Purchased gas .................................. 234,095 168,782 123,473
Accounts payable and other ..................... 45,799 39,684 29,932
Dividends payable .............................. 8,369 8,072 8,030
Accrued taxes .................................. 27,811 15,025 22,554
Derivatives .................................... 12,495 25,397 12,125
Customers' credit balances and deposits ........ 17,283 23,642 22,733
---------- ---------- ----------
Total current liabilities .................... 499,852 367,444 311,933
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes .......................... 101,466 92,435 88,555
Deferred investment tax credits ................ 9,062 9,148 9,410
Deferred revenue ............................... 14,619 15,019 16,220
Derivatives .................................... 3,151 6,612 3,291
Manufactured gas plant remediation ............. 65,830 65,830 53,840
Postretirement employee benefit liability ...... 7,714 19,950 6,847
Other .......................................... 11,405 10,490 10,104
---------- ---------- ----------
Total deferred credits ....................... 213,247 219,484 188,267
---------- ---------- ----------
Total capitalization and liabilities .... $1,443,201 $1,319,304 $1,253,091
========== ========== ==========
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). The
September 30, 2002 balance sheet data is derived from the audited financial
statements of New Jersey Resources Corporation (NJR or the Company). Although
management believes that the disclosures are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 2002 Annual Report on Form 10-K.
In the opinion of management, the information furnished reflects all
adjustments necessary for a fair statement of the results of the interim
periods. Because of the seasonal nature of the Company's utility operations and
NJR Energy Services Company (Energy Services) operations, and other factors, the
results of operations for the interim periods presented are not indicative of
the results to be expected for the entire year.
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," (SFAS 148), an amendment of
FASB Statement No 123. SFAS 148 provides implementation guidance for the
adoption of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123),
which the Company adopted as of October 1, 2002. The Company has complied with
the guidelines of SFAS 148 with respect to the adoption and disclosure of SFAS
123 (See Note 5.-Earnings Per Share (EPS)).
The Company completed its assessment of SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143), which became effective October 1,
2002, and based on its analysis, the Company does not expect this statement to
have a material effect on its financial position, results of operations, or cash
flows. SFAS 143 requires the Company to disclose certain asset retirement
information. As of December 31, 2002, September 30, 2002, and December 31, 2001,
the Company had asset retirement costs recovered through rates in excess of
actual costs incurred totaling $69.1 million, $67.8 million, and $65.5 million,
respectively, which are included in Accumulated depreciation on the Consolidated
Balance Sheets.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, New Jersey Natural Gas Company (NJNG), Energy Services,
NJR Retail Holdings Corporation (Retail Holdings), NJR Capital Services
Corporation (Capital) and NJR Service Corporation. Significant intercompany
transactions and accounts have been eliminated.
The Retail and Other segment includes Retail Holdings and its wholly-owned
subsidiary, NJR Home Services Company (Home Services). Home Services has a
wholly-owned subsidiary, NJR Plumbing Services Company. Retail and Other also
includes Capital and its wholly-owned subsidiaries, Commercial Realty &
Resources Corp. (CR&R), NJR Investment Company and NJR Energy Corporation (NJR
Energy).
6
3. Capitalized and Deferred Interest
The Company's capitalized interest totaled $81,000 and $122,000 for the
three months ended December 31, 2002 and 2001, respectively.
Pursuant to a New Jersey Board of Public Utilities (BPU) order, NJNG's
carrying costs are recoverable on uncollected balances related to underrecovered
gas costs through October 31, 2001 (see Note 4b.-BGSS and Other Adjustment
Clauses) and its MGP remediation expenditures (see Note 4c.-Manufactured Gas
Plant Remediation). Accordingly, Other income included $525,000 and $874,000 of
deferred interest related to remediation and underrecovered gas costs for the
three months ended December 31, 2002 and 2001, respectively.
4. Legal and Regulatory Proceedings
a. Energy Deregulation Legislation
In February 1999, the Electric Discount and Energy Competition Act
(EDECA), which provides the framework for the restructuring of New Jersey'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 Basic
Gas Supply Service (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 additional
customer choices, including various pricing options. In January 2002, the BPU
issued an order, which stated that BGSS could be provided by suppliers other
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.
b. BGSS and Other Adjustment Clauses
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. In January 2003, NJNG updated the BGSS request to seek a 6
percent price increase effective February 1, 2003. On February 5, 2003, NJNG
received a provisional 6 percent price increase, subject to refund with
interest, reflecting higher projected gas costs. The parties to the BGSS
proceeding are reviewing the filing to extend the BGSS incentives beyond October
31, 2003, discussed below.
NJNG is incited to reduce the BGSS costs through a series of
margin-sharing programs which include off-system sales, capacity release and
portfolio-enhancing programs. On October 30, 2002, the BPU approved an agreement
whereby the existing 85/15 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 an incentive for the permanent
reduction of the cost of capacity, continued to receive 60/40 sharing treatment
between customers and shareowners for transactions completed on or before
December 31, 2002. Any
7
new transactions that become effective after January 1, 2003, would not be
eligible under the portfolio-enhancing programs. Management believes that the
elimination of the portfolio-enhancing program will not have a material effect
on its financial position, results of operations or cash flows. Management also
believes as part of the BGSS proceedings that it can replace these programs with
new incentive-based programs that will not have a material effect on its
financial position, results of operations or cash flows. No assurance can be
given as to the ultimate resolution of this matter.
NJNG is also involved in various proceedings associated with several other
adjustment clauses (e.g., Transportation Initiation Clause (TIC) and New Jersey
Clean Energy Program, formerly known as Comprehensive Resource Analysis) which
in management's opinion will not have a material adverse effect on its financial
condition or results of operations. (See Item.1-Business Segments-Regulation and
Rates in the Company's Form 10-K).
c. Manufactured Gas Plant (MGP) Remediation
NJNG has identified 11 former MGP sites, dating back to the late 1800s and
early 1900s, which contain contaminated residues from the former gas
manufacturing operations. Ten of the 11 sites in question were acquired by NJNG
in 1952. All of the gas manufacturing operations ceased at these sites at least
by the mid-1950s and in some cases had been discontinued many years earlier, and
all of the former gas manufacturing facilities were subsequently dismantled by
NJNG or the previous owners. Since October 1989, NJNG has entered into
Administrative Consent Orders or Memoranda of Agreement with the NJDEP covering
all 11 sites. These orders and agreements establish the procedures to be
followed by NJNG in developing a final remedial clean-up plan for each site.
NJNG is currently involved in administrative proceedings with the New Jersey
Department of Environmental Protection (NJDEP) with respect to the plant sites
in question, and is participating in various studies and investigations by
outside consultants to determine the nature and extent of any such contaminated
residues and to develop appropriate programs of remedial action, where
warranted.
Until September 2000, most of the cost of such studies and investigations
had been shared under an agreement with the former owner and operator of 10 of
the MGP sites. In September 2000, a revised agreement was executed pursuant to
which NJNG is responsible for two of the sites, 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 the two sites it
remains responsible for. NJNG continues to participate in the investigation and
remedial action for one MGP site that was not subject to the original
cost-sharing agreement. Through a Remediation Rider approved by the BPU, NJNG is
recovering its remediation expenditures incurred through June 30, 1998, over a
seven-year period. Costs incurred subsequent to June 30, 1998, including
carrying costs on the deferred expenditures (see Note 3 to the Consolidated
Financial Statements - Capitalized and Deferred Interest), will generally be
reviewed annually and recovered over rolling seven-year periods, subject to BPU
approval. In September 1999, NJNG filed for recovery of expenditures incurred
through June 30, 1999. In January 2001, NJNG filed for recovery of expenditures
incurred through June 30, 2000. The BPU is currently reviewing both filings.
In March 1995, NJNG instituted an action for declaratory relief against 24
separate insurance companies in the Superior Court of New Jersey, Docket number
OCM-L-859-95. These insurance carriers provided comprehensive general liability
coverage to NJNG from 1951 through 1985. The complaint was amended in July 1996
to name Kaiser-Nelson Steel and Salvage Company (Kaiser-Nelson) and its
successors as additional defendants. In September 2001, NJNG reached a favorable
settlement
8
with the insurance carrier that provided the majority of NJNG's coverage. This
settlement involves a significant cash payment to NJNG that will be paid in
four installments. NJNG has now dismissed or reached a settlement with all of
its insurance carriers. NJNG continues to pursue its claim against Kaiser-Nelson
for environmental damages caused by Kaiser-Nelson's decommissioning of
structures at several MGP sites.
d. Various
The Company is party to various other claims, legal actions and complaints
arising in the ordinary course of business. In management's opinion, the
ultimate disposition of these matters will not have a material adverse effect on
its financial condition or results of operations.
5. Earnings Per Share (EPS)
According to SFAS No. 128 "Earnings Per Share," which established
standards for computing and presenting basic and diluted EPS, the incremental
shares required for inclusion in the denominator for the diluted EPS calculation
were 341,459 and 343,839 for the three months ended December 31, 2002 and 2001,
respectively. These shares relate to stock options and restricted stock and were
calculated using the treasury stock method. The numerator for each applicable
basic and diluted EPS calculation was net income.
Effective October 1, 2002, the Company has adopted the fair value method
of recording stock-based compensation under Statement of SFAS No. 123
"Accounting for Stock-Based Compensation," as amended (SFAS 123), which is
considered the preferred method of accounting. The Company adopted the
prospective application of SFAS 123 for options granted after October 1, 2002,
the cost of which will be expensed through the income statement based on the
fair value of the award at the grant date. The Company will present pro forma
presentation in tabular format for awards issued prior to October 1, 2002, which
are accounted for under Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees." The Company did not recognize any expense
related to stock options in the first quarter ended December 31, 2002, since no
options were granted. The following is a comparison of the as reported and pro
forma net income for options granted prior to October 1, 2002.
Three Months Ended
December 31
2002 2001
---------- ----------
As Reported: (Thousands)
Net Income $ 23,323 $ 19,681
---------- ----------
Earnings Per Share-Basic $ .86 $ .74
---------- ----------
Earnings Per Share-Diluted $ .85 $ .73
---------- ----------
Pro Forma for options issued
prior to October 1, 2002:
Net Income $ 22,804 $ 19,129
---------- ----------
Earnings Per Share-Basic $ .85 $ .72
---------- ----------
Earnings Per Share-Diluted $ .83 $ .71
---------- ----------
9
6. Construction Fund and Long-Term Debt
On December 23, 2002, the Company renewed and extended its $380 million
committed credit facilities with several banks, which replaced a $335 million
revolving credit agreement. The NJR portion of the facility consists of $100
million with a 364-day term and $80 million with a three-year term expiring
January 2006, and the NJNG portion of the facility consists of $150 million with
a 364-day term and $50 million with a three-year term expiring January 2006. The
NJR facilities are used to finance unregulated operations. NJNG's facilities are
used to support its commercial paper borrowings. Consistent with management's
intent to maintain a portion of its commercial paper borrowings on a long-term
basis, and as supported by its long-term revolving credit facility, $20 million,
$25 million and $50 million of commercial paper borrowings are included in
Long-term debt on the Consolidated Balance Sheet at December 31, 2002, September
30, 2002 and December 31, 2001, respectively.
In July 2002, the New Jersey Economic Development Authority (EDA) approved
$12 million of new funds to finance NJNG's northern division construction over
the next three years.
In July 2002, NJNG entered into $97.1 million of interest-rate caps with
several banks at a rate of 3.25 percent, expiring in July 2004. These caps are
designed to limit NJNG's variable rate debt exposure for all of its outstanding
tax exempt EDA Bonds.
In fiscal 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 2002, NJNG received $5.3 million under this
agreement in connection with the sale-leaseback of its vintage 2001 meters.
Management has the ability to continue the sale-leaseback meter program on an
annual basis.
In December 2002, NJNG's $25 million, 7.5 percent Series V First Mortgage
Bonds matured.
10
7. Segment Reporting
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 service, sales and
installation of appliances, commercial real estate development, investment and
other corporate activities.
Three Months Ended
December 31
2002 2001
--------- ---------
(Thousands)
Operating Revenues
Natural Gas Distribution $ 226,084 $ 219,948
Energy Services 438,812 170,888
Retail and Other 4,999 5,093
--------- ---------
Subtotal 669,895 395,929
Intersegment revenues (1,116) (98)
--------- ---------
Total $ 668,779 $ 395,831
========= =========
Operating Income
Natural Gas Distribution $ 34,798 $ 29,998
Energy Services 6,920 3,525
Retail and Other 157 1,247
--------- ---------
Total $ 41,875 $ 34,770
========= =========
The Company's assets of each of the various business segments are detailed
below:
As of As of As of
December 31, 2002 September 30, 2002 December 31, 2001
----------------- ------------------ -----------------
(Thousands)
Assets
Natural Gas Distribution $1,110,765 $1,059,417 $1,079,109
Energy Services 247,480 207,964 123,509
Retail and Other 84,956 51,923 50,473
---------- ---------- ----------
Total $1,443,201 $1,319,304 $1,253,091
========== ========== ==========
8. Investments
Included in Equity investments on the Consolidated Balance Sheet is the
Company's less-than-1-percent ownership interest in the Capstone Turbine
Corporation (Capstone), a developer of microturbines. In July 2001, the Company
entered into a five-year zero-premium collar to hedge changes in the value of
100,000 shares of its investment in Capstone. The collar consists of a purchased
put option with a strike price of $9.97 per share and a sold call option with a
strike price of $24.16 per share for 100,000 shares. The Company entered into
this transaction to hedge its anticipated sale of 100,000 shares of Capstone at
the settlement date in 2006 and, accordingly, accounts for the transaction as a
cash flow hedge with changes in fair value accounted for in Other comprehensive
income. The change in Other comprehensive
11
income for the three months ended December 31, 2002, was a $13,000 unrealized
loss related to this collar. Through December 31, 2002, Accumulated other
comprehensive income includes an $828,000 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.
9. Comprehensive Income
The components of Comprehensive income are as follows:
Three Months Ended
December 31,
2002 2001
-------- --------
(Thousands)
Net income $ 23,323 $ 19,681
-------- --------
Other comprehensive income:
Change in fair value of equity investments, net (105) 601
Change in fair value of derivatives, net 6,791 (6,824)
-------- --------
Total Other comprehensive income $ 6,686 $ (6,223)
-------- --------
Comprehensive income $ 30,009 $ 13,458
======== ========
Accumulated other comprehensive income, included in Stockholders equity on
the Consolidated Balance Sheets, was a negative $5.7 million at December 31,
2002, a negative $12.4 million at September 30, 2002 and $3.4 million at
December 31, 2001.
The amounts included in Other comprehensive income, which relate to
natural gas instruments, will reduce or be charged to gas costs as the
underlying physical transaction occurs. Based on the amount recorded in
Accumulated other comprehensive income at December 31, 2002, $5.1 million is
expected to be recorded as an increase to gas costs for the remainder of fiscal
2003. For the three months ended December 31, 2002 and 2001, $4.5 million was
charged and $15.3 million was credited to gas costs, respectively.
The cash flow hedges described above cover various periods of time ranging
from February 2003 to October 2010.
10. Commitments and Contingent Liabilities
NJNG is involved with the environmental investigations and remedial
actions at certain MGP sites (see Note 4c. - Manufactured Gas Plant (MGP)
Remediation). 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 materially from these estimates.
Where available information is sufficient to
12
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 $50.3 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, and the ultimate
ability of other responsible parties to pay. NJNG will continue to seek recovery
of such costs through a Remediation Rider but can give no assurance that all
such costs will be recovered.
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 in June 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 three-year
agreements with third parties for the purchase of over 50 percent of the
required level of services from Stagecoach. In August 2002, NJNG, in connection
with its system requirements, was awarded two-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 two-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 material 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.
13
11. Regulatory Assets
At December 31, 2002 and 2001, respectively, the Company had the following
regulatory assets on the Consolidated Balance Sheets:
As of As of As of
December 31, September 30, December 31,
2002 2002 2001
------------ ------------- ------------
(Thousands)
Regulatory assets-current
Underrecovered gas costs $ 34,909 $ 33,912 $ 17,421
Weather-normalization clause 9,898 10,061 9,857
-------- -------- --------
$ 44,807 $ 43,973 $ 27,278
======== ======== ========
Regulatory assets - non-current
Remediation costs
Expended, net $ 60,690 $ 65,687 $ 44,823
Liability for future expenditures, net 50,330 42,330 30,340
Underrecovered gas costs 11,625 15,118 20,726
Postretirement benefit costs 3,247 3,322 3,548
Weather-normalization clause -- 4,858 722
Derivatives -- 2,562 1,312
Other 981 660 205
-------- -------- --------
$126,873 $134,537 $101,676
======== ======== ========
12. Other
At December 31, 2002, there were 26,990,115 shares of common stock
outstanding and the book value per share was $14.27.
Certain reclassifications have been made of previously reported amounts to
conform with current year classifications.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002
RESULTS OF OPERATIONS
Consolidated net income for the quarter ended December 31, 2002 increased
18 percent to $23.3 million, compared with $19.7 million for the same period
last year. Basic EPS increased 16 percent to $.86, compared with $.74 last year.
Diluted EPS increased 16 percent to $.85, compared with $.73 last year.
The increase in consolidated net income for the three months ended
December 31, 2002 was attributable primarily to continued profitable customer
growth and colder weather in the Company's principal subsidiary, NJNG, and
continued growth in Energy Services.
Natural Gas Distribution OPERATIONS
NJNG's financial results are summarized as follows:
Three Months Ended
December 31,
2002 2001
------- -------
(Thousands)
Gross margin
Residential and commercial $53,966 $49,952
Transportation 7,997 6,083
------- -------
Total firm margin 61,963 56,035
Off-system and capacity management 1,218 1,635
Interruptible 220 212
------- -------
Total gross margin $63,401 $57,882
======= =======
Operation and maintenance expense $20,050 $19,142
======= =======
Operating income $34,798 $29,998
======= =======
Other income $ 403 $ 1,101
======= =======
Net income $19,523 $17,134
======= =======
Gross Margin
Gross margin is defined as gas revenues less gas purchases, sales tax and
a Transitional Energy Facilities Assessment (TEFA), which is included in Energy
and other taxes on the Consolidated Statements of Income. Management believes
that gross margin provides a more meaningful basis for evaluating utility
operations since gas costs, sales tax and TEFA are passed through to customers
and, therefore, have no effect on earnings. Gas costs are charged to operating
expenses on the basis of therm sales at the rates included in NJNG's tariff. The
BGSS allows NJNG to recover gas costs that exceed the level reflected in its
base rates. Sales tax is calculated at 6 percent of revenue and excludes sales
to cogeneration facilities, other utilities, off-system sales and federal
accounts. TEFA is calculated on a per-therm basis and excludes sales to
cogeneration facilities, other utilities and off-system sales.
15
Firm Margin
Residential and commercial, which we consider to be firm gross margin, is
subject to a Weather Normalization Clause (WNC), which provides for a revenue
adjustment if the weather varies by more than one-half of 1 percent from normal,
or 20-year average, weather. The WNC does not fully protect NJNG from factors
such as unusually warm weather and declines in customer usage patterns, which
were set at the conclusion of NJNG's last base rate case in January 1994. The
accumulated adjustment from one heating season (i.e., October through May) is
billed or credited to customers in subsequent periods. This mechanism reduces
the variability of both customer bills and NJNG's 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 increased $5.9 million, or 10.6 percent, for the three
months ended December 31, 2002, compared with the same period last year, due
primarily to 36 percent colder weather and customer growth compared with the
same period last year.
The weather for the three months ended December 31, 2002 was 10 percent
colder than normal, which, in accordance with the WNC, resulted in the deferral
of $1.6 million of gross margin to be refunded to NJNG's customers in the
future. At December 31, 2002, NJNG had a net $9.9 million in accrued WNC margin
to be collected from its customers through fiscal 2004. NJNG estimates that for
the three months ended December 31, 2002, the colder weather resulted in
approximately $600,000 of additional margin beyond the amount recorded in the
WNC.
Gross margin from sales to residential and commercial customers increased
$4 million, or 8 percent, for the three months ended December 31, 2002, compared
with the same period last year. The increase was due primarily to the colder
weather and the impact of 11,207 customer additions during the 12 months ended
December 31, 2002. Sales to residential and commercial customers were 17.1 Bcf
for the three months ended December 31, 2002, compared with 13.1 Bcf for the
same period last year.
Gross margin from transportation service increased $1.9 million, or 31
percent, for the three months ended December 31, 2002, compared with the same
period last year. The increase was due primarily to an increase in customers
utilizing the transportation service and colder weather. NJNG transported 3 Bcf
and 2.1 Bcf for the three months ended December , 2002 and 2001, respectively.
NJNG had 19,903 and 10,273 residential customers and 4,593 and 3,566
commercial customers using transportation service at December 31, 2002 and 2001,
respectively. The increase in the number of transportation customers was due
primarily to increased activity by third-party suppliers.
Off-System and Capacity Management
To reduce the overall cost of its 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
16
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 retained 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 retained 40
percent of the savings for the first 12 months following any transaction and 15
percent for the remaining period through December 31, 2002, with 60 percent and
85 percent, respectively, credited to firm sales customers through the BGSS.
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, receives 60/40 sharing treatment between
customers and shareowners for transactions completed on or before December 31,
2002. Any new transactions that become effective after January 1, 2003, would
not be eligible under the portfolio-enhancing programs. Management believes that
the elimination of the portfolio-enhancing program will not have a material
effect on its financial position, results of operations or cash flows.
Management also believes as part of the BGSS proceedings that it can replace
these programs with new incentive-based programs that will not have a material
effect on its financial position, results of operations or cash flows. No
assurance can be given as to the ultimate resolution of this matter.
NJNG's off-system sales, capacity management and FRM programs totaled 14
Bcf and generated $1.2 million of gross margin, for the three months ended
December 31, 2002, compared with 26.2 Bcf and $1.6 million of gross margin for
the respective period last year. The decrease in margin was due primarily to
lower results from the FRM program.
Interruptible
NJNG serves 52 customers through interruptible sales and/or transportation
tariffs. Sales made under the interruptible sales tariff are priced on
market-sensitive oil and gas parity rates. Although therms sold and transported
to interruptible customers represented 5 percent of total throughput for the
three months ended December 31, 2002 and 2001, they accounted for less than 1
percent of the total gross margin in each period due to the margin-sharing
formulas that govern these sales. Under these formulas, NJNG retains 10 percent
of the gross margin from interruptible sales and 5 percent of the gross margin
from transportation sales, with 90 percent and 95 percent, respectively,
credited to firm sales customers through the BGSS. Interruptible sales were .1
Bcf for the three months ended December 31, 2002 and 2001. In addition, NJNG
transported 1.6 Bcf and 2.3 Bcf for the three months ended December 31, 2002 and
2001, respectively, for its interruptible customers.
17
Operation & Maintenance (O&M) Expense
O&M expense increased $908,000, or 4.7 percent, for the three months ended
December 31, 2002, compared with the same period last year due primarily to
higher insurance and pension costs.
Operating Income
Operating income increased $5 million, or 17 percent, for the three months
ended December 31, 2002, compared with the same period last year. The increase
was due primarily to the increase in total gross margin described above, and a
decrease in depreciation expense, which 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. These
increases were partially offset by the increased O&M described above.
Net Income
Net income increased $2.4 million, or 14 percent, for the three months
ended December 31,2002, compared with the same period last year due primarily to
higher operating income mentioned above. The increase was partially offset by an
increase in income taxes and a decrease in carrying costs on deferred regulatory
assets, which is included in Other income.
ENERGY SERVICES OPERATIONS
Energy Services provides unregulated wholesale energy services, including
natural gas supply, pipeline capacity and storage management to customers in New
Jersey and in states from the Gulf Coast to New England and Canada.
Energy Services' natural gas marketing activities include contracting to
buy natural gas from suppliers at various points of receipt, aggregating natural
gas supplies and arranging for their transportation, negotiating the sale of
natural gas and matching natural gas receipts and deliveries based on volumes
required by clients. Energy Services' customers include energy marketers,
utilities, natural gas producers and pipeline and storage operators among
others.
Three Months Ended
December 31,
2002 2001
-------- --------
(Thousands)
Revenues $438,812 $170,888
======== ========
Gross margin $ 8,209 $ 4,420
======== ========
Operating income $ 6,920 $ 3,525
======== ========
Other income $ 46 $ 55
======== ========
Net income $ 3,871 $ 2,136
======== ========
Energy Services' revenues increased for the three months ended December
31, 2002, compared to the same period last year due primarily to an increase in
the price of gas and higher gas volumes sold and
18
managed. Energy Services' gross margin, operating income and net income
increased for the three months ended December 31, 2002, compared with the same
period last year, as a result of continued volatility in the natural gas
commodity markets and increased capacity management and storage throughput.
Energy deliveries totaled 101.8 Bcf for the three months ended December
31, 2002, compared with 60.9 Bcf for the same period last year. The increase was
due primarily to additional volumes from pipeline, storage and capacity
transactions, and additional sales to wholesale customers.
RETAIL AND OTHER OPERATIONS
Retail and other consists primarily of Home Services, which provides
service, sales and installation of appliances to approximately 130,000
customers, CR&R, which develops commercial real estate, and NJR Energy, which
consists primarily of equity investments in Capstone and the Iroquois Gas
Transmission System, L.P. (Iroquois). The consolidated financial results of
Retail and other are summarized as follows:
Three Months Ended
December 31,
2002 2001
------- ------
(Thousands)
Revenues $ 4,999 $5,093
======= ======
Other income $ 270 $ 96
======= ======
Net (loss)/income $ (71) $ 411
======= ======
Retail and other revenues for the three months ended December 31, 2002
decreased slightly compared with the same period last year due primarily to
lower rental revenue associated with the sale of a building in June 2002, which
more than offset increased revenue at Home Services. Revenue in Home Services
increased due primarily to price increases on appliance service contracts.
Net income for the three months ended December 31, 2002 decreased compared
with the same period last year due primarily to higher pension costs.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its common equity requirements, if any, through new
issuances of its common stock, including the proceeds from its Automatic
Dividend Reinvestment Plan (DRP). The DRP allows the Company to use newly issued
shares to satisfy its funding requirements. The Company also has the option of
using shares purchased on the open market.
In order to meet the working capital and external debt financing
requirements of its unregulated subsidiaries, as well as its own working capital
needs, the Company maintains committed credit facilities
19
with several banks. On December 23, 2002, the Company renewed and extended its
committed credit facilities totaling $380 million. The NJR portion of the
facility consists of $100 million with a 364-day term and $80 million with a
three-year term expiring in January 2006. At December 31, 2002, there was $138.4
million outstanding under these agreements. NJNG satisfies its debt needs by
issuing short- and long-term debt based upon its own financial profile.
The following table is a summary of contractual cash obligations and their
applicable payment due dates.
Payments Due by Period
Less
than 1 1-3 4-5
Contractual Obligations Total Year Years Years After 5 Years
- ----------------------- ---------- -------- -------- -------- -------------
(Thousands)
Long-term debt $ 292,845 -- $125,000 -- $167,845
Capital lease obligations 54,397 $ 2,350 7,751 $ 2,826 41,470
Operating leases 8,296 2,594 4,252 532 918
Short-term debt 151,650 151,650 -- -- --
Potential storage obligations 159,870 904 19,658 42,159 97,149
Gas supply purchase obligations 902,490 154,475 416,682 146,486 184,847
---------- -------- -------- -------- --------
Total contractual cash obligations $1,569,548 $311,973 $573,343 $192,003 $492,229
========== ======== ======== ======== ========
NJNG
The seasonal nature of NJNG's operations creates large short-term cash
requirements, primarily to finance gas purchases and customer accounts
receivable. NJNG obtains working capital for these requirements, as well as for
the temporary financing of construction and gas remediation expenditures and
energy tax payments, through the issuance of commercial paper and short-term
bank loans. The NJNG portion of the committed credit facility, which was renewed
on December 23, 2002, totaling $200 million, consists of $150 million with a
364-day term and $50 million with a three-year term expiring in January 2006.
This facility is used to support the issuance of commercial paper. In December
2002, NJNG received $5.3 million in connection with the sale-leaseback of its
vintage 2001 meters under a financing agreement.
Remaining fiscal 2003 construction expenditures are estimated at $40
million. These expenditures will be incurred for services, mains and meters to
support NJNG's continued customer growth, and general system renewals and
improvements. In addition, NJNG estimates additional MGP remediation
expenditures of approximately $20 million (see Note 4c - Manufactured Gas Plant
Remediation).
NJNG expects to finance these expenditures through internal generation and
the issuance of short- and long-term debt. 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.
20
Credit Ratings
The table below summarizes NJNG's credit ratings issued by two rating
entities, Standard and Poor's Rating Information Service, a division of
McGraw-Hill (Standard & Poor's), and Moody's Investor Service, Inc. (Moody's).
Standard &
Poor's Moody's
------ -------
Corporate Rating A N/A
Commercial Paper A-1 P-1
Senior Secured A+ A2
Ratings Outlook Positive Stable
NJNG is not party to any lending agreements that would accelerate the
maturity date of any obligation due to a failure to maintain any specific credit
rating.
ENERGY SERVICES
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
CR&R has signed a 15-year lease to construct a 200,000-square-foot
build-to-suit building in the Monmouth Shores Corporate Office Park II. This
transaction is subject to the receipt of certain permits and approvals. Total
construction expenditures are estimated at $22.5 million with an expected
completion date in the third fiscal quarter of 2004. These expenditures will be
financed through the NJR portion of the committed credit facilities.
Expenditures for the project through December 31, 2002, totaled $217,000,
excluding the cost of the land.
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
21
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 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 MGP sites, which are discussed below under Environmental
Items, and the WNC, which is discussed in Natural Gas Distribution Operations
segment of the MD&A. If there are changes in future regulatory positions that
indicate the recovery of such regulatory assets is not probable, the related
cost would be charged to income.
Derivatives
Derivative activities are recorded in accordance with 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
as of December 31, 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,
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
22
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.
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 December 31, 2002, $111 million of previously incurred
and accrued remediation costs, net of insurance recoveries, is included in
Regulatory assets on the Consolidated Balance Sheet.
Unbilled Revenue
Revenues related to the sale of natural gas are generally recorded when
natural gas is delivered to customers. However, the determination of the natural
gas sales to individual customers is based on the reading of their meters, which
occurs on a systematic basis throughout the month. At the end of each month,
amounts of natural gas delivered to customers since the date of the last meter
reading are estimated and the corresponding unbilled revenue is estimated. This
unbilled revenue is estimated each month based on monthly natural gas delivered
into the system, unaccounted for gas based on historical results, and applicable
customer rates.
Postretirement Employee Benefits
The Company's costs of providing postretirement employee benefits (see
Note 9.-Employee Benefit Plans in the Company's 2002 Annual Report on Form 10-K)
are dependent upon numerous factors resulting from actual plan experience and
assumptions of future experience.
Postretirement employee benefit costs, for example, are impacted by actual
employee demographics (including age, compensation levels, and employment
periods), the level of contributions made to the plans, and the return on plan
assets. Changes made to the provisions of the plans may also impact current and
future postretirement employee benefit costs. Postretirement employee benefit
costs may also be significantly affected by changes in key actuarial
assumptions, including anticipated rates of return on plan assets, health care
cost trends, and discount rates used in determining the projected benefit
obligations. In determining postretirement employee benefit obligations and cost
amounts, assumptions can change from period to period, which could result in
material changes to net postretirement employee benefit periodic cost and
related liability recognized by the Company.
The Company's postretirement employee benefit plan assets consist
primarily of corporate equities and obligations, U.S. Government obligations and
cash equivalents. Fluctuations in actual equity market returns as well as
changes in interest rates may result in increased or decreased postretirement
employee benefit costs in future periods.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
Natural gas is a nationally traded commodity, and its prices are
determined effectively by the New York Mercantile Exchange (NYMEX) and
over-the-counter markets. The prices on the NYMEX and over-the-counter markets
generally reflect the notional balance of natural gas supply and demand, but are
also influenced significantly from time to time by other events.
The regulated and unregulated natural gas businesses of the Company and
its subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and
over-the-counter swap agreements. To manage these instruments, the Company has
well-defined risk management policies and procedures, which include daily
monitoring of volumetric limits and monetary guidelines. The Company's natural
gas businesses are conducted through three of its operating subsidiaries. First,
NJNG is a regulated utility whose recovery of gas costs is protected by the
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 20.9 Bcf of natural gas (Gas Sale
Contract) to a gas marketing company.
NJR Energy has hedged both its price and physical delivery risks
associated with the Gas Sale Contract. To hedge its price risk, NJR Energy
entered into two swap agreements effective November 1995. Under the terms of
these swap agreements, NJR Energy will pay to its swap counterparties the
identical fixed price it receives from the gas marketing company in exchange for
the payment by such swap counterparties of a floating price based on an index
price plus a spread per Mmbtu for the total volumes under the Gas Sale Contract.
In order to hedge its physical delivery risk, NJR Energy entered into a purchase
contract with a second gas marketing company for the identical volumes that it
is obligated to sell under the Gas Sale Contract, under which it pays the
identical floating price it receives under the swap agreements mentioned above.
The following table reflects the changes in the fair market value of
commodity derivatives from September 30, 2002 to December 31, 2002.
Balance Increase Less Balance
September 30, (Decrease) in Fair Amounts December 31,
2002 Market Value Settled 2002
------------- ------------------ ------- ------------
(Thousands)
NJNG $ (2,564) $ (87) $(3,111) $ 460
Energy Services (14,689) 6,058 (2,216) (6,415)
NJR Energy 3,362 5,478 780 8,060
-------- -------- ------- -------
Total $(13,891) $ 11,449 $(4,547) $ 2,105
======== ======== ======= =======
24
There were no contracts originated and valued at fair market value and no
changes in methods of valuations during the three months ended December 31,
2002.
The following is a summary of fair market value of commodity derivatives
at December 31, 2002, by method of valuation and by maturity.
After Total
2004 2005-2007 2006 Fair Value
------- --------- ------ ----------
(Thousands)
Price based
on NYMEX $ 598 $(14,776) $ 85 $(14,093)
Price based on
over-the-counter
published
quotations 5,254 8,596 1,275 15,125
Price based upon
models -- 688 385 1,073
------- -------- ------ --------
$ 5,852 $ (5,492) $1,745 $ 2,105
======= ======== ====== ========
The following is a summary of commodity derivatives by type as of December
31, 2002:
Amounts included in
Volume Price per Derivatives
(Bcf) Mmbtu (Thousands)
------ --------- -------------------
NJNG
Futures 4.65 3.11 - 4.56 $ 2,566
Options 1.6 3.10 - 10.00 4,397
Swaps 35.4 -- (6,503)
Energy Services
Futures 1.1 2.85 - 5.47 (7,253)
Swaps 33.0 -- 838
NJR Energy
Swaps 23.0 -- 8,060
-------
$ 2,105
=======
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 December 31, 2002,
using the variance-covariance method with a 95 percent confidence level and a
one-day holding period, was $134,000. The VAR with a 99 percent confidence level
and a 10-day holding period was $598,000. The calculated VAR represents an
estimate of the potential change in the value of the net positions. These
estimates may not be indicative of actual results since actual market
fluctuations may differ from forecasted fluctuations.
25
Interest Rate Risk - Long-Term Debt
As of December 31, 2002, the Company (excluding NJNG) had variable rate,
long-term debt of $80 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 $472,000.
At December 31, 2002, NJNG had total variable-rate, long-term debt
outstanding of $117.1 million, of which $97.1 million has been hedged by the
purchase of a 3.25-percent interest-rate cap through July 2004. According to the
Company's sensitivity analysis, at December 31, 2002, NJNG's annual interest
rate exposure on the $97.1 million, based on the difference between current
average rates and the 3.25 percent interest-rate cap, is limited to $189,000,
net of tax. If interest rates were to change by 1 percent on the remaining $20
million of variable rate debt at December 31, 2002, NJNG's annual interest
expense, net of tax, would change by $118,000.
26
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, an evaluation
was carried out, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective, in all
material respects, with respect to the recording, processing, summarizing and
reporting, within the time periods specified in the SEC's rules and forms, of
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation described above.
27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Information required by this Item is incorporated herein by reference to
Part I, Item 1, Note 4 - Legal and Regulatory Proceedings.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4-1 $200 million revolving credit agreement by and among NJNG and PNC Bank, as
agent, dated December 23, 2002
4-2 $180 million revolving credit agreement by and among New Jersey Resources
Corporation and PNC Bank, as agent, dated December 23, 2002
99-1 Certification of the Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act*
99-2 Certification of the Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act*
* This certificate accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company
for purposes of Section 18 or any other provision of the Securities
Exchange Act of 1934, as amended.
(b) Reports on Form 8-K
On December 9, 2002, a report on Form 8-K was filed by the Company
furnishing under Item 9 information disclosed pursuant to Regulation FD.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION
--------------------------------
Date: February 14, 2003 /s/ Glenn C. Lockwood
--------------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
29
CERTIFICATIONS
I, Laurence M. Downes, certify that:
1) I have reviewed this Quarterly Report on Form 10-Q of New Jersey Resources
Corporation;
2) Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
Quarterly Report;
4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b.) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Quarterly Report (the "Evaluation Date"); and
c.) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6) The Registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003 By: /s/ Laurence M. Downes
----------------------------------
Laurence M. Downes
Chairman & Chief Executive Officer
30
CERTIFICATIONS
I, Glenn C. Lockwood, certify that:
1) I have reviewed this Quarterly Report on Form 10-Q of New Jersey Resources
Corporation;
2) Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
Quarterly Report;
4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b.) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this Quarterly Report (the "Evaluation Date"); and
c.) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6) The Registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003 By: /s/ Glenn C. Lockwood
----------------------------------
Glenn C. Lockwood
Senior Vice President,
Chief Financial Officer
31