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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 Commission file number 1-8359
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2376465
(State or other jurisdiction 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 August 5,
1999 was 17,820,900.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
(Thousands, except per share data)
OPERATING REVENUES ........................... $159,486 $113,432 $731,391 $600,413
-------- -------- -------- --------
OPERATING EXPENSES
Gas purchases ............................... 119,756 74,089 525,512 404,086
Operation and maintenance ................... 18,767 18,151 61,036 58,221
Depreciation and amortization ............... 7,406 7,069 22,206 21,184
Energy and other taxes ...................... 5,842 5,676 32,354 32,709
State income taxes .......................... 256 289 7,213 5,274
Federal income taxes ........................ 639 403 21,237 19,337
-------- -------- -------- --------
Total operating expenses ................... 152,666 105,677 669,558 540,811
-------- -------- -------- --------
OPERATING INCOME ............................. 6,820 7,755 61,833 59,602
Other income, net ............................ 677 379 1,575 2,154
Interest charges, net ........................ 4,429 4,843 14,750 14,945
-------- -------- -------- --------
INCOME BEFORE PREFERRED STOCK
DIVIDENDS ...................................
3,068 3,291 48,658 46,811
Preferred stock dividends .................... 8 397 109 1,190
-------- -------- -------- --------
NET INCOME ................................... $ 3,060 $ 2,894 $ 48,549 $ 45,621
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC ............................... $ .17 $ .16 $ 2.72 $ 2.56
======== ======== ======== ========
DILUTED ............................. $ .17 $ .16 $ 2.70 $ 2.55
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE ................... $ .42 $ .41 $ 1.26 $ 1.23
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING
BASIC ............................... 17,888 17,790 17,867 17,799
======== ======== ======== ========
DILUTED ............................. 18,005 17,899 17,980 17,902
======== ======== ======== ========
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
JUNE 30,
1999 1998
- --------------------------------------------------------------------------------
(Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................... $ 48,549 $ 45,621
Adjustments to reconcile net income to cash flows
Depreciation and amortization .................. 22,206 21,184
Amortization of deferred charges ............... 2,114 617
Deferred income taxes .......................... 3,263 13,895
Change in working capital ...................... 52,053 (58,585)
Other, net ..................................... (6,116) (5,465)
--------- ---------
Net cash flows from operating activities ......... 122,069 17,267
--------- ---------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
Proceeds from long-term debt .................... 7,800 78,445
Proceeds from common stock ...................... 6,873 4,240
Payments of long-term debt ...................... (20,077) (38,045)
Payments of preferred stock ..................... (20,120) (120)
Purchases of treasury stock ..................... (5,855) (7,789)
Payments of common stock dividends .............. (22,321) (21,770)
Net change in short-term debt ................... (27,300) (5,200)
--------- ---------
Net cash flows from (used in) financing activities (81,000) 9,761
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Expenditures for
Utility plant .................................. (35,251) (28,029)
Real estate properties ......................... (256) (1,648)
Equity investments and other ................... -- (11,488)
Cost of removal ................................ (3,716) (2,260)
Proceeds from asset sales ....................... 1,900 15,600
--------- ---------
Net cash flows used in investing activities ...... (37,323) (27,825)
--------- ---------
Net change in cash and temporary investments ..... 3,746 (797)
Cash and temporary investments at September 30 ... 2,476 5,467
--------- ---------
Cash and temporary investments at June 30 ........ $ 6,222 $ 4,670
========= =========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ..................................... $ (31,239) $ (8,020)
Construction fund ............................... 3,900 (16,000)
Inventories ..................................... 36,222 (5,021)
Deferred gas costs .............................. 44,673 8,967
Purchased gas ................................... 4,551 (15,759)
Prepaid and accrued taxes, net .................. 6,314 (1,563)
Customers' credit balances and deposits ......... (4,606) (8,982)
Accounts payable ................................ (7,050) (4,256)
Other, net ...................................... (712) (7,951)
--------- ---------
Total ............................................ $ 52,053 $ (58,585)
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) ........... $ 16,223 $ 15,770
Income taxes .................................... $ 23,593 $ 8,221
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
ASSETS
- ---------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, JUNE 30,
1999 1998 1998
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------
(Thousands)
PROPERTY, PLANT AND EQUIPMENT
Utility plant ........................... $ 929,616 $ 895,321 $ 880,224
Real estate properties .................. 24,745 24,490 24,528
--------- --------- ---------
954,361 919,811 904,752
Accumulated depreciation and amortization (257,027) (239,814) (235,089)
--------- --------- ---------
Property, plant and equipment, net ..... 697,334 679,997 669,663
--------- --------- ---------
CURRENT ASSETS
Cash and temporary investments .......... 6,222 2,476 4,670
Construction fund ....................... 12,100 16,000 16,000
Customer accounts receivable ............ 81,177 48,805 50,719
Unbilled revenues ....................... 2,631 3,795 8,213
Allowance for doubtful accounts ......... (1,890) (1,907) (2,541)
Gas in storage, at average cost ......... 16,813 52,797 40,422
Materials and supplies, at average cost . 3,608 3,846 4,196
Deferred gas costs ...................... -- 16,589 14,038
Prepaid state taxes ..................... 9,497 11,752 11,926
Other ................................... 5,931 7,324 7,872
--------- --------- ---------
Total current assets ..................... 136,089 161,477 155,515
--------- --------- ---------
DEFERRED CHARGES AND OTHER
Equity investments ..................... 9,229 9,196 9,087
Regulatory assets ...................... 42,456 40,297 39,234
Long-term deferred gas costs ........... -- 21,833 11,687
Other .................................. 32,202 30,218 34,599
--------- --------- ---------
Total deferred charges and other ..... 83,887 101,544 94,607
--------- --------- ---------
Total assets ....................... $ 917,310 $ 943,018 $ 919,785
========= ========= =========
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
- ------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, JUNE 30,
1999 1998 1998
(unaudited) (unaudited)
- -------------------------------------------------------------------------------------------
(Thousands)
CAPITALIZATION
Common stock equity ................... $318,255 $290,804 $301,540
Redeemable preferred stock ............ 520 20,640 20,640
Long-term debt ........................ 286,264 326,741 331,735
-------- -------- --------
Total capitalization ................. 605,039 638,185 653,915
-------- -------- --------
CURRENT LIABILITIES
Current maturities of long-term debt .. 30,157 1,957 137
Short-term debt ....................... 33,400 60,700 42,800
Purchased gas ......................... 52,012 47,461 42,120
Accounts payable and other ............ 23,349 29,706 24,376
Dividends payable ..................... 7,507 7,304 7,305
Accrued taxes ......................... 8,697 7,029 10,826
Customers' credit balances and deposits 9,046 13,652 4,544
-------- -------- --------
Total current liabilities ............ 164,168 167,809 132,108
-------- -------- --------
DEFERRED CREDITS
Deferred income taxes ................. 79,413 73,759 70,625
Deferred investment tax credits ....... 10,484 10,628 10,702
Deferred revenue ...................... 18,529 19,375 19,669
Long-term deferred gas costs .......... 5,558 -- --
Other ................................. 34,119 33,262 32,766
-------- -------- --------
Total deferred credits ............... 148,103 137,024 133,762
-------- -------- --------
Total capitalization and liabilities $917,310 $943,018 $919,785
======== ======== ========
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The preceding financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). The September 30, 1998 balance sheet data is derived from the audited
financial statements of New Jersey Resources Corporation (the Company). Although
management believes that the disclosures are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 1998 Annual Report on Form 10-K.
In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of the interim periods. Because of the seasonal
nature of the Company's utility operations and other factors, the results of
operations for the interim periods presented are not indicative of the results
to be expected for the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries -- New Jersey Natural Gas Company (NJNG), NJR Energy
Holdings Corporation (Energy Holdings) and NJR Development Company (NJR
Development). NJR Energy Services Company (Energy Services), New Jersey Natural
Energy Company (Natural Energy) and NJR Energy Corporation (NJR Energy) are
wholly-owned subsidiaries of Energy Holdings and Commercial Realty & Resources
Corp. (CR&R), is a wholly-owned subsidiary of NJR Development. Significant
intercompany accounts and transactions have been eliminated.
3. New Accounting Standards
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income," which states that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 also requires
that the Company classify items of other comprehensive income by their nature in
a financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of a statement of financial position. The impact of adopting SFAS
No. 130 does not have a material effect on either the Company's financial
condition or results of operations.
In June 1997, the Financial Accounting Standards Boards (FASB) issued SFAS
No. 131 "Disclosure About Segments of an Enterprise and Related Information" and
in February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits." These statements will be adopted by
the Company for the fiscal year ending September 30, 1999. It is management's
opinion that these statements will not have a material effect on either the
Company's financial condition
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or results of operations. In June 1998, the FASB issued SFAS No. 133 "Accounting
for Derivative Investments and Hedging Activities," which must be adopted by the
quarter ending December 31, 2000. The December 31, 2000 date of adoption for
SFAS No. 133 represents a one-year deferral due to entities and their auditors
requesting more time to study, understand, and implement the provisions of SFAS
No. 133. Entities also requested more time to complete information system
modifications. The Company is currently evaluating the effects of SFAS No. 133
on its financial condition and results of operations, which will vary based on
the Company's use of derivative instruments during any given reporting period
following the time of adoption.
4. Capitalized Interest
The Company's capitalized interest totaled $186,000 and $163,000 for the
three months ended June 30, 1999 and 1998, respectively, and $547,000 and
$539,000 for the nine months ended June 30, 1999 and 1998, respectively.
5. Legal and Regulatory Proceedings
a. Levelized Gas Adjustment (LGA) and Other Adjustment Clauses
On July 7, 1999, the New Jersey Board of Public Utilities (BPU) approved a
settlement agreement that provided for a decrease in NJNG's Gas Cost Recovery
(GCR) level and an increase in its Weather Normalization Clause (WNC),
Remediation Adjustment (RA), Demand Side Management Adjustment Clause (DSMAC)
and Transportation Education and Implementation charge (TEI) factors. As a
result of this settlement, sales customers received a rate decrease of $.0278
per therm, or approximately 3%, and transportation customers experienced an
increase of $.0088 per therm, or approximately 2%. The BPU also approved a
Flexible Pricing Mechanism (FPM) which permits NJNG to adjust its Levelized Gas
Adjustment (LGA) prices during the November through April period to help prevent
significant under/over recoveries. The FPM is subject to certain monthly and
annual limitations and requires a five-day notice period to the BPU and the
Ratepayer Advocate.
b. Energy Deregulation Legislation
On February 9, 1999, Governor Whitman signed the "Electric Discount and
Energy Restructuring Act" (the Act) which provides the foundation for the
restructuring of New Jersey's energy markets. The Act includes various
provisions relating to natural gas utilities. These provisions provide all
customer classes with the ability to choose their natural gas supplier other
than their incumbent utility by December 31, 1999. The Act also allows
continuation of the utilities role as a gas supplier at least until December
31, 2002, when the BPU must decide whether to make the gas supply function
competitive. The Act allows natural gas utilities to stay in competitive
services (i.e., appliance services), and customers to choose their provider of
account services (i.e., meter reading, billing and collections) by December 31,
2002. The BPU is continuing to issue standards and rules to implement the Act.
Additionally, on April 30, 1999, NJNG filed a rate unbundling petition
pursuant to a BPU order. Specifically, the filing re-labels the NJNG's current
rates. The filing does not result in any change in overall rates collected by
NJNG and the Company expects that the BPU will issue its order by December 31,
1999.
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c. Gas Remediation
NJNG has identified eleven former manufactured gas plant (MGP) sites,
dating back to the late 1800's and early 1900's, which contain contaminated
residues from the former gas manufacturing operations. Ten of the eleven sites
in question were acquired by NJNG in 1952. All of the gas manufacturing
operations ceased at these sites at least by the mid-1950's and in some cases
had been discontinued many years earlier, and all of the old gas manufacturing
facilities were subsequently dismantled by NJNG or the former owner. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP) and local government authorities with
respect to the plant sites in question, and is participating in various studies
and investigations by outside consultants to determine the nature and extent of
any such contaminated residues and to develop appropriate programs of remedial
action, where warranted. Since October 1989, NJNG has entered into
Administrative Consent Orders or Memoranda of Agreement with the NJDEP covering
all eleven sites. These documents establish the procedures to be followed by
NJNG in developing a final remedial clean-up plan for each site.
Most of the cost of such studies and investigations is being shared under an
agreement with the former owner and operator of ten of the MGP sites. Through a
Remediation Rider approved by the BPU, NJNG is recovering its expenditures
incurred through June 30, 1998 over a seven-year period. Costs incurred
subsequent to June 30, 1998 will be reviewed annually and, subject to BPU
approval, recovered over seven-year periods.
In March 1995, NJNG filed a complaint in New Jersey Superior Court against
various insurance carriers for declaratory judgment and for damages arising from
such defendants' breach of their contractual obligations to defend and/or
indemnify NJNG against liability for claims and losses (including defense costs)
alleged against NJNG relating to environmental contamination at the former MGP
sites and other sites. NJNG is seeking (i) a declaration of the rights, duties
and liabilities of the parties under various primary and excess liability
insurance policies purchased from the defendants by NJNG from 1951 through 1985,
and (ii) compensatory and other damages, including costs and fees arising out of
defendants' obligations under such insurance policies. The complaint was amended
in July 1996 to name Kaiser-Nelson Steel & Salvage Company (Kaiser-Nelson) and
its successors as additional defendants. The Company is seeking (a) a
declaration of the rights, duties and liabilities of the parties under
agreements with respect to claims against the Company that allege property
damage caused by various substances used, handled or generated by NJNG or the
predecessor in title that were removed from several of the MGP sites by
Kaiser-Nelson, and (b) money damages or compensatory relief for the harm caused
by Kaiser-Nelson's aforementioned actions. Discovery is proceeding in this
matter. There can be no assurance as to the outcome of these proceedings.
d. South Brunswick Asphalt, L.P.
NJNG has been named as a defendant in a civil action commenced in New Jersey
Superior Court by South Brunswick Asphalt, L.P. (SBA) and its affiliated
companies seeking damages arising from alleged environmental contamination at
three sites owned or occupied by SBA and its affiliated companies. Specifically,
the suit charges that tar emulsion removed from 1979 to 1983 by an affiliate of
SBA (Seal Tite Corp.) from NJNG's former gas manufacturing plant sites has been
alleged by the NJDEP to constitute a hazardous waste and that the tar emulsion
has contaminated the soil and ground water at the three sites in question. In
February 1991, the NJDEP issued letters classifying the tar emulsion/sand and
gravel mixture at each site as dry industrial waste, a non-hazardous
classification. In April 1996, in a
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meeting with all parties to the litigation and the judge assigned to the case,
the NJDEP confirmed the non-hazardous classification, which will allow for
conventional disposal. In May 1997, SBA submitted applications to NJDEP for
permits to allow SBA to recycle the tar emulsion/sand and gravel mixture at each
site into asphalt, to be used as a paving materials. To this point NJDEP has not
formally advised the court whether it will grant or deny SBA's applications. In
July 1998, SBA filed an amended complaint adding NJDEP to the proceedings to
facilitate the resolution of these applications. Following service of SBA's
amended complaint, NJDEP advised SBA that it intended to deny SBA's permit
applications and filed a motion for dismissal of the amended complaint. In March
1999, the court granted NJDEP's motion in part and denied NJDEP's motion in
part, and directed SBA to file a more definite statement of its claims for
equitable relief against NJDEP, including its request that a mandatory
injunction be imposed compelling NJDEP to issue the subject permits. SBA's more
definite statement of its claims has not yet been filed. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on its consolidated financial condition or results of operations.
e. Combe Fill South Landfill
NJNG has been joined as a third-party defendant in two civil actions
commenced in October 1998 in the U.S. District Court for the district of New
Jersey by the U.S. Environmental Protection Agency and NJDEP. These two actions
seek recovery of costs expended in connection with and for continuation of the
cleanup of the Combe Fill South Landfill, a Superfund site in Chester, New
Jersey. The plaintiffs claim that hazardous waste NJNG is alleged to have
generated was sent to the site. There are approximately 180 defendants and
third-party defendants in the actions thus far. Each third-party complaint seeks
damages under CERCLA Section 113 and the New Jersey Spill Act, declaratory
relief holding each third-party defendant strictly liable, and contribution and
indemnification under the common law of the United States and New Jersey. No
specific monetary demands or scope of cleanup work have been set forth to date.
NJNG is in the process of investigating the allegations, formulating its
position with respect thereto, and notifying its insurance carriers. NJNG is
currently unable to predict the extent, if any, to which it may have cleanup or
other liability with respect to these civil actions, but would seek recovery of
any such costs through the ratemaking process. No assurance can be given as to
the timing or extent of the ultimate recovery of any such costs.
f. Various
The Company is party to various other claims, legal actions and complaints
arising in the ordinary course of business. In management's opinion, the
ultimate disposition of these matters will not have a material adverse effect on
its financial condition or results of operations.
6. Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings per Share" which establishes
standards for computing and presenting basic and diluted earnings per share
(EPS). The incremental shares required for inclusion in the denominator for the
diluted EPS calculation were 116,093 and 109,191 for the three months ended June
30, 1999 and 1998, respectively, and 113,265 and 102,368 for the nine months
ended June 30, 1999 and 1998, respectively. These shares relate to stock options
and restricted stock and were calculated using the treasury stock method. The
numerator for both the basic and diluted calculation was net income. There was
no impact for the three months ended June 30, 1999 and 1998, a two-cent dilutive
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effect for the nine months ended June 30, 1999 and a one-cent dilutive
effect for the nine months ended June 30, 1998.
7. Long-Term Debt
In April 1998, NJNG entered into a loan agreement whereby the New Jersey
Economic Development Authority loaned NJNG the proceeds from its $18 million
Natural Gas Facilities Revenue Bonds, Series 1998C, which were deposited into a
construction fund. NJNG may obtain these funds in reimbursement for certain
qualified expenditures. In April 1998, NJNG drew down $2 million from the
construction fund and issued $2 million of its Series GG Bonds. In April 1999,
NJNG drew down $3.9 million from the construction fund and issued $3.9 million
of its Series GG Bonds.
In April 1999, NJNG redeemed its 10.10% $20 million Series S First Mortgage
Bonds.
8. Other
At June 30, 1999 there were 17,845,205 shares of common stock outstanding
and the book value per share was $17.83.
Certain reclassifications have been made of previously reported amounts to
conform with current year classifications.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 1999
A. RESULTS OF OPERATIONS
Consolidated net income for the quarter ended June 30, 1999 increased 3% to
$3.0 million, compared with $2.9 million for the same period last year. Basic
and diluted EPS increased 6% to $.17, compared with $.16 last year.
Consolidated net income for the nine months ended June 30,1999 increased 6%
to $48.5 million, compared with $45.6 million for the same period last year.
Basic EPS increased 6% to $2.72, compared with $2.56 last year. Diluted EPS
increased 6% to $2.70, compared with $2.55 last year.
The increase in consolidated net income in both the three and nine months
ended June 30, 1999 was attributable primarily to continued profitable customer
growth at the Company's principal subsidiary, NJNG, improved unregulated
wholesale results and benefits from refinancing activity.
NJNG OPERATIONS
NJNG's financial results are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------------------------------------------
(Thousands)
Gross margin
Residential and commercial ....... $ 24,109 $ 26,887 $132,453 $134,710
Firm transportation .............. 6,099 2,229 24,498 14,113
-------- -------- -------- --------
Total firm margin .................. 30,208 29,116 156,951 148,823
Interruptible .................... 162 145 460 463
Off-system and capacity management 813 960 3,828 4,022
-------- -------- -------- --------
Total gross margin ................. $ 31,183 $ 30,221 $161,239 $153,308
======== ======== ======== ========
Appliance service revenues ......... $ 1,566 $ 1,583 $ 7,485 $ 7,103
======== ======== ======== ========
Operating income before federal
income taxes .................... $ 5,764 $ 6,067 $ 77,872 $ 76,476
======== ======== ======== ========
Net income ......................... $ 2,470 $ 1,817 $ 46,520 $ 43,452
======== ======== ======== ========
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Gross Margin
Effective January 1, 1998, gross margin is defined as gas revenues less
gas costs, sales tax and a transitional energy facilities assessment (TEFA).
Gross margin provides a more meaningful basis for evaluating utility
operations, since gas costs, sales tax and TEFA are passed through to customers
and, therefore, have no effect on earnings. Gas costs are charged to operating
expenses on the basis of therm sales at the rates included in NJNG's tariff.
The LGA clause allows NJNG to recover gas costs that exceed the level reflected
in its base rates. Sales tax is calculated at 6% of revenue and excludes 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. Prior to January 1, 1998, gross margin was defined as gas revenues less
gas costs and gross receipts and franchise taxes, which were replaced by the
sales tax, TEFA and state income tax.
State income taxes are included in operating expenses. The revised tax
structure allows NJNG to be more competitive with other energy providers, and
has not adversely impacted NJNG's net income.
The comparison of gross margin between periods will be impacted by the
state tax change described above.
Firm Margin
Residential and commercial (i.e., firm) gross margin is subject to the WNC,
which provides for a revenue adjustment if the weather varies by more than
one-half of 1% from normal, or 20-year average, weather. The WNC does not fully
protect NJNG from factors such as unusually warm weather and declines in
customer usage patterns, which were set at the conclusion of NJNG's last base
rate case in January 1994. The accumulated adjustment from one heating season
(i.e., October-May) is billed or credited to customers in subsequent periods.
This mechanism reduces the variability of both customer bills and NJNG's
earnings due to weather fluctuations.
The components of gross margin from firm customers are being impacted by
customers switching from sales service to firm transportation service. NJNG's
total gross margin is not negatively impacted by customers who utilize its firm
transportation service and purchase their gas from another supplier, as NJNG's
tariffs are designed such that no profit is earned on the commodity portion of
sales to firm customers, and all customers who do purchase gas from another
supplier continue to utilize NJNG for transportation.
Total firm margin has increased by 3.8% and 5.6% for the three and nine
months ended June 30, 1999, respectively, compared with the same periods last
year, reflecting customer growth and 2% colder weather than last year.
The weather for the nine months ended June 30, 1999 was 8% warmer than
normal, which, in accordance with the WNC, resulted in $8.9 million of gross
margin being accrued for future recovery from customers.
Gross margin from sales to firm customers decreased $2.8 million, or
approximately 10%, and $2.3 million, or approximately 1.7%, for the three and
nine months ended June 30, 1999, respectively, compared with the same periods
last year. The decrease in gross margin for the nine months ended was due to
22,226 customers switching from sales service to firm transportation service,
which more than offset the impact of 11,519 customer additions during the
twelve months ended June 30, 1999. Firm sales for the nine months decreased by
approximately 1% compared with the same period last year also due to the
switching of customers to transportation service.
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Gross margin from firm transportation increased $3.9 million, or 174%, and
$10.4 million, or 74%, for the three and nine months ended June 30, 1999,
respectively, compared with the same periods last year. NJNG transported 1.6
billion cubic feet (Bcf) and 8.3 Bcf for the three and nine months ended June
30, 1999, respectively, compared with .8 Bcf and 5.6 Bcf in the comparable
periods last year. At June 30, 1999 and 1998 NJNG provided firm transportation
service to 34,049 and 11,823 customers, respectively. The growth in the number
of firm transportation customers is due primarily to NJNG's residential pilot
program, which allows up to 40,000 residential customers to change natural gas
suppliers. Under this program 29,779 and 7,963 residential customers were using
this service at June 30, 1999 and 1998, respectively. The number of customers
switching from sales to transportation may continue to grow as customers select
other suppliers, under the pilot program. Under the Act, all residential
customers will have the ability to switch to transportation beginning January 1,
2000.
Off-System and Capacity Management
In order to reduce the overall cost of its gas supply commitments, NJNG has
entered into contracts to sell gas to customers outside its franchise territory
when the gas is not needed for system requirements. These sales enable NJNG to
spread its fixed demand costs, which are charged by pipelines to access their
supplies year round, over a larger and more diverse customer base. NJNG also
participates in the capacity release market on the interstate pipeline network
when the capacity is not needed for its own system requirements. Through
September 30, 1998, NJNG retained 20% of the gross margin from these sales, with
the balance credited to firm sales customers through the LGA clause. Effective
October 1, 1998 through December 31, 2001, NJNG will retain 15% of the gross
margin from these sales.
Also effective October 1, 1998, NJNG has a new incentive mechanism designed
to reduce the fixed cost of its gas supply portfolio. Any savings achieved
through the permanent reduction or replacement of capacity or other services
will be shared between customers and shareholders. Under this program, NJNG
retains 40% of the savings for the first 12 months following any transaction and
retains 15% of the savings for the remaining period through December 31, 2001,
with the balances credited to firm sales customers through the LGA clause.
NJNG's off-system and capacity management sales totaled 33.1 Bcf and
generated $813,000 of gross margin, and 113.4 Bcf and $3.8 million of gross
margin, for the three and nine months ended June 30, 1999, respectively,
compared with 23.2 Bcf and $960,000 of gross margin, and 73.9 Bcf and $4 million
of gross margin, in the comparable periods last year. The margin decrease was
due primarily to the warmer-than-normal weather, which increased the
availability of supply and capacity and resulted in lower margins per therm.
Interruptible
NJNG services 50 customers through interruptible sales and/or
transportation tariffs. Sales made under the interruptible sales tariff are
priced on market-sensitive oil and gas parity rates. Although therms sold and
transported to interruptible customers represented 4% and 5% of total therm
throughput in the nine months ended June 30, 1999 and 1998, respectively, they
accounted for less than 1% of the total gross margin in each period due to the
regulated margin-sharing formulas that govern these sales. Under these formulas,
NJNG retains 10% of the gross margin from the interruptible sales and 5% of the
gross
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margin from transportation sales, with the balance credited to firm sales
customers through the LGA clause.
Operating Income before Federal Income Taxes
Operating income before federal income taxes decreased $303,000, or 5%, and
increased $1.4 million or 1.8% for the three and nine months ended June 30,
1999, respectively, compared with the same periods last year. The three month
decrease is primarily due to an increase in operation and maintenance, and
depreciation expenses which more than offset the increase in gross margin. The
nine month increase is primarily due to the increase in firm gross margin,
which more than offset higher operation and maintenance expenses.
Net Income
Net income increased $653,000, or 36%, and $3.1 million, or 7%, for the
three and nine months ended June 30, 1999, respectively, compared with the same
periods last year. Other income, net of tax for both the three and nine months
ended June 30, 1999 includes $472,000 related to the May 1999 settlement of a
contract to serve a cogeneration project that was subsequently cancelled, and
the resolution of an informal review by the BPU's Audit Division staff of gas
purchases related to a long-term contract to provide gas supply to the project.
Financing costs were lower in both the three and nine months ended June 30, 1999
due primarily to refinancing activity. These factors more than offset the lower
operating income before federal income taxes in the three months ended June 30,
1999. The increase in the nine months ended June 30, 1999 was the result of
increased operating income in addition to these factors.
ENERGY HOLDINGS OPERATIONS
Energy Holdings' consolidated financial results, which include Energy
Services and Natural Energy, the Company's unregulated fuel and capacity
management and marketing subsidiaries, and the continuing operations of NJR
Energy, which consist primarily of its equity investment in the Iroquois Gas
Transmission System, L.P., are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------------------------------------------
(Thousands)
Revenues ............................. $ 51,794 $ 25,502 $211,417 $130,797
======== ======== ======== ========
Operating income before federal income
Taxes ............................. $ 875 $ 1,588 $ 3,457 $ 2,923
======== ======== ======== ========
Net income ........................... $ 463 $ 820 $ 1,809 $ 1,477
======== ======== ======== ========
Energy Holdings' revenues increased for the three and nine months ended
June 30, 1999, compared to the same periods last year, reflecting primarily
higher fuel and capacity management sales. Operating income before federal
income taxes and net income for the nine months ended June 30, 1999 increased
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primarily due to higher margins from daily gas sales and fuel management
agreements, partially offset by lower margins from retail sales, when compared
with the same period last year. Operating income before federal income taxes and
net income for the three months ended June 30, 1999 decreased primarily due to
lower retail sales margins.
Energy Service's gas under management totaled 25.7 Bcf and 94.0 Bcf for the
three and nine months ended June 30, 1999, and 14.6 Bcf and 61.7 Bcf for the
comparable periods last year. Retail gas sales totaled 1.6 Bcf and 6.6 Bcf for
the three and nine months ended June 30, 1999, respectively, and 1.4 Bcf and 5.7
Bcf in the comparable periods last year.
NJR DEVELOPMENT OPERATIONS
NJR Development's consolidated financial results, which consist solely of
CR&R's operations, are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
-----------------------------------------
(Thousands)
Revenues ........ $ 239 $ 190 $ 723 $ 557
====== ====== ====== ======
Other income, net $ 102 $ 113 $ 307 $1,520
====== ====== ====== ======
Net income (loss) $ 16 $ (13) $ 33 $ 511
====== ====== ====== ======
In 1996, CR&R entered into a sale-leaseback transaction which generated a
pre-tax gain of $17.8 million, which is included in Deferred revenue and is
being amortized to Other income, net over 25 years in accordance with generally
accepted accounting principles. The primary tenant of the facility, NJNG, is
leasing the building under a long-term master lease agreement and continues to
occupy a majority of the space in the building.
The decrease in net income for the nine months ended June 30, 1999 compared
with the same period last year is due to the sale of a 280,000 square-foot
office building for $15.6 million, which generated Other income, net of $900,000
in fiscal 1998.
THE YEAR 2000 ISSUE
The Company's overall goal is to be Year 2000 ready. "Year 2000 ready"
means that critical systems, devices, applications or business relationships
have been evaluated and are expected to be suitable for continued use into and
beyond the Year 2000, or contingency plans are in place.
The Company began addressing the Year 2000 issue in 1994 by assessing its
enterprise computer systems, such as general ledger, payroll, inventory control,
accounts receivable and Customer Information and Billing System (CIS). The
majority of these systems have been replaced and have been running the Company's
day-to-day computing environment since 1995. The vendor of the software systems
notified the Company that the new CIS, installed in August 1997, is Year 2000
compliant and the balance of the systems will be compliant with a scheduled
system upgrade that has been completed.
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In 1997, a Year 2000 Project was established to provide leadership and
direction to the Year 2000 efforts throughout the Company and its subsidiaries.
The project scope was also expanded to include "embedded" systems (such as chart
recorders, data loggers and calibration equipment), end-user computing hardware
and software, plant and corporate facilities, gas control hardware and software,
meter reading equipment and remittance processing equipment, and business
relationships with key suppliers and customers. Additionally, the Year 2000
Project includes intelligent devices used in field operations.
The Company is using a multi-step approach in conducting its Year 2000
Project. These steps are inventory, assessment, remediation, testing, and
contingency planning. The first step, an inventory of all systems and devices
with potential Year 2000 problems, was completed in May 1998. The next step,
also completed in May 1998, was to conduct an initial assessment of the
inventory to determine the state of its Year 2000 readiness. As part of the
assessment phase, remediation strategies have been identified and remediation
cost estimates developed. The Company is utilizing both internal and external
resources to remediate and test for Year 2000 readiness. The testing and
contingency phases are scheduled to end in September 1999. The Company has
initiated formal communications with the suppliers with which it has active
contracts to determine the extent to which the Company is vulnerable to those
suppliers failure to remediate their own Year 2000 issues. Key vendors have been
mailed surveys regarding their Year 2000 compliance and most responses have been
received. The Company will continue to pursue its key vendors to ascertain their
Year 2000 readiness.
Costs
The capitalized costs through June 30, 1999 of updating the Company's
enterprise computer systems, including the CIS described above, was $19.5
million. The Company expects to incur $6.2 million in 1999 for projects which
will also address Year 2000 readiness, of which $5.9 million is for new software
and hardware which the Company expects to capitalize. The costs of the projects
and the date on which the Company plans to complete the Year 2000 modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third parties' Year 2000 readiness and other factors.
Risk Assessment and Contingency Plans
At this time, the Company believes its most reasonably likely worst case
scenario is a temporary disruption of service to its gas customers, including
the disruptions caused by key vendors on which the Company relies for its gas
deliveries. The Company is assessing the risk of this scenario and is
formulating contingency plans, currently scheduled to be completed during the
third quarter of 1999, to mitigate the potential impact. In particular, the
Company believes that most of the gas movement components can be manually
controlled. The Company has been informed that its major gas supplier has very
thorough contingency plans, which include staff standing by at the time of
transition.
Contingency plans will be prepared so that the Company's critical business
processes can be expected to continue to function on January 1, 2000 and beyond.
The Company's contingency plans will be structured to address both remediation
of systems and their components and overall business operating risk. The work on
the contingency plan is focusing primarily on high priority items that affect
customer safety, continuation of service and revenue. These plans are intended
to mitigate both internal risks as well as potential risks in the supply chain
of the Company's suppliers and customers.
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The Company's Year 2000 project is designed to provide corrective action
with respect to Year 2000 risks. If the plan is not successfully carried out in
a timely manner, or if unforeseen events occur, Year 2000 problems could have a
material adverse impact on the Company. Management does not expect such problems
to have such an impact.
B. LIQUIDITY AND CAPITAL RESOURCES
In order to meet the working capital and external debt financing
requirements of its unregulated subsidiaries, as well as its own working capital
needs, the Company maintains committed credit facilities with a number of banks
totaling $105 million. At June 30, 1999, $67.1 million was outstanding under
these agreements. NJNG satisfies its debt needs by issuing short-term and
long-term debt based upon its own financial profile. The Company meets the
common equity requirements of each subsidiary, if any, through new issuances of
the Company's common stock, including the proceeds from its Automatic Dividend
Reinvestment Plan (DRP). The DRP also allows for the purchase of shares in the
open market to satisfy the plan's needs. The Company can switch funding options
every 90 days.
NJNG
The seasonal nature of NJNG's operations creates large short-term cash
requirements, primarily to finance gas purchases and customer accounts
receivable. NJNG obtains working capital for these requirements, as well as for
the temporary financing of construction expenditures, sinking fund needs and
energy tax payments through the issuance of commercial paper and short-term bank
loans. To support the issuance of commercial paper, NJNG maintains committed
credit facilities totaling $80 million.
Remaining fiscal 1999 construction expenditures are estimated at $15.5
million. These expenditures will be incurred for services, mains and meters to
support NJNG's continued customer growth, and general system renewals and
improvements. NJNG expects to finance these expenditures through the issuance of
short-term and long-term debt. The timing and mix of these issuances will be
geared toward maintaining a common equity ratio of between 50% and 55%, which is
consistent with maintaining its current short-term and long-term credit ratings.
ENERGY HOLDINGS
Energy Holdings does not currently expect any significant capital
expenditures or external financing requirements in fiscal 1999.
NJR DEVELOPMENT
CR&R's future capital expenditures will be limited to the fit-up of
existing tenant space, developing existing acreage and additional investments to
preserve the value of its existing real estate holdings. CR&R does not currently
expect any significant capital expenditures or external financing requirements
in fiscal 1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
The regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and
over-the-counter swap agreements. The Company's natural gas businesses are
conducted through three of its operating subsidiaries. First, NJNG is a
regulated utility whose recovery of gas costs is protected by the LGA, but to
further hedge against price fluctuations, utilizes futures and options through
its financial risk management program. Second, Energy Services has entered into
fixed-price sales contracts with wholesale customers for an aggregate of
approximately 4.7 Bcf of natural gas at prices ranging from $1.91 to $2.65 per
Mmbtu. Energy Services has also hedged its commitments to purchase natural gas
for the retail customers of Natural Energy and hedged purchases and sales of
storage gas. Finally, NJR Energy has entered into a long-term, fixed-price
contract to sell approximately 28.7 Bcf of natural gas to a gas marketing
company at prices ranging from $2.43 to $4.41 per Mmbtu.
Natural gas is a nationally traded commodity, and its prices are effectively
determined by the New York Mercantile Exchange (NYMEX) and over-the-counter
markets. The prices on the NYMEX and over-the-counter markets generally reflect
the national balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
NJNG entered into futures contracts to buy and sell 10.1 Bcf of natural gas
through March 2000 at prices ranging from $1.89 to $2.53 per Mmbtu, and as of
June 30, 1999, NJNG had a deferred unrealized gain of approximately $2.2 million
from these contracts.
Additionally, through its Financial Risk Management program, NJNG had
options on 2.8 Bcf of natural gas at strike prices ranging from $1.75 to $2.50
per Mmbtu on which it had an unrealized gain of $559,000 as of June 30, 1999.
As of June 30, 1999, Energy Services had entered into futures contracts to
buy 8.5 Bcf of natural gas through March 2001, at prices ranging from $1.91 to
$2.72 per Mmbtu, and had a deferred unrealized gain of $1.3 million from these
futures contracts. Energy Services also entered into natural gas swap agreements
in order to hedge its risks on 2.4 Bcf of natural gas. As of June 30, 1999,
Energy Services had a deferred unrealized gain of approximately $456,000 from
these swap agreements. Energy Services also held options for 1.8 Bcf at strike
prices of $2.00 to $2.45 on which it had an unrealized loss of $65,000 as of
June 30, 1999.
NJR Energy has hedged both its price and physical delivery risks associated
with its long-term, fixed-price sales contract with a gas marketing company (the
"Gas Sale Contract"). To hedge its price risk, NJR Energy entered into two swap
agreements. Under the terms of these two swap agreements, NJR Energy will pay to
the counterparties the identical fixed price it receives from the gas marketing
company in exchange for the payment by the counterparties of an index price plus
a spread per Mmbtu for the total volumes under the Gas Sale Contract. The swap
agreements were effective as of November 1995. In
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order to hedge its physical delivery risk, NJR Energy entered into a purchase
contract with a second gas marketing company for the identical volumes it is
obligated to sell under the Gas Sale Contract. NJR Energy has agreed to pay this
second gas marketing company the identical floating price it receives under the
swap agreements mentioned above.
To manage these instruments, the Company has well-defined risk management
policies and procedures, which include volumetric limits and monetary
guidelines.
All of the futures contracts, options and swap agreements described above
are held for hedging, rather than trading purposes. With respect to futures
contracts, options and swap agreements, the Company has performed a sensitivity
analysis to estimate its exposure to market risk arising from natural gas price
fluctuations using the net futures positions and the net swaps positions.
Futures contracts, options and swap agreements are substantially all settled at
the NYMEX settlement date and the related natural gas quantity is purchased or
sold in the physical market and, therefore, their notional values, which
represent the absolute sum of all outstanding natural gas futures contracts or
swap agreements, as the case may be, are not accurate measurements of risk to
the Company from those futures contracts or swap agreements. With respect to
natural gas futures contracts as of June 30, 1999, in the event of a
hypothetical 10 percent change in natural gas prices, the value of the Company's
contracts would change by approximately $4.6 million. With respect to natural
gas swap agreements as of June 30, 1999, in the event of a hypothetical 10
percent change in natural gas prices, the value of such agreements would change
by approximately $698,000 (in addition to the deferred unrealized gain of
approximately $460,000 discussed above). However, any such additional changes in
value under the futures contracts and the swap agreements would be substantially
offset by a corresponding change on the related underlying contracts that are
being hedged.
Interest Rate Risk
NJNG has total variable rate debt of $97 million, of which $56 million has
been hedged by the purchase of a 6.5% interest rate cap through the year 2003.
According to the Company's sensitivity analysis, NJNG's annual interest rate
exposure on the $56 million, based on the difference between current average
rates and the 6.5% interest rate cap, is limited to $1.1 million, net of tax. If
interest rates were to change by 100 basis points on the remaining $41 million
of variable rate debt, NJNG's annual interest expense, net of tax, would change
by $242,000. The Company has variable rate debt of $67.1 million, if interest
rates were to change by 100 basis points, annual interest expense, net of tax,
would change by $396,000.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact), including, without
limitation, expected disposition of legal and regulatory proceedings, effect of
new accounting standards and impact of the Year 2000 computer issue, are
forward-looking statements. Forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management.
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The Company wishes to caution readers that the assumptions which form the
basis for forward-looking statements with respect to or that may impact earnings
for fiscal 1999 and thereafter include many factors that are beyond the
Company's ability to control or estimate precisely, such as estimates of future
market conditions and the behavior of other market participants. Among the
factors that could cause actual results to differ materially from estimates
reflected in such forward-looking statements are weather conditions, economic
conditions in NJNG's service territory, fluctuations in energy-related commodity
prices, conversion activity and other marketing efforts, the conservation
efforts of NJNG's customers, the pace of deregulation of retail gas markets,
competition for the acquisition of gas, the regulatory and pricing policies of
federal and state regulatory agencies, the availability of Canada's reserves for
export to the United States and other regulatory changes.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not, by including this statement, assume any
obligation to review or revise any particular forward-looking statement
referenced herein in light of future events.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Information required by this Item is incorporated herein by reference
to Part I, Item 1, Note 5 Legal and Regulatory Proceedings.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION
Date: August 12, 1999 /s/Glenn C. Lockwood
---------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
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