CO
NDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
Three Months
Ended
December 31,
|
(Thousands, except per share data)
|
2007
|
2006
|
|
|
As Restated
(See Note
1)
|
|
|
|
|
|
|
OPERATING
REVENUES
|
$811,138
|
|
$ 737,401
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Gas
purchases
|
684,694
|
|
621,935
|
|
Operation
and maintenance
|
32,179
|
|
28,316
|
|
Regulatory
rider expenses
|
12,165
|
|
9,466
|
|
Depreciation
and amortization
|
9,403
|
|
8,902
|
|
Energy
and other taxes
|
18,160
|
|
13,952
|
|
Total
operating expenses
|
756,601
|
|
682,571
|
|
OPERATING
INCOME
|
54,537
|
|
54,830
|
|
Other
income
|
1,528
|
|
1,296
|
|
Interest
charges, net
|
7,810
|
|
7,875
|
|
INCOME BEFORE INCOME TAXES AND
EQUITY IN EARNINGS OF AFFILIATES
|
48,255
|
|
48,251
|
|
Income
tax provision
|
18,494
|
|
19,234
|
|
Equity
in earnings of affiliates, net of tax
|
424
|
|
417
|
|
NET
INCOME
|
$ 30,185
|
|
$29,434
|
|
|
|
|
|
|
EARNINGS PER COMMON
SHARE
|
|
|
|
|
BASIC
|
$1.09
|
|
$1.06
|
|
DILUTED
|
$1.08
|
|
$1.05
|
|
DIVIDENDS PER COMMON
SHARE
|
$0.40
|
|
$0.38
|
|
WEIGHTED AVERAGE SHARES
OUTSTANDING
|
|
|
|
|
BASIC
|
27,785
|
|
27,713
|
|
DILUTED
|
27,952
|
|
27,904
|
|
|
|
|
|
|
PRO-FORMA EARNINGS PER COMMON
SHARE (See Note 5)
|
|
|
|
|
BASIC
|
$0.72
|
|
$0.71
|
|
DILUTED
|
$0.72
|
|
$0.70
|
|
See
Notes to Condensed Unaudited Consolidated Financial Statements
New Jersey Resources
Corporation
Part
I
ITEM 1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Three Months
Ended
December 31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
As Restated
(See Note 1)
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$
|
30,185
|
|
|
$
|
29,434
|
|
Adjustments to reconcile net
income to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of tax
|
|
|
3,080
|
|
|
|
(2,069
|
)
|
Depreciation
and amortization
|
|
|
9,478
|
|
|
|
8,977
|
|
Allowance
for funds used during construction
|
|
|
(373
|
)
|
|
|
—
|
|
Deferred
income taxes
|
|
|
8,549
|
|
|
|
2,842
|
|
Manufactured
gas plant remediation costs
|
|
|
(4,041
|
)
|
|
|
(4,235
|
)
|
Equity
in earnings from investments, net of distributions
|
|
|
1,512
|
|
|
|
(417
|
)
|
Cost
of removal – asset retirement obligations
|
|
|
(177
|
)
|
|
|
(257
|
)
|
Contributions
to employee benefit plans
|
|
|
(150
|
)
|
|
|
(150
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Components
of working capital
|
|
|
(57,844
|
)
|
|
|
(14,579
|
)
|
Other
noncurrent assets
|
|
|
2,423
|
|
|
|
1,635
|
|
Other
noncurrent liabilities
|
|
|
833
|
|
|
|
(8,824
|
)
|
Cash
flows (used in) from operating activities
|
|
$
|
(6,525
|
)
|
|
$
|
12,357
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
4,192
|
|
|
|
4,976
|
|
Tax
benefit from stock options exercised
|
|
|
547
|
|
|
|
769
|
|
Proceeds
from sale-leaseback transaction
|
|
|
7,485
|
|
|
|
5,482
|
|
Payments
of long-term debt
|
|
|
(937
|
)
|
|
|
(775
|
)
|
Purchases
of treasury stock
|
|
|
(10,071
|
)
|
|
|
—
|
|
Payments
of common stock dividends
|
|
|
(10,633
|
)
|
|
|
(10,056
|
)
|
Net
proceeds from short-term debt
|
|
|
32,547
|
|
|
|
4,900
|
|
Cash
flows from financing activities
|
|
$
|
23,130
|
|
|
$
|
5,296
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Expenditures
for
|
|
|
|
|
|
|
|
|
Utility
plant
|
|
|
(13,526
|
)
|
|
|
(12,463
|
)
|
Real
estate properties and other
|
|
|
(168
|
)
|
|
|
(569
|
)
|
Cost
of removal
|
|
|
(1,208
|
)
|
|
|
(1,283
|
)
|
Investments
in equity investees
|
|
|
(2,998
|
)
|
|
|
—
|
|
Proceeds
from asset sales
|
|
|
—
|
|
|
|
1,792
|
|
Cash
flows used in investing activities
|
|
|
(17,900
|
)
|
|
|
(12,523
|
)
|
Change
in cash and temporary investments
|
|
|
(1,295
|
)
|
|
|
5,130
|
|
Cash
and temporary investments at beginning of period
|
|
|
5,140
|
|
|
|
4,991
|
|
Cash
and temporary investments at end of period
|
|
$
|
3,845
|
|
|
$
|
10,121
|
|
CHANGES IN COMPONENTS OF
WORKING CAPITAL
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(194,958
|
)
|
|
$
|
(146,039
|
)
|
Inventories
|
|
|
33,940
|
|
|
|
23,569
|
|
Underrecovered
gas costs
|
|
|
(18,883
|
)
|
|
|
(28,758
|
)
|
Gas
purchases payable
|
|
|
96,217
|
|
|
|
124,439
|
|
Prepaid
and accrued taxes, net
|
|
|
31,043
|
|
|
|
19,154
|
|
Accounts
payable and other
|
|
|
(1,017
|
)
|
|
|
(3,654
|
)
|
Restricted
broker margin accounts
|
|
|
(881
|
)
|
|
|
5,875
|
|
Customers’
credit balances and deposits
|
|
|
7,299
|
|
|
|
(10,029
|
)
|
Other
current assets
|
|
|
(10,604
|
)
|
|
|
864
|
|
Total
|
|
$
|
(57,844
|
)
|
|
$
|
(14,579
|
)
|
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$
|
6,434
|
|
|
$
|
7,599
|
|
Income
taxes
|
|
$
|
2,661
|
|
|
$
|
8,000
|
|
See
Notes to Condensed Unaudited Consolidated Financial Statements
New Jersey Resources
Corporation
Part
I
ITEM 1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
|
|
December 31,
|
|
September
30,
|
(Thousands)
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND
EQUIPMENT
|
|
|
|
|
|
|
Utility
plant, at cost
|
|
$
|
1,313,739
|
|
|
$
|
1,299,445
|
|
Real
estate properties and other, at cost
|
|
|
28,859
|
|
|
|
28,793
|
|
|
|
|
1,342,598
|
|
|
|
1,328,238
|
|
Accumulated
depreciation and amortization
|
|
|
(363,891
|
)
|
|
|
(357,367
|
)
|
Property,
plant and equipment, net
|
|
|
978,707
|
|
|
|
970,871
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and temporary investments
|
|
|
3,845
|
|
|
|
5,140
|
|
Customer
accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
270,323
|
|
|
|
132,444
|
|
Unbilled
|
|
|
66,177
|
|
|
|
8,895
|
|
Allowance
for doubtful accounts
|
|
|
(3,369
|
)
|
|
|
(3,166
|
)
|
Regulatory
assets
|
|
|
29,245
|
|
|
|
24,634
|
|
Gas
in storage, at average cost
|
|
|
404,825
|
|
|
|
439,168
|
|
Materials
and supplies, at average cost
|
|
|
5,436
|
|
|
|
5,033
|
|
Prepaid
state taxes
|
|
|
9,229
|
|
|
|
28,034
|
|
Derivatives,
at fair value
|
|
|
127,699
|
|
|
|
138,986
|
|
Broker
margin account
|
|
|
8,590
|
|
|
|
12,345
|
|
Other
|
|
|
15,122
|
|
|
|
8,353
|
|
Total
current assets
|
|
|
937,122
|
|
|
|
799,866
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investments
in equity investees
|
|
|
89,902
|
|
|
|
86,743
|
|
Regulatory
assets
|
|
|
305,832
|
|
|
|
312,369
|
|
Derivatives,
at fair value
|
|
|
39,213
|
|
|
|
44,306
|
|
Restricted
cash
|
|
|
4,200
|
|
|
|
4,200
|
|
Other
|
|
|
12,779
|
|
|
|
12,390
|
|
Total
noncurrent assets
|
|
|
451,926
|
|
|
|
460,008
|
|
Total
assets
|
|
$
|
2,367,755
|
|
|
$
|
2,230,745
|
|
See
Notes to Condensed Unaudited Consolidated Financial Statements
New Jersey Resources
Corporation
Part
I
ITEM 1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CAPITALIZATION AND
LIABILITIES
|
|
December 31,
|
|
September
30,
|
(Thousands)
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
Common
stock equity
|
|
$
|
668,969
|
|
|
$
|
644,797
|
|
Long-term
debt
|
|
|
359,165
|
|
|
|
383,184
|
|
Total
capitalization
|
|
|
1,028,134
|
|
|
|
1,027,981
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
34,905
|
|
|
|
4,338
|
|
Short-term
debt
|
|
|
289,026
|
|
|
|
256,479
|
|
Gas
purchases payable
|
|
|
314,553
|
|
|
|
218,336
|
|
Accounts
payable and other
|
|
|
55,341
|
|
|
|
64,386
|
|
Dividends
payable
|
|
|
11,101
|
|
|
|
10,633
|
|
Deferred
and accrued taxes
|
|
|
24,064
|
|
|
|
9,031
|
|
Regulatory
liabilities
|
|
|
—
|
|
|
|
9,583
|
|
New
Jersey clean energy program
|
|
|
10,945
|
|
|
|
8,832
|
|
Derivatives,
at fair value
|
|
|
62,120
|
|
|
|
79,243
|
|
Broker
margin account
|
|
|
1,917
|
|
|
|
15,143
|
|
Customers’
credit balances and deposits
|
|
|
34,561
|
|
|
|
27,262
|
|
Total
current liabilities
|
|
|
838,533
|
|
|
|
703,266
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
216,553
|
|
|
|
216,258
|
|
Deferred
investment tax credits
|
|
|
7,434
|
|
|
|
7,513
|
|
Deferred
revenue
|
|
|
9,631
|
|
|
|
9,806
|
|
Derivatives,
at fair value
|
|
|
40,474
|
|
|
|
38,085
|
|
Manufactured
gas plant remediation
|
|
|
105,340
|
|
|
|
105,340
|
|
Postemployment
benefit liability
|
|
|
27,170
|
|
|
|
25,743
|
|
Regulatory
liabilities
|
|
|
61,012
|
|
|
|
61,270
|
|
New
Jersey clean energy and conservation incentive programs
|
|
|
1,227
|
|
|
|
3,992
|
|
Asset
retirement obligation
|
|
|
24,068
|
|
|
|
23,895
|
|
Other
|
|
|
8,179
|
|
|
|
7,596
|
|
Total
noncurrent liabilities
|
|
|
501,088
|
|
|
|
499,498
|
|
Total
capitalization and liabilities
|
|
$
|
2,367,755
|
|
|
$
|
2,230,745
|
|
See
Notes to Condensed Unaudited Consolidated Financial Statements
New Jersey Resources
Corporation
Part
I
NOT
ES TO
CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
The
condensed consolidated financial statements have been prepared without audit, as
of December 31, 2007 and for three months ended December 31, 2007 and 2006,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). The September 30, 2007 balance sheet data is derived from the audited
financial statements of New Jersey Resources Corporation (NJR or the Company).
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in NJR’s 2007
Annual Report on Form 10-K.
The
condensed consolidated financial statements include the accounts of NJR and its
subsidiaries, New Jersey Natural Gas (NJNG), NJR Energy Services (NJRES), NJR
Retail Holdings (Retail Holdings), NJR Energy Investment (NJREI) and NJR Service
Company (NJR Service). Intercompany transactions and accounts have been
eliminated. Retail Holdings’ two principal subsidiaries are NJR Home Services
(NJRHS) and Commercial Realty & Resources (CR&R). NJREI’s primary
subsidiaries are NJR Energy and NJR Steckman Ridge Storage Company. NJR Energy
invests primarily in energy-related ventures through its subsidiary, NJNR
Pipeline (Pipeline), which holds the Company’s 5.53 percent ownership interest
in Iroquois Gas and Transmission System, L.P. (Iroquois). NJR Steckman Ridge
Storage Company holds the Company’s 50 percent combined interest in Steckman
Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a natural
gas storage facility that was acquired and is being developed with a partner in
western Pennsylvania.
In
the opinion of management, the information furnished reflects all adjustments
necessary for a fair presentation of the results of the interim periods. Because
of the seasonal nature of NJR’s utility and wholesale energy services
operations, in addition to other factors, the financial results for the interim
periods presented are not indicative of the results that are to be expected for
the fiscal year ending September 30, 2008.
Current
Assets
Included
in Other current assets is $2.6 million of restricted cash related to NJNG
natural gas purchases.
New Accounting
Standards
Recently Adopted
In
July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48,
Accounting for
Uncertainty in Income Taxes
(FIN 48), which alters the framework for
recognizing income tax contingencies. Previously, under Statement of Financial
Accounting Standards (SFAS) No. 5,
Accounting for Contingencies
,
the focus was on the subsequent liability recognition for estimated losses from
tax contingencies where such losses were probable and the related amounts could
be reasonably estimated. Under this new interpretation, a contingent tax asset
(i.e., an uncertain tax position) may only be recognized if it is more likely
than not that it will ultimately be sustained upon audit. The Company adopted
FIN 48 on October 1, 2007. The Company has evaluated its tax positions for all
jurisdictions and all years for which the statute of limitations remains open
and in accordance with the provisions of FIN 48, recorded an additional
liability for unrecognized tax benefits and interest of approximately $4.3
million and an increase in retained earnings as of October 1, 2007 of
approximately $1.2 million.. For additional information on the effect of
adoption, see
Note 11.
Adoption
of FIN
48
.
Not Yet Adopted
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS
157). SFAS 157 defines fair value as the amount that would be exchanged to sell
an asset or transfer a liability, in an orderly transaction between market
participants, and establishes a fair value hierarchy of quotes and unobservable
data that should be used to develop pricing assumptions. In addition, for assets
and liabilities that are not actively traded, for example, certain kinds of
derivatives, SFAS 157 requires that a fair value measurement include an
adjustment for risks
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
inherent
in a valuation technique and/or inputs, such as those used in pricing models.
SFAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company will adopt the provisions of the statement prospectively and is
evaluating the effect on its financial position and results of
operations.
In
February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to
elect to measure eligible items at fair value as an alternative to hedge
accounting and to mitigate volatility in earnings. A company can either elect
the fair value option according to a pre-existing policy, when the asset or
liability is first recognized or when it enters into an eligible firm
commitment. Changes in the fair value of assets and liabilities that the Company
chooses to apply the fair value option to, are reported in earnings at each
reporting date. SFAS 159 also provides guidance on disclosures that are intended
to provide comparability to other companies’ assets and liabilities that have
different measurement attributes and to other companies with similar financial
assets and liabilities. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the potential impact on
its statement of financial position and results of operations.
In
June 2007, the FASB Emerging Issues Task Force (EITF) reached consensus on EITF
Issue No. 06-11,
Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards
(EITF
06-11). EITF 06-11 applies to share-based payment arrangements that entitle
employees to receive dividends or dividend equivalents and provides that the tax
benefit related to dividends on certain share-based awards be recognized as an
increase to additional paid-in capital and should be included in the pool of
excess tax benefits available to absorb future tax deficiencies on share-based
payment awards. EITF 06-11 will be applied prospectively to the income tax
benefits of applicable dividends declared by the Company for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
effect of adoption on its statement of financial position and results of
operations.
On
December 4, 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160). SFAS 160 is an amendment of
Accounting Research Bulletin (ARB) No. 51 and was issued to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. This
Statement applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more
subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and that a parent company must
recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS
160 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The Company is currently evaluating the potential impact
on its statement of financial position and results of operations.
On
April 10, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (FSP FIN 39-1),
Amendment of FASB
Interpretation No. 3
9
.
FSP FIN 39-1 provides
additional guidance for parties that are subject to master netting
arrangements. Specifically, for transactions that are executed with the
same counterparty, it permits companies to offset the fair value amounts
recognized for derivatives as well as the related fair value amounts of cash
collateral receivables or payables, when certain conditions apply. FSP FIN
39-1 is effective for fiscal years beginning after November 15, 2007, with early
application permitted. The Company’s policy is to present its derivative
positions and any receivables or payables with the same counterparty on a gross
basis, therefore, NJR does not anticipate that FSP FIN 39-1 will have an impact
on its statement of financial position and results of operations.
Restatement
Subsequent
to the issuance of December 31, 2006 interim financial statements, the Company
determined that certain derivative financial instruments at NJRES and NJR Energy
were incorrectly accounted for as cash flow hedges. As a result, NJR concluded
that the change in fair value of these derivative instruments should be recorded
as a component of Gas purchases, or Operating revenues, as appropriate, in the
Condensed Consolidated Statements of Income and not in Other comprehensive
income, which is a component of Common Stock Equity, where they had been
previously reported in the Company’s Quarterly Report on Form 10-Q as of and for
the three-month period ended December 31, 2006.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Accordingly,
the following table sets forth the effects of the restatement on affected line
items in the Condensed Consolidated Statements of Income and Condensed
Consolidated Statements of Cash Flows for the three-month period ended December
31, 2006. Also included in the adjustment column, and as separate line items in
the tables below, are certain immaterial corrections that the Company made to
Other income and Equity in earnings of equity investees, net of tax for first
quarter of fiscal 2007.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(Thousands)
|
|
As
Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
Operating
revenue
|
|
$
|
741,465
|
|
|
$
|
(4,064
|
)
|
|
$
|
737,401
|
|
Gas
purchases
|
|
$
|
628,685
|
|
|
$
|
(6,750
|
)
|
|
$
|
621,935
|
|
Total
operating expenses
|
|
$
|
689,321
|
|
|
$
|
(6,750
|
)
|
|
$
|
682,571
|
|
Operating
Income
|
|
$
|
52,144
|
|
|
$
|
2,686
|
|
|
$
|
54,830
|
|
Other
income
|
|
$
|
1,989
|
|
|
$
|
(693
|
)
|
|
$
|
1,296
|
|
Income
before income taxes and equity in earnings of affiliates
|
|
$
|
46,258
|
|
|
$
|
1,993
|
|
|
$
|
48,251
|
|
Income
tax provision
|
|
$
|
18,134
|
|
|
$
|
1,100
|
|
|
$
|
19,234
|
|
Equity
in earnings, net of tax
|
|
$
|
—
|
|
|
$
|
417
|
|
|
$
|
417
|
|
Net
Income
|
|
$
|
28,124
|
|
|
$
|
1,310
|
|
|
$
|
29,434
|
|
Basic
earnings per share
|
|
$
|
1.01
|
|
|
$
|
0.05
|
|
|
$
|
1.06
|
|
Diluted
earnings per share
|
|
$
|
1.01
|
|
|
$
|
0.04
|
|
|
$
|
1.05
|
|
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Thousands)
|
|
As Previously
Reported
|
|
Adjustment
|
|
Restated
|
|
Net
Income
|
|
$
|
28,124
|
|
|
$
|
1,310
|
|
|
$
|
29,434
|
|
Unrealized
loss (gain) on derivative instruments, net of tax
|
|
$
|
120
|
|
|
$
|
(2,189
|
)
|
|
$
|
(2,069
|
)
|
Equity
in earnings from investments, net of distributions
|
|
$
|
—
|
|
|
$
|
(417
|
)
|
|
$
|
(417
|
)
|
Other
noncurrent assets
|
|
$
|
1,218
|
|
|
$
|
417
|
|
|
$
|
1,635
|
|
Other
noncurrent liabilities
|
|
$
|
(9,703
|
)
|
|
$
|
879
|
|
|
$
|
(8,824
|
)
|
Filed Base Rate
Case
As
a result of increases in NJNG’s operating, maintenance and capital costs, NJNG
petitioned the New Jersey Board of Public Utilities (BPU), on November 20, 2007,
to increase base rates for delivery service by approximately $58.4 million,
which includes a return on NJNG’s equity component of 11.375 percent. This
petition is consistent with NJNG’s objectives of providing safe and reliable
service to its customers and earning a market-based return on its regulated
investments. Preliminary matters and timelines are being established among NJNG,
the BPU and Division of Rate Counsel (Rate Counsel) before the Office of the
Administrative Law Judge. Based upon statutory time frames and potential
regulatory lag, it is unlikely that any modification to NJNG’s delivery rates
would become effective during fiscal 2008.
Conservation Incentive Program
(CIP)
The
CIP allows NJNG to recover utility gross margin variations related to both
weather and customer usage. Recovery of such utility gross margin variations
(filed for annually and recovered one year following the end of the CIP usage
year) is subject to additional conditions, including an earnings test and an
evaluation of Basic Gas Supply Service (BGSS) related savings.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
In
October 2007, the BPU provisionally approved the implementation of NJNG’s
initial CIP recovery rates, based upon program information NJNG included in an
Amendment to its Petition for Annual Review, which was filed with the BPU in
August 2007. The approved rates add 1.7 percent to the average residential
heating customer’s bill and are designed to recover approximately $15.6 million
of previously accrued amounts.
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the pilot program. As
of December 31, 2007, NJNG had a remaining liability of $1.2 million related to
these programs.
Basic Gas Supply
Service
BGSS
is a BPU approved rate mechanism designed to allow for the recovery of natural
gas commodity costs. NJNG periodically adjusts its rates to its residential and
small commercial customers to reflect increases or decreases in the cost of
natural gas sold to customers. The following are NJNG’s BGSS filings and related
rate adjustments or refunds during the first quarter of fiscal
2008:
Ÿ
|
On
October 3, 2007, the BPU provisionally approved a decrease to NJNG’s BGSS
rate effective October 4, 2007, which results in a 3.6 percent decrease to
the average residential customer bill.
|
|
|
Ÿ
|
On
November 26, 2007, NJNG notified the BPU that it would provide refunds and
subsequently issued a credit to customers of $32 million in December 2007,
as a result of the decrease in the anticipated costs of wholesale natural
gas prices.
|
Other Incentive
Programs
NJNG
is eligible to receive financial incentives for reducing BGSS costs through a
series of utility gross margin-sharing programs that include off-system sales,
capacity release, storage incentive and financial risk management (FRM)
programs. In October 2007, the BPU approved an extension of the utility gross
margin-sharing programs mentioned above through October 31, 2008. Concurrently,
the BPU reduced the sharing percentage of the margin generated by the FRM
program that will be retained by NJNG from 20 percent to 15 percent effective
November 1, 2007. The incentive programs are subject to revisions in NJNG’s base
rate case and remain in effect as currently established until it is
resolved.
Societal Benefits Clause (SBC) and
Weather Normalization Clause (WNC)
The
SBC is comprised of three primary components: a Universal Service Fund rider
(USF), a Manufactured Gas Plant Remediation Adjustment Clause (RAC), and the New
Jersey Clean Energy Program (NJCEP).
In
October 2007, the BPU approved the following adjustments to recovery rates
associated with the SBC programs:
SBC
Ÿ
|
$14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through June 30, 2006;
|
|
|
Ÿ
|
an
increase in the recovery of NJCEP funding requirements from $6.3 million
to $13.0 million for fiscal year 2008 due to the gradual increase in
NJNG’s obligation to the State of New Jersey and a prior underrecovery,
(NJNG’s liability as of December 31, 2007 was $11 million);
and,
|
|
|
Ÿ
|
a
decrease to the statewide USF recovery rate, which will have a negligible
impact on customer rates.
|
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
In
addition, the BPU approved an increase of $8.1 million, or 0.9 percent to the
WNC rate, to recover the net amounts deferred relating to weather related margin
variations during the 2004-2005 and 2005-2006 winter periods.
Regulatory Assets &
Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Condensed Consolidated Balance Sheets:
(Thousands)
|
December
31,
2007
|
September
30,
2007
|
Recovery
Period
|
Regulatory
assets–current
|
|
|
|
|
|
Underrecovered
gas costs
|
$ 9,300
|
|
—
|
|
Less
than one year
(1)
|
WNC
|
5,860
|
|
8,105
|
|
Less
than one year
(2)
|
CIP
|
14,085
|
|
16,529
|
|
Less
than one year
(3)
|
Total
current
|
$ 29,245
|
|
$ 24,634
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Note 12)
|
|
|
|
|
|
Expended,
net
|
$ 85,533
|
|
$ 85,071
|
|
(4)
|
Liability
for future expenditures
|
105,340
|
|
105,340
|
|
(5)
|
CIP
|
4,191
|
|
—
|
|
(6)
|
Deferred
income and other taxes
|
13,815
|
|
13,979
|
|
Various
(7)
|
Derivatives
(Note 3)
|
45,354
|
|
51,861
|
|
(8)
|
Postemployment
benefit costs (Note 9)
|
33,614
|
|
33,988
|
|
(9)
|
SBC
|
17,985
|
|
22,130
|
|
Various
(10)
|
Total
noncurrent
|
$305,832
|
|
$312,369
|
|
|
(1)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(2)
|
Recoverable
as a result of BPU approval in October 2007, without interest. This
balance reflects the net results for the winter periods of 2004-2005 and
2005-2006. No new WNC activity is being recorded due to the existence of
the CIP. All previously deferred amounts related to the WNC have been
approved for recovery.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $7.0 million relating to the weather component of
the calculation and approximately $7.1 million relating to the customer
usage component of the calculation. Recovery from customers is designed to
be one year from date of rate approval by the BPU.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated
future expenditures. Recovery will be requested when actual expenditures
are incurred.
|
(6)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $1.8 million relating to the weather component of
the calculation and approximately $2.4 million relating to the customer
usage component of the calculation.
|
(7)
|
Recoverable
without interest, subject to BPU approval.
|
(8)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(9)
|
Recoverable
or refundable, subject to BPU approval, without interest. Includes
unrecognized service costs recorded in accordance with SFAS No. 158,
Employers’ Accounting for
Defined Benefit Pension and Other Postemployment Plans
that NJNG
has determined are recoverable in rates charged to customers (see
Note 9. Employee Benefit
Plans).
|
(10)
|
Recoverable
with interest, subject to BPU
approval.
|
If
there are any changes in regulatory positions that indicate the recovery of
regulatory assets is not probable, the related cost would be charged to income
in the period of such determination.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
The
Company had the following regulatory liabilities, all related to NJNG, on the
Condensed Consolidated Balance Sheets:
(Thousands)
|
December
31,
2007
|
September
30,
2007
|
Regulatory
liability–current
|
|
|
|
|
Overrecovered
gas costs
|
—
|
|
$ 9,583
|
|
Total
current
|
—
|
|
$ 9,583
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
Cost
of removal obligation
(1)
|
$61,012
|
|
$60,094
|
|
Market
development fund (MDF)
(2)
|
—
|
|
1,176
|
|
Total-noncurrent
|
$61,012
|
|
$61,270
|
|
(1)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately
$19.9 million, including accretion of $350,000 for the three-month period
ended December 31, 2007, of regulatory assets relating to asset retirement
obligations have been netted against the cost of removal obligation as of
December 31, 2007 (see
Note 10. Asset Retirement
Obligations).
|
(2)
|
The
MDF provided financial incentives to encourage customers to switch to
third party suppliers and has supported other unbundling related
initiatives. The MDF funding obligations terminated as of October 31,
2006 and the remaining balance was credited back to customers through the
BGSS in October 2007.
|
The
Company and its subsidiaries are subject to market risk due to fluctuations in
the price of natural gas. To manage the risk of such fluctuations, the Company
and its subsidiaries enter into futures contracts, option agreements and swap
agreements to economically hedge future purchases and sales of natural
gas.
On
October 1, 2007, the Company changed the treatment of its physical commodity
contracts at NJRES, such that all contracts entered into after September 30,
2007 are now recognized as derivative instruments, and are not accounted for
using the “normal purchase normal sales” scope exception of Statement of
Financial Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(as amended and interpreted, SFAS
133). All NJRES physical commodity contracts entered into after September 30,
2007, are accounted for at fair value on the Condensed Consolidated Balance
Sheets, with changes in fair value being reflected as a component of Operating
revenues on the Condensed Consolidated Statements of Income. All physical
commodity contracts at NJRES that were in existence prior to October 1, 2007,
which were previously designated as meeting the normal purchase normal sales
scope exception of SFAS 133, as well as physical commodity contracts at NJNG and
NJR Energy, which also meet the normal purchase normal sale scope exception,
continue to be accounted for under accrual accounting.
All
of the Company’s financial instruments (financial futures, options or swaps),
are accounted for as derivatives in accordance with SFAS 133 and recorded
at fair value in the Condensed Consolidated Balance Sheets. Changes in fair
value are recorded as a component of Gas purchases or Operating revenues, for
NJRES and NJR Energy, respectively, in the Condensed Consolidated Statements of
Income as unrealized gains or losses. Changes in fair value of NJNG’s financial
derivative instruments are recorded as a component of Regulatory assets or
liabilities in the Condensed Consolidated Balance Sheets, as these amounts will
be recovered through future BGSS amounts as an increase or reduction to the cost
of natural gas in NJNG’s tariff.
When
certain financial derivative instruments at NJRES settle prior to the actual
sale of the natural gas inventory purchases that they were designed to
economically hedge, NJRES records realized gains or losses as a component of Gas
purchases in the Condensed Consolidated Statements of Income.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Unrealized
gains (losses) and realized gains (losses) at NJRES related to financial
derivative instruments that are included as a component of Gas purchases, and
unrealized gains (losses) at NJR Energy related to financial derivative
instruments and unrealized gains (losses) at NJRES related to physical commodity
contracts that are included as a component of Operating revenues, for the three
months ended December 31, 2007 and 2006 are as follows:
|
December
31,
|
(Thousands)
|
2007
|
2006
|
NJRES:
|
|
|
|
|
Unrealized
gains – Physical Commodity Contracts
|
$ 2,044
|
|
—
|
|
Unrealized
(losses) gains – Financial Instruments
|
(6,966
|
)
|
8,039
|
|
Realized
(losses) – Financial Instruments
|
(5,163
|
)
|
(1,289
|
)
|
Subtotal
NJRES
|
$(10,085
|
)
|
$
6,750
|
|
NJR
Energy
|
|
|
|
|
Unrealized
gains (losses) – Financial Instruments
|
(305
|
)
|
(4,064
|
)
|
Total
NJRES and NJR Energy unrealized and realized (losses)
gains
|
$(10,390
|
)
|
$
2,686
|
|
Generally,
exchange-traded futures contracts require a deposit of margin cash, the amount
of which is subject to change based on market price movements and in accordance
with exchange rules. The Company maintains broker margin accounts for NJNG and
NJRES. The balances are as follows:
(Thousands)
|
December
31,
2007
|
September 30,
2007
|
NJNG
broker margin deposit
|
$ 39
|
|
$
12,345
|
|
NJNG
broker margin (liability)
|
$(1,917
|
)
|
—
|
|
NJRES
broker margin deposit (liability)
|
$ 8,551
|
|
$(15,143
|
)
|
4.
|
INV
ESTMENTS
IN EQUITY INVESTEES
|
NJR’s
Investments in equity investees include the following investments:
(Thousands)
|
December
31,
2007
|
September 30,
2007
|
Steckman
Ridge
|
$60,881
|
|
$56,726
|
|
Iroquois
|
20,844
|
|
22,073
|
|
Other
|
8,177
|
|
7,944
|
|
Total
|
$89,902
|
|
$86,743
|
|
NJR
uses the equity method of accounting for its investments in Steckman Ridge and
Iroquois.
Other
investments represent investments in equity securities of publicly traded energy
companies, all of which are immaterial on an individual basis, and are accounted
for as available for sale securities, with any change in the value of such
investments recorded as Accumulated other comprehensive income, a component of
Common stock equity.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
The
following is summarized financial information for Iroquois, as of and for the
three-month periods as indicated below:
|
|
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$
|
38,754
|
|
|
$
|
39,519
|
|
Operating
income
|
|
$
|
19,298
|
|
|
$
|
20,021
|
|
Net
income
|
|
$
|
7,582
|
|
|
$
|
7,473
|
|
(Millions)
|
December
31,
2007
|
|
September 30,
2007
|
|
Total
assets
|
|
$
791.0
|
|
|
$
814.3
|
|
The
following table presents the calculation of the Company’s basic and diluted
earnings per share:
|
Three Months
Ended
December
31,
|
(Thousands, except per share
amounts)
|
2007
|
2006
|
Net
Income, as reported
|
$30,185
|
|
$29,434
|
|
Basic
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
27,785
|
|
27,713
|
|
Basic
earnings per common share
|
$1.09
|
|
$1.06
|
|
Diluted
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
27,785
|
|
27,713
|
|
Incremental
shares
(1)
|
167
|
|
191
|
|
Weighted
average shares of common stock outstanding–diluted
|
27,952
|
|
27,904
|
|
Diluted
earnings per common share
|
$1.08
|
|
$1.05
|
|
(1)
|
Incremental shares consist of
stock options, stock awards and performance
units.
|
On
January 23, 2008 the Company announced a three for two stock split payable on
March 3, 2008 with fractional shares paid in cash. The amounts above do not
include the effect of this proposed stock split. The following table shows the
impact of the planned stock split on the number of shares outstanding and
calculated basic and diluted earnings per share as if it occurred at the
beginning of the earliest period presented:
|
Pro- Forma
Three Months
Ended
December
31,
|
(Thousands, except per share
amounts)
|
2007
|
2006
|
Net
Income
|
$30,185
|
|
$29,434
|
|
Basic
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,678
|
|
41,570
|
|
Basic
earnings per common share
|
$0.72
|
|
$0.71
|
|
Diluted
earnings per share
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,678
|
|
41,570
|
|
Incremental
shares
|
250
|
|
287
|
|
Weighted
average shares of common stock outstanding–diluted
|
41,928
|
|
41,857
|
|
Diluted
earnings per common share
|
$0.72
|
|
$0.70
|
|
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
NJR
On
December 13, 2007, NJR refinanced its prior senior credit facility for a new
$325 million, five-year, revolving, unsecured credit facility. The new credit
facility permits the borrowing of amounts under a revolving basis, as well as
the issuance of letters of credit. It also permits an increase to the facility,
from time to time, with the existing or new lenders, in a minimum of $5 million
increments up to a maximum $100 million. The new credit facility refinances an
earlier credit facility that provided for $325 million in revolving credit that
was scheduled to expire on December 16, 2007. The Company used the initial
borrowings under the new credit facility to refinance its prior credit facility
and pay all related fees and expenses. Depending on borrowing levels and credit
ratings, NJR’s interest rate can either be, at its discretion, the London
inter-bank offered rate (“LIBOR”) or the Federal Funds Open Rate plus an
applicable spread and facility fee. As of December 31, 2007, NJR’s effective
rate was 5.18% on outstanding borrowings of $92.6 million under this credit
facility.
As
of December 31, 2007, NJR had four letters of credit outstanding, totaling $17.5
million, on behalf of NJRES. Two letters of credit, totaling $4.5 million, are
used in conjunction with a long-term natural gas storage agreement and expire on
December 31, 2008. The other two letters of credit, totaling $13 million, are
used for margin and collateral requirements for natural gas transactions and
expire on March 31, 2008.
NJR
also has a $675,000 letter of credit outstanding on behalf of CR&R, which
will expire on December 31, 2008. The letter of credit is in place to support
development activities.
These
letters of credit reduce the amount available under NJR’s committed credit
facility by the same amount. NJR does not anticipate that these letters of
credit will be drawn upon by the counterparties and they will be renewed as
necessary.
NJNG
In
August 2007, the BPU approved NJNG’s petition requesting authorization to issue
and sell, in one or more series, an aggregate of $125 million in medium-term
notes through July 31, 2010. The notes may be issued on a secured or unsecured
basis and maturities can range from one to forty years. The proceeds from the
issuance of the notes will be used to refinance short-term debt, which has been
incurred to fund capital expenditure requirements and pension and other
post-employment benefit programs. NJNG is currently seeking approval to revise
the market yield spread conditions of the BPU’s prior approval to reflect
current credit market conditions. Provided that such approval is granted by the
BPU, the notes are anticipated to be issued during the second quarter of fiscal
2008.
NJNG
received $7.5 million and $5.5 million in December 2007 and 2006, respectively,
in connection with the sale-leaseback of its natural gas meters. This
sale-leaseback program is expected to be continued on an annual
basis.
At
December 31, 2007, NJNG had a stand alone letter of credit in the amount of $3
million, which will expire on December 31, 2008. This letter of credit does not
reduce the amount available to be borrowed under NJNG’s credit facility. NJNG
does not anticipate that this letter of credit will be drawn upon by the
counterparty, and it will be renewed as necessary, upon its
expiration.
Neither
NJNG nor the results of its operations are obligated or pledged to support the
NJR or NJRES credit facilities.
NJRES
As
of December 31, 2007 NJRES had a 3-year $30 million committed credit facility
that expires in October 2009 with a multinational financial institution. There
were no borrowings under this facility as of December 31, 2007.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Consolidated
There
were no issuances or redemptions of long-term debt securities for NJR, NJNG or
NJRES during the three months ended December 31, 2007
A
summary of NJR’s and NJNG’s long-term debt, committed credit facilities which
require commitment fees on the unused amounts, and NJRES’ committed facility
that does not require a fee, are as follows:
|
December
31,
|
September
30,
|
(Thousands)
|
2007
|
2007
|
NJR
|
|
|
|
|
Long
- term debt
(1)
|
$75,000
|
|
$75,000
|
|
Bank
credit facilities
|
$325,000
|
|
$325,000
|
|
|
|
|
|
|
Amount
outstanding at end of period
|
$92,600
|
|
$40,250
|
|
Weighted
average interest rate at end of period
|
5.18
|
%
|
6.17
|
%
|
NJNG
(2)
|
|
|
|
|
Long
- term debt
(1)
|
$254,800
|
|
$254,800
|
|
Bank
credit facilities
|
$250,000
|
|
$250,000
|
|
|
|
|
|
|
Amount
outstanding at end of period
|
$190,100
|
|
$175,700
|
|
Weighted
average interest rate at end of period
|
4.48
|
%
|
5.19
|
%
|
NJRES
|
|
|
|
|
Bank
credit facilities
|
$30,000
|
|
$30,000
|
|
|
|
|
|
|
Amount
outstanding at end of period
|
—
|
|
$30,000
|
|
Weighted
average interest rate at end of period
|
—
|
|
5.78
|
%
|
(1)
|
Long-term debt excludes lease
obligations of $59.3 million
and $53.3 million
at
December 31, 2007 and September 30, 2007,
respectively.
|
(2)
|
The table includes only
committed credit facilities for short-term borrowings. Also included in
short-term debt on the Condensed Consolidated balance sheet as of December
31, 2007 and September 30, 2007, are $6.3 and $10.5 million, respectively,
related to an uncommitted credit
facility.
|
7.
|
CAP
ITALIZED
FINANCING COSTS AND DEFERRED
INTEREST
|
Allowance
for Funds Used During Construction, (AFUDC) included in Utility plant, and
capitalized interest included in Real estate properties and other and
Investments in equity investees on the Condensed Consolidated Balance Sheets,
are as follows:
|
Three Months
Ended
December
31
,
|
($ in
thousands)
|
2007
|
|
2006
|
|
AFUDC
– Utility plant
|
$535
|
|
$379
|
|
Weighted
average rate
|
8.31
|
%
|
5.36
|
%
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$36
|
|
$
43
|
|
Weighted
average interest rates
|
5.08
|
%
|
5.55
|
%
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$855
|
|
—
|
|
Weighted
average interest rates
|
5.98
|
%
|
—
|
|
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Commencing
on October 1, 2007, NJNG is including a capitalized cost of equity, at its
currently allowed return on equity rate of 11.5 percent, for its utility plant
construction as a component of AFUDC. Amounts shown in the table above for the
three months ended December 31, 2006 represent an interest cost component
only.
NJR,
through its CR&R subsidiary, capitalizes interest associated with the
development and construction of its commercial buildings. Interest is also
capitalized associated with the acquisition, development and construction of a
natural gas storage facility through NJR’s equity investment in Steckman Ridge
(see
Note 4. Investments in
Equity Investees
).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures. Accordingly, Other income included $738,000 and $887,000 of
deferred interest related to these SBC program costs for period ended December
31, 2007 and 2006, respectively.
8.
|
STO
CK-BASED
COMPENSATION
|
On
November 14, 2007, the Company granted 41,320 performance units, which are
market condition awards and vest in September 2010, and 41,320 shares of
restricted stock, which vest in equal installments over three years, subject to
certain conditions. On the same date, the Company also granted 23,590 restricted
shares that vest immediately. During the first quarter of fiscal 2008, 11,237
shares were issued pursuant to performance units granted in fiscal 2005 that
were earned as of September 30, 2007.
During
the first three months of fiscal 2008, included in operation and maintenance
expense is $483,000 related to stock based compensation. There is approximately
$5.0 million of deferred compensation expense related to unvested shares,
options and performance units that are expected to be recognized over the next 3
years.
Pension and Other Postemployment
Benefit Plans (OPEB)
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and life
insurance) for employees and covered dependents were as follows:
|
Pension
|
OPEB
|
|
Three Months
Ended
December
31,
|
Three Months
Ended
December
31,
|
(Thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service
cost
|
$ 728
|
|
$ 733
|
|
$ 488
|
|
$ 454
|
|
Interest
cost
|
1,648
|
|
1,554
|
|
821
|
|
757
|
|
Expected
return on plan assets
|
(2,183
|
)
|
(2,052
|
)
|
(583
|
)
|
(541
|
)
|
Recognized
actuarial loss
|
275
|
|
399
|
|
262
|
|
266
|
|
Prior
service cost amortization
|
14
|
|
21
|
|
20
|
|
20
|
|
Transition
obligation amortization
|
—
|
|
—
|
|
89
|
|
89
|
|
Net
periodic cost
|
$ 482
|
|
$ 655
|
|
$1,097
|
|
$1,045
|
|
In
fiscal 2008, the Company has no minimum pension funding requirements. The
Company’s funding to its OPEB plans is expected to be approximately $1.5 million
in fiscal 2008 and $1.1 million annually, over the next four years. Additional
contributions may be made based on market conditions and various
assumptions.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
10.
|
ASS
ET
RETIREMENT OBLIGATIONS (ARO)
|
NJR
recognizes AROs related to the costs associated with cutting and capping its
main and service gas distribution pipelines of NJNG, which is required by New
Jersey law when taking such gas distribution pipeline out of
service.
The
following is an analysis of the change in the ARO liability for the period ended
December 31, 2007, in thousands:
|
|
|
Balance
at October 1, 2007
|
$23,895
|
|
Accretion
|
350
|
|
Additions
|
—
|
|
Retirements
|
(177
|
)
|
Balance at December 31,
2007
|
$24,068
|
|
Accretion
amounts are not reflected as an expense on NJR’s Condensed Consolidated
Statements of Income, but rather are deferred as a regulatory asset and netted
against NJNG’s regulatory liabilities, for presentation purposes, on the
Condensed Consolidated Balance Sheet.
During
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109
(FIN 48), which is
effective for the Company in fiscal 2008. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in
accordance with FASB Statement No. 109,
Accounting for Income Taxes
(SFAS 109) and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it does
not have a greater than 50 percent likelihood of being sustained. Additionally,
FIN 48 provides guidance on derecognition, declassification and interest and
penalties, among other items.
The
Company adopted the provisions of FIN 48 on October 1, 2007. The total amount of
FIN 48 liabilities as of the date of adoption was $6.5 million, including $4.7
million of uncertain tax liabilities and $1.8 million of interest and penalties.
As a result of the implementation of FIN 48, the Company recognized an
additional $4.3 million as an increase in the liability for unrecognized tax
benefits and interest. The previously recorded amount of $2.2 million, as well
as the additional amount recognized associated with the adoption of FIN 48, are
included as a component of Deferred and accrued taxes in the Current
classification of the Condensed Consolidated Balance Sheets. The following table
represents the increase in liability with respect to the adoption of FIN
48:
($ in
millions)
|
As of
October 1,
2007
|
Increase
in Retained Earnings (cumulative effect)
|
|
$
|
1.2
|
|
Decrease
in Deferred income taxes
|
|
$
|
(4.3
|
)
|
Increase
in Deferred and accrued taxes (FIN 48 liability)
|
|
$
|
4.3
|
|
There
are $1.7 million of state taxes included in the balance of unrecognized tax
benefits as of October 1, 2007. If they were to be recognized, it would
affect the effective tax rate, as this amount had previously been fully reserved
for, and was fully reflected as a component of current Deferred and accrued
taxes in the Condensed Consolidated Balance Sheets.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
There
is $3.1 million included in the balance of unrecognized tax benefits as of
October 1, 2007 that relates to a filing position the Company took concerning
the depreciable life of certain of its fixed assets at NJNG. The Company filed
an automatic change in method of accounting which is currently under audit with
the Internal Revenue Service (IRS). The Company anticipates closing the audit
and settling this issue within the next 12 months. The settlement of this issue
would reduce the FIN 48 reserve by approximately $3.6 million, which includes
associated interest.
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as additional tax expense. Upon adoption of FIN 48 on October 1, 2007
the Company had $1.8 million of accrued interest and penalties related to the
above liability computed under FIN 48, which had previously been expensed in the
Condensed Consolidated Statements of Income.
The
Company and one or more of its subsidiaries files income tax returns in the
United States Federal jurisdiction and in the states of New Jersey, New York and
Connecticut. The Company neither files in, nor believes it has a filing
requirement in, any foreign jurisdictions.
The
Company is no longer subject to United States federal income tax examinations
for years prior to fiscal 2004. The IRS commenced an examination of the
Company’s fiscal 2005 federal income tax return during the third quarter of
fiscal 2007. The exam is expected to be completed by the end of fiscal
2008.
The
Company is not currently under examination in any state but the periods ended
September 30, 2003 forward are all statutorily open to examination. In New
Jersey, NJNG currently has an open Tax Court case for the periods September 30,
1998 through September 30, 2002, which relates to New Jersey tax apportionment
rules. The Company expects a final tax court ruling related to this case during
fiscal 2008, and the unrecognized benefit of the $1.7 million of state taxes
that is included as part of the entire initial adoption of FIN 48, as described
above.
An
unfavorable ruling would result in a tax, interest and penalty expense of
approximately $2.9 million. This liability has previously been reserved for, and
the tax and interest would be deductible for federal income tax
purposes.
12.
|
COM
MITMENTS
AND CONTINGENT LIABILITIES
|
Cash
Commitments
NJNG
has entered into long-term contracts, expiring at various dates through 2022,
for the supply, storage and delivery of natural gas. These contracts include
current annual fixed charges of approximately $85.7 million at current contract
rates and volumes, which are recoverable through the BGSS.
For
the purpose of securing adequate storage and pipeline capacity, NJRES enters
into storage and pipeline capacity contracts, which require the payment of
certain demand charges by NJRES, in order to maintain the ability to access such
natural gas storage or pipeline capacity, during a fixed time period, which
generally range from one to five years. Demand charges are based on established
rates as regulated by the Federal Energy Regulatory Commission (FERC). These
demand charges represent commitments to pay storage providers or pipeline
companies for the right to store and transport natural gas utilizing their
respective assets. As of December 31, 2007, NJRES had contractual obligations
for demand charges related to storage contracts and pipeline capacity contracts
of $32.1 million and $59.9 million, respectively.
As
of December 31, 2007, there were NJR guarantees covering approximately $352
million of natural gas purchases and demand fee commitments of NJRES and NJNG
not yet reflected in Accounts payable on the Condensed Consolidated Balance
Sheet.
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Costs
for storage and pipeline demand fees, included as a component of Gas purchases
on the Condensed Consolidated Statements of Income, are as follows:
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
2007
|
|
2006
|
|
NJRES
|
$27.6
|
|
$36.8
|
|
NJNG
|
18.7
|
|
19.3
|
|
Total
|
$46.3
|
|
$56.1
|
|
NJNG’s
capital expenditures are estimated at $78.6 million for fiscal 2008, of which
approximately $16.4 million has been committed, and consists primarily of its
construction program to support customer growth, maintenance of its distribution
system and replacement needed under pipeline safety regulations.
The
Company’s future minimum lease payments under various operating leases are less
than $3.0 million annually for the next five years and $2.2 million in the
aggregate for all years thereafter.
Legal
Proceedings
Manufactured Gas Plant
Remediation
NJNG
is responsible for the remedial cleanup of three Manufactured Gas Plant (MGP)
sites, dating back to gas operations in the late 1800s and early 1900s, which
contain contaminated residues from former gas manufacturing operations. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP) with respect to two of the sites, as well as
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, under Administrative
Consent Orders or Memoranda of Agreement with the NJDEP.
NJNG
may, subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a remediation adjustment
clause (RAC) approved by the BPU. In October 2007, the BPU approved $14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through September 30, 2006. As of December 31, 2007, $85.5
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds, are included in Regulatory assets on the
Condensed Consolidated Balance Sheet.
In
September 2007, NJNG updated an environmental review of the MGP sites, including
a review of potential liability for investigation and remedial action. NJNG
estimated at the time of the review that total future expenditures to remediate
and monitor the three MGP sites for which it is responsible will range from
approximately $105.3 million to $164.8 million. NJNG’s estimate of these
liabilities is based upon known facts, existing technology and enacted laws and
regulations in place when the review was completed. However, NJNG expects actual
costs to differ from these estimates. Where it is probable that costs will be
incurred, but the information is sufficient only to establish a range of
possible 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 and a corresponding Regulatory asset of
$105.3 million on the Condensed Consolidated Balance Sheet. The actual costs to
be incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG
is presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the three MGP sites.
NJDEP has not made any specific demands for compensation for alleged injury to
groundwater or other natural resources. NJNG’s evaluation of these
potential
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
claims
is in the early stages, and it is not yet possible to quantify the amount of
compensation, if any, that NJDEP might seek to recover. NJNG anticipates any
costs associated with this matter would be recoverable through the
RAC.
NJNG
will continue to seek recovery of MGP-related costs through the RAC. If any
future regulatory position indicates that the recovery of such costs is not
probable, the related cost would be charged to income in the period of such
determination. However, because recovery of such costs is subject to BPU
approval, there can be no assurance as to the ultimate recovery through the RAC
or the impact on the Company’s results of operations, financial position or cash
flows, which could be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed above, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, results of operations or
cash flows.
Information
related to the Company’s various business segments, which are presented in the
Condensed Consolidated Statements of Cash Flows, is detailed below.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations. The Energy Services segment consists
of unregulated wholesale energy operations. The Retail and Other segment
consists of appliance and installation services, commercial real estate
development, investments and other corporate activities.
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
Revenues
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$
|
284,360
|
|
|
$
|
239,407
|
|
Energy
Services
|
|
|
520,211
|
|
|
|
495,787
|
|
Retail
and Other
|
|
|
6,631
|
|
|
|
2,276
|
|
Subtotal
|
|
|
811,202
|
|
|
|
737,470
|
|
Intersegment
Revenues
(1)
|
|
|
(64
|
)
|
|
|
(69
|
)
|
Total
|
|
$
|
811,138
|
|
|
$
|
737,401
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$
|
9,233
|
|
|
$
|
8,738
|
|
Energy
Services
|
|
|
53
|
|
|
|
54
|
|
Retail
and Other
|
|
|
117
|
|
|
|
110
|
|
Total
|
|
$
|
9,403
|
|
|
$
|
8,902
|
|
Operating
Income
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$
|
31,602
|
|
|
$
|
36,716
|
|
Energy
Services
|
|
|
22,563
|
|
|
|
21,596
|
|
Retail
and Other
|
|
|
372
|
|
|
|
(3,482
|
)
|
Total
|
|
$
|
54,537
|
|
|
$
|
54,830
|
|
Net
Income
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$
|
16,670
|
|
|
$
|
19,908
|
|
Energy
Services
|
|
|
13,150
|
|
|
|
11,524
|
|
Retail
and Other
|
|
|
365
|
|
|
|
(1,998
|
)
|
Total
|
|
$
|
30,185
|
|
|
$
|
29,434
|
|
(1)
|
Consists of transactions
between subsidiaries that are eliminated in
consolidation.
|
New Jersey Resources
Corporation
Part
I
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
At
December 31, 2007, there were 27,815,759 shares of common stock outstanding and
the book value per share was $24.01.
IT
EM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast and
Mid-Continent regions to the New England region and Canada through its two
principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR Energy Services
(NJRES).
Comprising
the Natural Gas Distribution segment, NJNG is a natural gas utility that
provides regulated retail natural gas service in central and northern New Jersey
and also participates in the off-system sales and capacity release markets. NJNG
is regulated by the New Jersey Board of Public Utilities (BPU).
NJRES
maintains and transacts around a portfolio of physical assets consisting of
natural gas storage and transportation contracts. In addition, NJRES provides
wholesale energy services to non-affiliated utility and energy companies. NJRES
comprises the Energy Services segment.
The
Retail and Other segment includes NJR Home Services (NJRHS), which provides
service, sales and installation of appliances; NJR Energy (NJRE), an investor in
energy-related ventures, most significantly through NJNR Pipeline, which holds
the Company’s 5.53 percent interest in Iroquois Gas and Transmission System, LP
(Iroquois), a 412-mile natural gas pipeline from the New York-Canadian border to
Long Island, New York, and NJR Steckman Ridge Storage Company, which has a 50
percent equity ownership interest in Steckman Ridge GP, LLC and Steckman Ridge,
LP (collectively, Steckman Ridge), a planned 17.7 billion cubic foot (Bcf)
natural gas storage facility, with up to 12 Bcf working capacity, that is being
jointly developed and constructed with a partner in western Pennsylvania; NJR
Investment, which makes energy-related equity investments; Commercial Realty and
Resources (CR&R), which holds and develops commercial real estate; and NJR
Service Company, which provides support services to the various NJR
businesses
NJR
has restated the financial statements for the period ended December 31, 2006
related to a change in accounting for certain derivative financial instruments.
Refer to
Note 1. General,
herein.
Net
income by business segment is as follows:
|
Three Months
Ended
December
31,
|
($ in thousands)
|
2007
|
|
2006
|
Net
Income
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$16,670
|
|
55
|
%
|
|
$19,908
|
|
68
|
%
|
Energy
Services
|
13,150
|
|
44
|
|
|
11,524
|
|
39
|
|
Retail
and Other
|
365
|
|
1
|
|
|
(1,998
|
)
|
(7
|
)
|
Total
|
$30,185
|
|
100
|
%
|
|
$29,434
|
|
100
|
%
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJRES
and NJR Energy account for certain of its derivative instruments (financial
futures, swaps and options) used to economically hedge the forecasted purchase,
sale and transportation of natural gas at fair value, as required under
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(as amended and interpreted, SFAS
133). In addition, effective October 1, 2007, NJRES is no longer electing the
“normal purchase normal sale” (NPNS) scope exception of SFAS 133 for contracts
that result in the physical purchase or sale of natural gas at NJRES. As such,
any new contracts to purchase or sell the natural gas commodity are accounted
for as derivatives, at fair value, at NJRES.
The
change in fair value of these derivative instruments at NJRES and NJR Energy
over periods of time, referred to as unrealized gains or losses, can result in
substantial volatility in reported net income under generally accepted
accounting principles of the United States of America (GAAP). When a financial
instrument settles the result is the realization of these gains or losses. NJRES
utilizes certain financial instruments to economically hedge inventory placed
into storage that will be sold at a later date, all of which were contemplated
as part of an entire forecasted transaction. GAAP requires that when a financial
instrument that is economically hedging natural gas that has been placed into
inventory, but not yet sold, has been settled, the realized gain or loss
associated with that settlement must be reflected currently in the income
statement. While NJRES will recognize the same economic impact from the entire
planned transaction, this also leads to additional volatility in NJRES’
earnings.
Unrealized
losses and gains at NJRES and NJR Energy are the result of changes in the fair
value of natural gas futures and basis swaps, as applicable, used to
economically hedge future natural gas sales, purchases and transportation.
Additionally NJRES records unrealized gains and losses on physical natural gas
commodity contracts entered into after September 30, 2007. Realized gains and
losses at NJRES are the result of the settlement of natural gas futures
instruments used to economically hedge natural gas purchases in inventory that
have not been sold.
Included
in Net income in the table above are unrealized (losses) and gains in the Energy
Services segment of $(2.9) million and $4.5 million, after taxes, for the
three-month period ended December 31, 2007 and 2006, respectively. Also included
in Net income in the table above are realized (losses) of $(3.0) million and
$(759,000), after taxes, for the three-month period ended December 31, 2007 and
2006, respectively, related to derivative instruments that have settled that are
designed to economically hedge natural gas that is still in storage
inventory.
Included
in Net income above are unrealized (losses) in the Retail and Other segment of
$(180,000) and $(2.4) million, after taxes, for the period ended December 31,
2007 and 2006, respectively.
Natural Gas Distribution
Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably through several key initiatives including:
Ÿ
|
Assessing
the market and timing with respect to filing for a base rate increase,
which takes into account many factors, including, but not limited to,
earning a reasonable rate of return on the investments that have been
constructed in the gas distribution system, as well as recovery of all
prudently incurred costs in order to provide reliable service throughout
NJNG’s service territory.
Based
upon increases in NJNG’s operating, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for its
natural gas delivery service by approximately $58.4 million, including a
return on NJNG’s equity component of 11.375 percent. This base rate case
filing is consistent with NJNG’s objectives of providing safe and reliable
service to its customers and earning a market-based return. Based upon
statutory time frames and potential regulatory lag, it is unlikely that
any modification to its delivery rates would become effective during
fiscal 2008;
|
|
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Ÿ
|
Working
with the BPU and New Jersey Department of the Public Advocate, Rate
Counsel, for the development of the decoupling of the impact of customer
usage on utility gross margin, which has allowed for the implementation of
the Conservation Incentive Program (CIP). The CIP allows NJNG to promote
conservation programs to its customers while maintaining protection of its
utility gross margin associated with reduced customer usage. CIP usage
differences are calculated annually and are recovered one year following
the end of the CIP usage year;
|
|
|
Ÿ
|
Managing
its customer growth, which is expected to range from 1.6 to 1.8 percent
annually;
|
|
|
Ÿ
|
Generating
earnings from various BPU-authorized gross margin-sharing incentive
programs; and
|
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging program
designed to keep customers’ prices as stable as
possible.
|
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
The
CIP pilot program was implemented effective October 1, 2006 to allow NJNG to
recover utility gross margin variations related to both weather and customer
usage. Recovery of such margin variations is subject to additional conditions
including an earnings test, which includes a return on equity component of 10.5
percent, and an evaluation of Basic Gas Supply Service (BGSS)-related savings
achieved. An annual review of the CIP must be filed in June of each year,
coincident with NJNG’s annual BGSS filing. In October 2007, the BPU
provisionally approved NJNG’s initial CIP recovery rates, which are designed to
recover approximately $15.6 million of accrued margin amounts.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of December 31, 2007 and
September 30, 2007, the obligation to fund these conservation programs was
recorded at its present value of $1.2 million and $1.4 million, respectively on
the Condensed Consolidated Balance Sheets.
Prior
to fiscal 2007, the impact of weather was mitigated by a Weather Normalization
Clause (WNC), which was suspended with the commencement of the CIP. In October
2007, the BPU approved the full recovery of $8.1 million of previously deferred
amounts related to the WNC.
Energy Services
Segment
NJRES
provides unregulated wholesale energy services, including base load natural gas,
peaking and balancing services, utilizing physical assets it controls through
natural gas pipeline transportation and storage contracts, as well as providing
asset management services to customers in states from the Gulf Coast and
Mid-continent regions to the Appalachian and Northeast regions and
Canada.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJRES
incorporates the following elements to provide for growth, while focusing on
maintaining a low-risk operating and counterparty credit profile:
Ÿ
|
Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
|
|
|
Ÿ
|
Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers by identifying the lowest cost alternative with the
natural gas supply, transportation availability and markets to which NJRES
is able to access through its business footprint and contractual asset
portfolio;
|
|
|
Ÿ
|
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate gross margin; and
|
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
NJRES
views “financial margin” as its key financial measurement metric. NJRES’
financial margin represents revenues earned from the sale of natural gas less
costs of natural gas sold, transportation and storage, and excludes any
accounting impact from the change in fair value of derivative instruments
designed to hedge the economic impact of its transactions that have not been
settled, which represent unrealized gains and losses, and realized gains and
losses associated with financial instruments economically hedging natural gas in
storage and not yet sold.
NJRES
has built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales to these
customers have allowed NJRES to leverage its transportation and storage capacity
and manage sales to these customers in an aggregate fashion. This strategy
allows NJRES to extract more value from its portfolio of natural gas storage and
pipeline transportation capacity through the arbitrage of pricing differences as
a result of locational differences or over different periods of
time.
NJRES
also focuses on creating value from underutilized natural gas assets, which are
typically amassed through contractual rights to natural gas transportation and
storage capacity. NJRES has developed a portfolio of natural gas storage and
transportation capacity in states in the Northeast, Gulf Coast, Mid-continent
and Appalachian regions and eastern Canada. These assets become more valuable
when prices change between these areas and across time periods. NJRES seeks to
optimize this process on a daily basis as market conditions change by evaluating
all the natural gas supplies, transportation and opportunities to which it has
access, to find the most profitable alternative to serve its various
commitments. This enables NJRES to capture geographic pricing differences across
these various regions as delivered natural gas prices change as a result of
market conditions. NJRES focuses on earning a financial margin on a single
original transaction and then utilizing that transaction, and the changes in
prices across the regions or across time periods, as the basis to further
improve the initial result.
In
a similar manner, NJRES participates in natural gas storage transactions where
it seeks to identify pricing differences that occur over time, as prices for
future delivery periods at many different delivery points, are readily
available. For example, NJRES generates financial margin by locking in the
differential between purchasing natural gas at a low current or future price
and, in a related transaction, selling that natural gas at a higher current or
future price, all within the constraints of its credit and contracts policies.
Through the use of transportation and storage services, NJRES is able to
generate financial margin through pricing differences that occur over the
duration of time the assets are held.
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJRES
also participates in park-and-loan transactions with pipeline counterparties,
where NJRES will borrow natural gas when there is an opportunity to capture
arbitrage value. In these cases, NJRES evaluates the economics of the
transaction to determine if it can capture pricing differentials in the
marketplace in order to be able to generate financial margin. In evaluating
these transactions NJRES will compare the fixed fee it will pay and the
resulting spread it can generate when considering the amount it will receive to
sell the borrowed gas to another counterparty in relation to the cost it will
incur to purchase the gas at a later date for return back to the pipeline. When
the transaction allows NJRES to generate a financial margin, NJRES will fix the
financial margin by economically hedging the transaction with natural gas
futures.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including trading limits, approval processes, segregation
of duties, and formal contract and credit review and approval procedures. NJRES
continuously monitors and seeks to reduce the risk associated with various
counterparties credit exposure. The Risk Management Committee (RMC) of NJR,
oversees compliance with these established guidelines.
Retail and Other
Segment
In
the Retail and Other segment, NJR utilizes a subsidiary, NJR Energy Holdings, to
develop its investments in natural gas “mid-stream” assets. Mid-stream assets
represent natural gas transportation and storage facilities. NJR believes that
acquiring, owning and developing these mid-stream assets, which generally have a
regulated rate or tariff structure, can provide a significant growth opportunity
for the Company. To that end, NJR has acquired an interest in Iroquois and
Steckman Ridge, which is currently under development, and is actively pursuing
other potential opportunities that meet its investment and development criteria.
Other businesses in the Retail and Other segment include NJRHS, which provides
service, sales and installation of appliances to over 149,000 customers, and is
focused on growing its installation business and expanding its service contract
customer base, and CR&R, which seeks additional opportunities to enhance the
value of its undeveloped land.
The
financial results of Retail and Other consist primarily of the operating results
of NJRHS and equity in earnings attributable to the Company’s equity investment
in Iroquois as well as to investments made by NJR Energy, an investor in other
energy-related ventures through its operating subsidiaries.
As
of December 31, 2007, excluding capitalized interest and other direct costs, NJR
has invested $58 million in the Steckman Ridge natural gas storage facility.
Project costs related to the development of the storage facility are expected to
be approximately $250 million of which NJR is responsible for 50 percent, or
$125 million. NJR anticipates that Steckman Ridge will be able to secure
non-recourse financing for a portion of the construction and development of its
facilities, thereby potentially reducing the expected funding obligation of NJR.
There can be no assurances that such non-recourse project financing will be
secured or available for Steckman Ridge.
Critical Accounting
Policies
A
summary of NJR’s critical accounting policies is included in
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
of its Annual
Report on Form 10-K for the period ended September 30, 2007. NJR’s critical
accounting policies have not changed materially from those reported in the 2007
Annual Report on Form 10-K with the exception of the following:
Derivative Instrument
s
Derivative
activities are recorded in accordance with SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities,
as amended (SFAS 133), under which
NJR records the fair value of derivatives held as assets and liabilities. NJR’s
unregulated subsidiaries record changes in the fair value of its derivative
instruments in Gas purchases or Operating revenues, as appropriate, on the
Condensed Consolidated Statements of Income.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
In
providing its unregulated wholesale energy services, NJRES also enters into
physical contracts to buy and sell natural gas. For contracts entered into prior
to October 1, 2007, NJRES elected to use the “normal purchase normal sale” scope
exception (NPNS or normal) under SFAS 133 since the contracts provided for the
purchase or sale of natural gas with the intention of delivering the natural gas
in quantities expected to be used or sold by NJRES over a reasonable period of
time in the normal course of its business. The Company continues to believe that
the conditions that originally qualified these contracts as normal continue to
exist, and, accordingly, NJRES will record the related liabilities incurred and
assets acquired under these remaining contracts when title to the underlying
natural gas commodity passes under accrual based accounting.
Effective
October 1, 2007, the Company has decided to discontinue using the NPNS exception
for any new physical commodity contracts entered into by NJRES. The criteria for
designating contracts as normal includes an assessment of the probability of
delivery at inception while considering certain factors such as expected future
demand. NJRES will continue to enter into these contracts with the intention of
physically delivering the natural gas; however, NJRES has determined that the
probability of net settling these contracts for cash may be greater than had
previously been experienced. As a result, commencing with contracts entered into
subsequent to September 30, 2007, NJRES will treat these contracts as
derivatives and record them at fair value in the Condensed Consolidated Balance
Sheet, with changes in fair value being recorded as a component of Operating
revenues in the Condensed Consolidated Statements of Income.
Capitalized Financing
Costs
NJNG
capitalizes an allowance for funds used during construction (AFUDC), as a
component of Utility plant in the Condensed Consolidated Balance Sheets.
Commencing October 1, 2007, in addition to cost of debt, AFUDC also includes the
estimated cost of equity funds used to finance construction on its natural gas
transmission and distribution system, which is currently established through
allowed rates at 11.5 percent. The debt portion of AFUDC is recorded as a
reduction to Interest expense and the equity portion is recorded in Other income
in the Condensed Consolidated Statements of Income. Under regulatory rate
practices and in accordance with SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation
, NJNG fully recovers both components of AFUDC
through base rates.
Recently Issued Accounting
Standards
Refer
to
Note 1. General
, for
discussion of recently issued accounting standards.
Results of
Operations
Consolidated
Net
income for the three-month period ended December 31, 2007 increased by 2.6
percent to approximately $30.2 million, compared with net income of
approximately $29.4 million for the same period in fiscal 2007. Basic and
diluted earnings per share increased by 2.8 percent to $1.09 and $1.08, compared
with $1.06 and $1.05, respectively.
The
increase in net income was due primarily to the following:
Ÿ
|
increased
gross margin and lower interest expense at NJRES due to decreased
short-term debt levels used to fund natural gas storage purchases for
inventory;
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Ÿ
|
lower
unrealized losses at NJR Energy as a result of fluctuations in market
prices and mix of open financial positions economically hedging forecasted
natural gas purchases and sales; partially offset by
|
|
|
Ÿ
|
lower
gross margin from incentive-based programs and increased operation and
maintenance expense at NJNG.
|
The
Company’s Operating revenues and Gas purchases are as follows:
|
|
Three Months
Ended
December
31,
|
|
($ in
Thousands)
|
|
2007
|
|
|
2006
|
|
|
% Change
|
Operating
revenues
|
|
$
|
811,138
|
|
|
$
|
737,401
|
|
|
|
10.0
|
%
|
Gas
purchases
|
|
$
|
684,694
|
|
|
$
|
621,935
|
|
|
|
10.1
|
%
|
Operating
revenues increased $73.7 million for the three months ended December 31, 2007,
compared with the same period of the prior fiscal year due primarily
to:
Ÿ
|
increased
NJNG firm sales as a result of it being 13.4 percent colder than the same
period of the prior fiscal year, and lower BGSS customer refunds provided
to residential and small commercial customers in fiscal 2008 compared to
fiscal 2007; and
|
|
|
Ÿ
|
increased
revenues at NJRES due to higher sales volumes and prices, along with the
commencement of including the change in fair value of physical commodity
contracts beginning in fiscal 2008.
|
These
same factors resulted in an increase in Gas purchases of $62.8 million for the
three months ended December 31, 2007, as compared to the same periods in the
prior fiscal year, which includes the impact of a decrease of $19 million in
unrealized gains at NJRES that resulted in increased gas purchases.
Natural Gas Distribution
Operations
NJNG
is a local natural gas distribution company that provides regulated retail
energy services to approximately 481,000 residential and commercial customers in
central and northern New Jersey and participates in the off-system sales and
capacity release markets.
NJNG’s
business is seasonal by nature, as weather conditions directly influence the
volume of natural gas delivered. Specifically, customer demand substantially
increases during the winter months when natural gas is used for heating
purposes. As a result, NJNG receives most of its gas distribution revenues
during the first and second fiscal quarters and is subject to variations in
earnings and working capital during the year.
The
Electric Discount and Energy Competition Act (EDECA) provides the framework for
New Jersey’s energy markets, which are open to competition from other energy
suppliers. Currently, NJNG’s residential markets are open to competition, and
its rates are segregated between BGSS (natural gas commodity) and delivery
(i.e., transportation) components. NJNG earns no utility gross margin on the
commodity portion of its natural gas sales. NJNG earns utility gross margin
through the delivery of natural gas to its customers. Under an existing order
from the BPU, BGSS can be provided by suppliers other than the state’s natural
gas utilities.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJNG’s
financial results are as follows:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
284,360
|
|
|
$
|
239,407
|
|
Less:
|
|
|
|
|
|
|
|
|
Gas
purchases
|
|
|
190,148
|
|
|
|
150,993
|
|
Energy
and other taxes
|
|
|
16,363
|
|
|
|
12,520
|
|
Regulatory
rider expense
|
|
|
12,165
|
|
|
|
9,466
|
|
Total
Utility Gross Margin
|
|
$
|
65,684
|
|
|
$
|
66,428
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
Residential
and commercial
|
|
$
|
59,196
|
|
|
$
|
58,368
|
|
Transportation
|
|
|
4,934
|
|
|
|
4,566
|
|
Total
Utility Firm Gross Margin
|
|
|
64,130
|
|
|
|
62,934
|
|
Incentive
programs
|
|
|
1,420
|
|
|
|
3,278
|
|
Interruptible
|
|
|
134
|
|
|
|
216
|
|
Total
Utility Gross Margin
|
|
|
65,684
|
|
|
|
66,428
|
|
Operation
and maintenance expense
|
|
|
23,879
|
|
|
|
20,255
|
|
Depreciation
and amortization
|
|
|
9,233
|
|
|
|
8,738
|
|
Other
taxes not reflected in utility gross margin
|
|
|
970
|
|
|
|
719
|
|
Operating
Income
|
|
$
|
31,602
|
|
|
$
|
36,716
|
|
Other
income
|
|
|
1,232
|
|
|
|
1,047
|
|
Interest
charges, net
|
|
|
6,119
|
|
|
|
5,393
|
|
Income
tax provision
|
|
|
10,045
|
|
|
|
12,462
|
|
Net
Income
|
|
$
|
16,670
|
|
|
$
|
19,908
|
|
Utility Gross
Margin
NJNG’s
utility gross margin is defined as natural gas revenues less natural gas
purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA) and
regulatory rider expenses. Management believes that utility gross margin
provides a more meaningful basis than revenue for evaluating utility operations
since natural gas costs, sales tax, TEFA and regulatory rider expenses are
included in operating revenue and passed through to customers and, therefore,
have no effect on utility gross margin. This definition of utility gross margin
may not be comparable to the definition of gross margin used by others in the
natural gas distribution business and other industries.
Natural
gas costs are charged to operating expenses on the basis of therm sales at the
prices in NJNG’s BGSS tariff approved by the BPU. The BGSS tariff rate includes
projected natural gas costs, net of supplier refunds, the impact of hedging
activities and credits from non-firm sales and transportation activities. Any
underrecoveries or overrecoveries from the projected amounts are deferred and
reflected in the BGSS tariff rate in subsequent years.
TEFA,
which is included in Energy and other taxes on the Condensed Consolidated
Statements of Income, is calculated on a per-therm basis and excludes sales to
cogeneration facilities, other utilities and off-system sales. TEFA represents a
regulatory allowed assessment imposed on all energy providers in the state of
New Jersey, as TEFA has replaced the previously used utility gross receipts tax
formula.
Regulatory
rider expenses consist of recovery of state-mandated programs and the
remediation adjustment clause costs. These expenses are offset by corresponding
revenues and are calculated on a per-therm basis.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJNG’s
Operating revenues and Gas purchases for the three months ended December 31,
2007 increased $45.0 million, and $39.2 million, respectively, compared
with the same period in the prior fiscal year due primarily to weather being
13.4 percent colder than the same period in the prior fiscal year. The increase
in Operating revenues and Gas purchases was also affected by the BGSS customer
refunds provided to residential and small commercial customers of $32.1 million
and $55.1 million, inclusive of sales tax refunds of $2.1 million and $3.6
million, in December 2007 and December 2006, respectively. In both fiscal years,
these customer refunds were the result of anticipated reductions in the cost to
acquire wholesale natural gas, as compared to the current established rate
included in NJNG’s BGSS tariff.
Sales
tax and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Condensed Consolidated Statements of Income, totaled $16.4
million and $12.5 million for the three months ended December 31, 2007 and 2006,
respectively. The increase is due primarily to an increase in operating revenue
from firm sales of $42 million for the three months ended December 31,
2007.
Regulatory
rider expenses totaled $12.2 million and $9.5 million for the three months ended
December 31, 2007 and 2006, respectively. The increase in regulatory rider
expenses is due primarily to an increase in firm throughput of 2.4 Bcf for the
three months ended December 31, 2007 as compared to the three months ended
December 31, 2006, which was due primarily to an increase in usage as a result
of the previously mentioned colder weather.
Utility
gross margin is comprised of three major categories:
Ÿ
|
Utility
Firm Gross Margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
|
Ÿ
|
Incentive
programs, where margins generated or savings achieved from BPU-approved
off-system sales, capacity release, Financial Risk Management (defined in
Incentive Programs, below) or storage incentive programs are shared
between customers and NJNG; and
|
|
|
Ÿ
|
Utility
gross margin from interruptible customers, which is generated from large
commercial and industrial customers who receive non-firm natural gas
service at lower rates, and is subject to BPU-approved incentives through
October 31, 2007.
|
Utility Firm Gross
Margin
Effective
October 1, 2006, the BPU approved the CIP to encourage energy savings while
allowing NJNG to recover the necessary costs of operations. The three-year pilot
program eliminates the disincentive to promote conservation and energy
efficiency, since utility gross margin is no longer directly linked to customer
usage. The CIP tariff normalizes NJNG’s utility gross margin recoveries for
variances not only in weather but also other factors affecting usage, including
customer conservation. Recovery of utility gross margin for the non-weather
variance through the CIP is limited to the amount of certain gas supply cost
savings achieved, and is subject to an earnings test, which contains a return on
equity component of 10.5 percent.
Customers
switching between sales service and transportation service affect the components
of utility gross margin from firm customers. NJNG’s total utility gross margin
is not negatively affected by customers who use its transportation service and
purchase natural gas from another supplier because its tariff is designed so
that no profit is earned on the commodity portion of sales to firm customers.
All customers who purchase natural gas from another supplier continue to use
NJNG for transportation service.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Total
utility firm gross margin increased $1.2 million, or 1.9 percent, for the three
months ended December 31, 2007, as compared to the same period in the prior
fiscal year, due primarily to an increase in residential customers along with a
slight increase in transport customer margin. Gross margin from the commercial
customers remained relatively consistent with the same period in the prior
fiscal year.
The
weather for the three months ended December 31, 2007 was 8.2 percent warmer than
normal, which resulted in an accrual of utility gross margin under the CIP of
$2.9 million, compared with 18.3 percent warmer than normal weather for the same
period last fiscal year, which resulted in an accrual of utility gross margin of
$8.0 million.
In addition,
customer usage was lower than the established benchmark
during fiscal
2008
,
which resulted in an additional accrual of utility gross margin under the CIP of
$
3.2
million
compared to $3.3
million in fiscal 2007
.
For
the period ended December 31, 2007, NJNG had 9,324 and 8,551 residential
customers and 4,889 and 4,319 commercial customers using its transportation
service at December 31, 2007 and 2006, respectively. The increase in
transportation customers for the period ended December 31, 2007 was due
primarily to an increase in marketing activity by third party natural gas
service providers in NJNG’s service territory.
Utility
firm gross margin from transportation service remained relatively flat at $4.9
million for the three months ended December 31, 2007, as compared to 4.6 million
for the three months ended December 31, 2006. NJNG transported 2.8 Bcf for its
firm customers in the three months ended December 31, 2007, compared with 2.5
Bcf for the same period ended December 31, 2006.
NJNG
added, in total, 1,723 and 2,614 new customers during the three months ended
December 31, 2007 and 2006, respectively. In addition, NJNG converted 104 and 69
existing customers to natural gas heat and other services during the same
periods for fiscal 2008 and 2007, respectively. This customer growth represents
an estimated annual increase of approximately 0.24 Bcf in sales to firm
customers, assuming normal weather and usage.
Incentive
Programs
To
reduce the overall cost of its natural gas supply commitments, NJNG has entered
into contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system requirements. These
off-system sales enable NJNG to spread its fixed demand costs, which are charged
by pipelines to access their supplies year round, over a larger and more diverse
customer base. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to hedge NJNG’s
natural gas costs. As of November 1, 2007, NJNG retains 15 percent of the
utility gross margin, with 85 percent credited to firm customers through the
BGSS. Previously, NJNG customers were credited 80 percent and NJNG retained 20
percent of the gains and losses.
The
storage incentive program shares gains and losses on an 80 percent and 20
percent basis between customers and NJNG, respectively. This program measures
the difference between the actual cost of natural gas injected into storage and
a benchmark applicable to the April-through-October injection
season.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJNG’s
incentive programs totaled 9.7 Bcf and generated $1.4 million of utility gross
margin for the three months ended December 31, 2007, compared with 10.6 Bcf and
$3.3 million of utility gross margin during the same period last fiscal year.
Utility gross margin from incentive programs comprised 2.2 percent of total
utility gross margin at December 31, 2007 and 4.9 percent of total utility gross
margin for the same period in fiscal 2007, respectively. The decrease in utility
gross margin was due primarily to:
Ÿ
|
a
decrease in margin from the storage program as a result of timing
variations of storage incentive transactions;
|
|
|
Ÿ
|
a
decrease in margin from the FRM program as a result of natural gas option
spreads that were lower in the three months ended December 31, 2007 as
compared with the three months ended December 31, 2006, coupled with
slightly decreased volumes and a decrease in the sharing percentage;
slightly offset by
|
|
|
Ÿ
|
an
increase in higher average sales prices offset by a decrease in sales
volumes, which resulted in a net increase in off system sales
margin.
|
New
York Mercantile Exchange (NYMEX) settlement prices for natural gas are a general
indication of the monthly market movements. NYMEX prices have increased by 6.2
percent to an average of $6.965/dth for the three months ended December 31,
2007, compared with $6.557/dth for the same period of the prior fiscal year,
while the average off-system price increased by 12 percent to an average of
$7.934/dth during the period ended December 31, 2007 compared to $7.083/dth in
the same period last fiscal year.
Interruptible Tariff
Revenues
NJNG
serves 45 customers through interruptible sales and/or transportation tariffs.
Sales made under the interruptible sales tariff are priced on market-sensitive
energy parity rates. Although therms sold and transported to interruptible
customers represented 5.4 percent of total throughput for the three months ended
December 31, 2007, and 4.0 percent of the total throughput during the same
period last fiscal year, they accounted for less than 1 percent of the total
utility gross margin in each year due to the sharing formulas that govern these
sales through October 2007.
Under
these formulas, NJNG retains 10 percent of the utility gross margin from
interruptible sales and 5 percent of the utility gross margin from
transportation sales, with 90 percent and 95 percent, respectively, credited to
firm sales customers through the BGSS. Interruptible sales were 0.7 Bcf and 0.2
Bcf for the three months ended December 31, 2007 and 2006, respectively. In
addition, NJNG transported 0.9 Bcf for each of the three months ended December
31, 2007 and 2006, respectively, for its interruptible customers. The agreement
with the BPU approved on October 3, 2007, included the termination of the
incentive programs related to interruptible sales, on-system interruptible
transportation and sales to certain electric generation facilities effective
November 1, 2007.
Operation and Maintenance
Expense
Operation
and maintenance expense increased $3.6 million, or 17.9 percent, during the
three months ended December 31, 2007, as compared with the same period last
fiscal year, due primarily to:
Ÿ
|
higher
compensation costs of $2.7 million due primarily to an increases in the
number of employees and overtime labor as well as annual wage
increases;
|
|
|
Ÿ
|
an
increase in the bad debt reserves of $229,000 as a result of an increase
in operating revenue that result in a change in the nature of customer
accounts receivable; and
|
|
|
Ÿ
|
an
increase in materials and supplies expense of $329,000 due primarily to an
increase in high pressure meter
relocations.
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Operating
Income
Operating
income decreased $5.1 million, or 13.9 percent, for the three months ended
December 31, 2007 as compared with the same period last fiscal year, due
primarily to:
Ÿ
|
a
decrease in margin from incentive programs of $1.9 million as discussed
above;
|
|
|
Ÿ
|
an
increase in depreciation expense of $495,000, as a result of greater
utility plant being placed into service; and
|
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $3.6
million, as discussed above; partially offset by
|
|
|
Ÿ
|
an
increase in firm margin in the amount of $1.2 million as discussed
above.
|
Interest
Charges
Interest
charges increased $726,000 for the three months ended December 31, 2007 compared
with the same period last fiscal year, due primarily to:
Ÿ
|
an
increase in BGSS interest of $194,000 due to customers balances associated
with overrecovered gas costs;
|
|
|
Ÿ
|
an
increase of $119,000 in short-term interest due to higher average balances
on short-term debt offset by lower average interest rates;
and
|
|
|
Ÿ
|
an
increase of $217,000 associated with reduced amounts capitalized under
NJNG’s new AFUDC accounting policy effective October 1, 2007. As a result
of now including a cost of equity component in its AFUDC calculation, the
amount of interest capitalized for AFUDC purposes is calculated using a
lower basis, as compared with the prior period, thereby causing the
increase in interest expense.
|
Net
Income
Net
income decreased $3.2 million, or 16.3 percent, to $16.7 million from $19.9
million in the three months ended December 31, 2007 and 2006, respectively,
primarily as a result of lower operating income of $5.1 million, as described
above, offset by lower income tax expense of $2.4 million.
Energy Services
Operations
NJRES
utilizes contractual assets that it controls for natural gas storage and
pipeline transportation to meet its various sale and delivery commitments to its
customers. NJRES purchases natural gas predominantly in the Gulf region of the
United States and Canada, and transports that gas, through the use of pipeline
contracts to which it has reserved capacity through the payment of a fixed
demand charge, to either storage facilities that it has reserved, primarily in
the Appalachian, Mid-Continent and Gulf regions of the United States and Canada
or directly to customers in various market areas including the Northeastern
region of the United States and eastern Canada.
NJRES
enters into contracts for delivery of physical natural gas and also enters into
derivative financial contracts at advantageous prices to establish an initial
financial margin for each of its forecasted transactions. Through the use of its
contracts for natural gas storage and pipeline capacity, NJRES is able to take
advantage of pricing differences between geographic locations, commonly referred
to as “locational spreads,” as well as over
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
different
time periods, for the delivery of natural gas to its customers, thereby
improving the initially established financial margin result. NJRES utilizes
financial futures, forwards and swap contracts to economically fix and protect
the cash flows surrounding these transactions.
Predominantly
all of NJRES’ purchases and sales result in the physical delivery of natural
gas, and therefore, NJRES has elected the “normal purchase normal sale” scope
exception of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended (SFAS 133), for all
physical commodity contracts entered into prior to October 1, 2007, under which
related liabilities incurred and assets acquired under these contracts are
recorded when title to the underlying commodity passes. For all physical
commodity contracts entered into subsequent to September 30, 2007, NJRES has
elected to not use the normal purchase normal sale scope exception of SFAS 133,
and records these physical commodity contracts at fair value on the Condensed
Consolidated Balance Sheets. All changes in the fair value of physical commodity
contracts entered into subsequent to October 1, 2007 are recorded as part of
Operating revenues in the Condensed Consolidated Statements of
Income.
The
changes in fair value of NJRES’ financial instruments, which are financial
futures, options, and swap contracts, are recognized in the Condensed
Consolidated Statements of Income, as a component of Gas purchases.
NJRES’
financial and physical contracts will result, over time, in earning a gross
margin on the entire transaction. For financial reporting purposes under GAAP,
the change in fair value associated with derivative instruments used to
economically hedge these transactions are recorded as a component of Operating
revenues or Gas purchases in the Condensed Consolidated Statements of Income, as
appropriate, during the duration of the financial instrument or commodity
contract. These changes in fair value are referred to as unrealized gains and
losses. In other instances, certain financial contracts designed to economically
fix or hedge the price of natural gas that is purchased and placed into storage,
to be sold at a later date, settle and result in realized gains, which are
recorded as a component of Gas purchases in the Condensed Consolidated
Statements of Income.
These
unrealized gains or losses from the change in fair value of unsettled financial
instruments and physical commodity contracts, or realized gains or losses
related to financial instruments that economically hedge natural gas inventory
that has not been sold as part of a planned transaction, cause large variations
in the reported gross margin and earnings of NJRES. NJRES will continue to earn
the same amount of gross margin over the time period of the forecasted
transaction; however, gross margin or earnings during periods prior to
transaction settlement will not reflect the underlying economic
result.
NJRES
expenses its demand charges, which represent the right to use natural gas
pipeline and storage capacity assets of a third-party for a fixed period of
time, ratably over the term of the related natural gas pipeline or storage
contract.
NJRES’
financial results are summarized as follows:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$
|
520,211
|
|
|
$
|
495,787
|
|
Gas
purchases
|
|
|
494,546
|
|
|
|
470,942
|
|
Gross
margin
|
|
|
25,665
|
|
|
|
24,845
|
|
Operation
and maintenance expense
|
|
|
2,840
|
|
|
|
3,003
|
|
Depreciation
and amortization
|
|
|
53
|
|
|
|
54
|
|
Other
taxes
|
|
|
209
|
|
|
|
192
|
|
Operating
income
|
|
|
22,563
|
|
|
|
21,596
|
|
Other
income
|
|
|
130
|
|
|
|
135
|
|
Interest
charges, net
|
|
|
877
|
|
|
|
1,711
|
|
Income
tax provision
|
|
|
8,666
|
|
|
|
8,496
|
|
Net
income
|
|
$
|
13,150
|
|
|
$
|
11,524
|
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Gross
margin for the three months ended December 31, 2007 remained relatively
consistent in comparison with the same period in the prior fiscal year. NJRES
incurred derivative losses of $(10.1) million and gains of $6.8 million for the
three months ended December 31, 2007 and 2006, respectively, due primarily to
fluctuations in market prices and portfolio mix of open trade positions that
reduced the unrealized portion of financial derivative gains from $8.0 million
in the prior fiscal year period to an unrealized loss of $(7.0) million in the
current fiscal year period. These losses on financial derivatives were partially
offset by the unrealized gains associated with the change in fair value of
physical commodity forward positions of $2.0 million, which commenced in fiscal
2008.
Additionally,
management of the Company uses non-GAAP measures when viewing the results of
NJRES to monitor the operational results without the impact of unsettled and
certain settled derivative instruments. These non-GAAP measures are “financial
margin” and “net financial earnings.”
Financial
margin represents Operating revenues from the sale of natural gas less Gas
purchases, and excludes the accounting impacts of unrealized gains and losses
from derivative instruments and realized gains and losses of certain derivative
instruments related to natural gas inventory. These accounting impacts represent
the change in fair value of these financial instruments, which represent futures
and swaps designed to economically hedge forecasted natural gas purchases, sales
and transportation, and are primarily open positions resulting in unrealized
gains or losses and settled derivative positions related to natural gas that is
still included in inventory storage. These settled instruments represent
realized gains and losses under GAAP, but result in economically hedging the
ultimate sale of natural gas. In addition, all of NJRES’ physical commodity
contracts entered into after September 30, 2007 are being accounted for as
derivatives, with the change in fair value recorded as an unrealized gain or
loss under GAAP. Net financial earnings represent Net income excluding the
accounting impacts of unrealized and realized gains and losses from these
derivative instruments, after taxes.
As
revenues from the sale of natural gas to its customers, on a wholesale basis,
are highly correlated to the wholesale price of natural gas and the economic
impact of its derivative instruments will be substantially the same as the
accounting results under GAAP upon transaction settlement, management of the
Company believes that the net financial margin and net financial earnings
measurements represent the economic results of operations of NJRES. While
significant volatility is measured on a GAAP basis the ultimate impact of the
transaction will yield the same cash flow and economic result upon settlement of
the derivative instrument and completion of the forecasted transaction. In
viewing the financial margin and net financial earnings of NJRES, management of
the Company reviews the results of operations without this volatility to measure
the economic impact that NJRES achieved in relation to established
benchmarks and goals.
The
following table is a computation of Financial margin of NJRES:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$
|
520,211
|
|
|
$
|
495,787
|
|
Gas
purchases
|
|
|
494,546
|
|
|
|
470,942
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
|
|
4,922
|
|
|
|
(8,039
|
)
|
Realized
loss from derivative instruments related to natural gas
inventory
|
|
|
5,163
|
|
|
|
1,289
|
|
Financial
margin
|
|
$
|
35,750
|
|
|
$
|
18,095
|
|
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
A
reconciliation of Operating income, the closest GAAP financial
measurement, to the Financial margin of NJRES is as
follows:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
income
|
|
$
|
22,563
|
|
|
$
|
21,596
|
|
Add:
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
|
|
2,840
|
|
|
|
3,003
|
|
Depreciation
and amortization
|
|
|
53
|
|
|
|
54
|
|
Other
taxes
|
|
|
209
|
|
|
|
192
|
|
Subtotal
– Gross margin
|
|
$
|
25,665
|
|
|
$
|
24,845
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
|
|
4,922
|
|
|
|
(8,039
|
)
|
Realized
loss from derivative instruments related to natural gas
inventory
|
|
|
5,163
|
|
|
|
1,289
|
|
Financial
margin
|
|
$
|
35,750
|
|
|
$
|
18,095
|
|
A
reconciliation of Net income to Net financial earnings is as
follows:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$
|
13,150
|
|
|
$
|
11,524
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of taxes
|
|
|
2,900
|
|
|
|
(4,464
|
)
|
Realized
loss from derivative instruments related to natural gas
inventory,
net
of taxes
|
|
|
3,042
|
|
|
|
759
|
|
Net
financial earnings
|
|
$
|
19,092
|
|
|
$
|
7,819
|
|
NJRES'
financial margin for the three months ended December 31, 2007 increased $17.7
million, compared with the same period in prior fiscal year, due primarily to
increased availability of capacity assets in the Northeast market region. The
additional capacity enabled NJRES to transport higher volumes of natural gas to
the Northeast region during the current winter season, when these capacity
assets have a greater market value and correspondingly higher locational spread,
than in the summer season when demand for natural gas is typically lower. The
increase in financial margin was also partially attributable to colder weather
in the Northeast and Mid-Continent regions of the U.S., when compared to the
same period in the prior fiscal year, which resulted in higher demand levels for
natural gas, and enabled NJRES to actively participate in the supply of natural
gas to those regions through transaction activities that optimized the value of
the existing portfolio of physical assets.
NJRES’
operation and maintenance expense decreased $163,000, during the three months
ended December 31, 2007, compared with the same period last fiscal year, due
primarily to timing of adjustments related to performance incentives, partially
offset by additional shared corporate service costs.
Future
results are subject to NJRES’ ability to maintain and expand its wholesale
marketing activities and are contingent upon many other factors, including an
adequate number of appropriate counterparties, volatility in the natural gas
market, sufficient liquidity in the energy trading market and continued access
to the capital markets.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Retail and Other
Operations
The
consolidated financial results of Retail and Other are summarized as
follows:
|
|
Three Months
Ended
December
31,
|
|
(Thousands)
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$
|
6,631
|
|
|
$
|
2,276
|
|
Operation
and maintenance expense
|
|
$
|
5,460
|
|
|
$
|
5,058
|
|
Other
income
|
|
$
|
166
|
|
|
$
|
114
|
|
Equity
in earnings, net of tax
|
|
$
|
424
|
|
|
$
|
417
|
|
Net
income (loss)
|
|
$
|
365
|
|
|
$
|
(1,998
|
)
|
NJR
Energy has an economic hedge associated with a long-term fixed-price contract to
sell gas to a counterparty. Unrealized losses or gains at NJR Energy are the
result of the change in value associated with derivative financial instruments
(futures contracts) designed to economically hedge the long-term fixed-price
contract.
The
results of operations include unrealized (losses) associated with these
derivative instruments of $(305,000) and $(4.1) million for the three months
ended December 31, 2007 and 2006, respectively, which are recorded, pre-tax, as
a component of Operating revenues. On an after-tax basis, these unrealized
(losses) are $(180,000) and $(2.4) million for the three months ended December
31, 2007 and 2006, respectively.
Operating
revenue for the three months ended December 31, 2007 increased $4.4 million due
primarily to lower unrealized losses at NJR Energy, which are the result of a
combination of the partial settlement of these futures contracts, partially
offset by an increase in value of the futures contracts in relation to changing
market conditions.
Operation
and maintenance expenses for the three months ended December 31, 2007 increased
$402,000 due to higher compensation costs due primarily to an increase in the
number of employees as well as annual wage increases.
Other
income for the three months ended December 31, 2007 remained consistent as
compared to the same period in fiscal 2007.
Taxes
netted in Equity in earnings from Iroquois are $282,000 and $276,000 and are
included in the Condensed Consolidated Statements of Income for the three months
ended December 31, 2007 and 2006, respectively. Equity in earnings from Iroquois
is driven by the underlying performance of natural gas transportation through
its existing pipeline, which is based on FERC regulated tariffs.
Net
income for the three months ended December 31, 2007 increased $2.4 million
compared to the same period in fiscal 2007 due primarily the reasons noted
above.
Liquidity and Capital
Resources
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and provides adequate
financial flexibility for accessing capital markets as required.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
NJR’s
consolidated capital structure was as follows:
|
|
December 31,
|
|
September
30,
|
|
|
2007
|
|
2007
|
Common
stock equity
|
|
|
49
|
%
|
|
|
50
|
%
|
Long-term
debt
|
|
|
27
|
|
|
|
30
|
|
Short-term
debt
|
|
|
24
|
|
|
|
20
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Common stock
equity
NJR
satisfies its external common equity requirements, if any, through issuances of
its common stock, including the proceeds from stock issuances under its
Automatic Dividend Reinvestment Plan (DRP) and proceeds from the exercise of
options issued under the Company’s long-term incentive program. The DRP allows
NJR, at its option, to use shares purchased on the open market or newly issued
shares.
As
of December 31, 2007, the Company had a 4.5 million share repurchase plan that
has been approved by its Board of Directors and has repurchased approximately
3.5 million shares under this plan.
Debt
NJR
and its unregulated subsidiaries rely on cash flows generated from operating
activities and utilization of committed credit facilities to provide liquidity
to meet working capital and external debt-financing requirements.
As
of December 31, 2007, NJR, NJRES and NJNG had committed credit facilities of
$605 million with approximately $289 million available under these facilities
(see
Note 6.
Debt).
NJR
believes that as of December 31, 2007, NJR, NJNG and NJRES were, and currently
are, in compliance with all debt covenants.
NJR
believes that existing borrowing availability, its current cash balances and its
cash flow from operations will be sufficient to satisfy it and its subsidiaries’
working capital, capital expenditure and dividend requirements for the
foreseeable future. NJR, NJNG and NJRES currently anticipate that its financing
requirements in fiscal 2008 and 2009 will be met through the issuance of
short-term and long-term debt and proceeds from the Company’s Automatic Dividend
Reinvestment Plan. The proposed issuance of up to $125 million of medium-term
debt to satisfy a portion of NJNG’s financing requirements is pending BPU review
and approval.
NJR
On
December 13, 2007, NJR refinanced its prior senior credit facility for a new
$325 million, five-year, revolving, unsecured credit facility. The new credit
facility permits the borrowing of amounts under a revolving basis, as well as
the issuance of letters of credit. It also permits an increase to the facility,
from time to time, with the existing or new lenders, in a minimum of $5 million
increments up to a maximum $100 million. The new credit facility refinances an
earlier credit facility that provided for $325 million in revolving credit that
was scheduled to expire on December 16, 2007. NJR used the initial borrowings
under the new credit facility to refinance its prior credit facility and pay all
related fees and expenses. The new credit facility permits the borrowing of
revolving loans and swingline loans, as well as the issuance of letters of
credit. In addition, NJR’s subsidiaries have guaranteed to the lenders all of
NJR’s obligations under the new credit facility.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Depending
on borrowing levels and credit ratings, NJR’s interest rate can either be, at
its discretion, the London inter-bank offered rate (“LIBOR”) or the Federal
Funds Open Rate plus an applicable spread and facility fee. As of
December
31, 2007, NJR’s effective rate was 5.18 percent on outstanding
borrowings of $92.6 million under this credit facility.
In
addition, borrowings under NJR’s new credit facility are conditioned upon
compliance with a maximum leverage ratio, as defined in the new credit facility,
of not more than 0.65 to 1.00 at any time.
NJR
uses its short term borrowings primarily to finance its share repurchases, to
satisfy NJRES’ short term liquidity needs and to finance, on an initial basis,
unregulated investments. NJRES’ use of high-injection, high-withdrawal storage
facilities and anticipated pipeline park-and-loan arrangements, combined with
related economic hedging activities in the volatile wholesale natural gas
market, create significant short-term cash requirements.
NJNG
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its own
financial profile. The seasonal nature of NJNG’s operations creates large
short-term cash requirements, primarily to finance natural gas purchases and
customer accounts receivable. NJNG obtains working capital for these
requirements, and for the temporary financing of construction and MGP
remediation expenditures and energy tax payments, through the issuance of
commercial paper and short-term bank loans.
To
support the issuance of commercial paper, NJNG has a $250 million committed
credit facility with several banks, with a 5-year term, expiring in December
2009. NJNG had $109.1 million of commercial paper borrowings supported by the
credit facility as of December 31, 2007, and $175.7 million of commercial paper
borrowings as of September 30, 2007.
NJNG
has a 3-year, $30 million uncommitted credit facility with a multinational
financial institution. As of December 31, 2007, NJNG had borrowings of $6.3
million outstanding under this facility. Borrowings under this facility are in
addition to the amount available under the NJNG bank credit facility mentioned
above.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
NJRES
has a 3-year $30 million committed credit facility with a multinational
financial institution. Borrowings under this facility are guaranteed by NJR.
There were no borrowings under this facility as of December 31,
2007.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Contractual
Obligations
The
following table is a summary of NJR, NJNG and NJRES contractual cash obligations
and financial commitments and their applicable payment due dates as of December
31, 2007.
(Thousands)
|
Payments Due by Period
|
|
Contractual Obligations
|
Total
|
|
Up to
1 Year
|
|
2-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
Long-term
debt
(1)
|
$522,886
|
|
$45,754
|
|
$71,349
|
|
$23,748
|
|
$382,035
|
|
Capital
lease obligations
(1)
|
91,418
|
|
8,813
|
|
17,821
|
|
19,899
|
|
44,885
|
|
Operating
leases
|
10,933
|
|
3,027
|
|
4,021
|
|
1,707
|
|
2,178
|
|
Short-term
debt
(1)
|
304,026
|
|
304,026
|
|
—
|
|
—
|
|
—
|
|
New
Jersey Clean Energy Program
(1)
|
10,945
|
|
10,945
|
|
—
|
|
—
|
|
—
|
|
Construction
obligations
|
3,938
|
|
3,938
|
|
—
|
|
—
|
|
—
|
|
Remediation
expenditures
(2)
|
105,340
|
|
19,000
|
|
17,900
|
|
10,200
|
|
58,240
|
|
Natural
gas supply purchase obligations–NJNG
|
91,093
|
|
71,359
|
|
19,734
|
|
—
|
|
—
|
|
Demand
fee commitments - NJNG
|
601,752
|
|
85,737
|
|
204,600
|
|
169,595
|
|
141,820
|
|
Natural
gas supply purchase obligations–NJRES
|
866,577
|
|
537,302
|
|
329,275
|
|
—
|
|
—
|
|
Demand
fee commitments - NJRES
|
218,026
|
|
92,001
|
|
81,764
|
|
33,104
|
|
11,157
|
|
Total
contractual cash obligations
|
$2,826,934
|
|
$1,181,902
|
|
$746,464
|
|
$258,253
|
|
$640,315
|
|
(1) These
obligations include an interest component, as defined under the governing
agreements.
(2) Expenditures
are estimated.
In
fiscal 2008, the Company has no minimum pension funding requirements. The
Company’s funding to its OPEB plans is expected to be approximately $1.5 million
in fiscal 2008 and $1.1 million annually, over the next four years. Additional
contributions may be made based on market conditions and various
assumptions.
As
of December 31, 2007, there were NJR guarantees covering approximately $352
million of natural gas purchases and demand fee commitments of NJRES and NJNG,
included in natural gas supply purchase obligations above, not yet reflected in
Accounts payable on the Condensed Consolidated Balance Sheet.
The
Company is obligated to fund up to $125 million associated with the construction
and development of Steckman Ridge. Currently, NJR anticipates that Steckman
Ridge will secure non-recourse project financing for a portion of its
construction activities and therefore potentially reduce NJR’s obligation. There
can be no assurances that Steckman Ridge will eventually secure such
non-recourse project financing.
Total
capital expenditures for fiscal 2008 are estimated at $78.6 million, including
expenditures of $13.5 million incurred during the three months ended December
31, 2007.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash Flow
Operating
Activities
As
presented in the Condensed Consolidated Statements of Cash Flows, cash flow used
in operations totaled $6.5 million for the three months ended December 31, 2007,
compared with cash flow from operations of $12.4 million for the same period in
fiscal 2007. Operating cash flows were primarily impacted by variations in
working capital, which are a function of the seasonality of NJR’s business and
fluctuations in wholesale natural gas prices.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Changes
in working capital more than offset higher net income and deferred income taxes
during the first quarter of fiscal 2008. The components of working capital that
contributed to the decrease in operating cash flows for the three months ended
December 31, 2007 as compared to the same period in fiscal 2007 are as
follows:
Ÿ
|
At
NJNG, an increase in billed and unbilled accounts receivable of $48.9
million as a result of colder weather and lower customer credits in fiscal
2008 as compared to fiscal 2007; partially offset by
|
|
|
Ÿ
|
A
decrease in inventory at NJNG as a result of increased usage during the
heating season; and
|
|
|
Ÿ
|
A
decrease in the change in gas purchases payable primarily at NJRES as a
result of lower gas storage balances, partially offset by increased
natural gas commodity prices.
|
NJNG’s
MGP expenditures are currently expected to total $19.1 million in fiscal 2008
(see
Note 12. Commitments and
Contingent Liabilities).
Financing
Activities
Cash
flow from financing activities totaled $23.1 million for the three months ended
December 31, 2007, compared with cash flows from financing activities of $5.3
million for the same period in the prior fiscal year. The change was due
primarily to an increase in short-term borrowings, which typically increase
during the winter and was impacted during the first quarter of fiscal 2008 by
the increased demand of natural gas as a result of the colder weather as
compared with the same period in fiscal 2007, offset by cash payments for
treasury stock of $10.1 million of which $7.7 million is for settled purchases
from the fourth quarter of fiscal 2007.
NJNG
received $7.5 million in the three months ended December 31, 2007, in connection
with the sale-leaseback of its gas meters. This sale-leaseback program will
continue on an annual basis.
Investing
Activities
Cash
flows used in investing activities totaled $17.9 million for the three months
ended December 31, 2007, compared with $12.5 million in the same period in
fiscal 2007. The increase was due primarily to an additional equity investment
in Steckman Ridge and increased capital expenditures for utility plant offset by
cash received from the sale of land at CR&R in the first quarter of fiscal
2007 that did not recur in fiscal 2008.
Retail
and Other capital expenditures each year have been made primarily in connection
with investments made to preserve the value of real estate holdings. At December
31, 2007, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
NJR
is obligated to finance 50 percent of the acquisition and development costs of
the Steckman Ridge storage facility, up to a maximum of $125 million, of which
$58 million was expended through December 31, 2007.
NJR’s
investment in Steckman Ridge is a strategic investment to enter the mid-stream
natural gas business. This storage capacity will provide NJR the potential to
diversify is revenue stream through another market-based outlet that has a
consistent demand and a regulated tariff structure. NJR anticipates a portion of
Steckman Ridge to be financed on a non-recourse, or project, basis and for the
majority of its revenue to be secured by long-term contracts; however, there can
be no assurances that this will occur.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2008.
New Jersey Resources
Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Credit Ratings
The
table below summarizes NJNG’s credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc. (Moody’s)
as of December 31, 2007:
|
Standard and
Poor’s
|
Moody’s
|
Corporate Rating
|
A+
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
AA-
|
Aa3
|
Ratings
Outlook
|
Negative
|
Stable
|
NJNG’s
S&P and Moody’s Senior Secured ratings are investment-grade ratings and
represent the sixth highest rating within the investment grade category. Moody’s
and S&P give NJNG’s commercial paper the highest rating within the
Commercial Paper investment-grade category.
Investment-grade
ratings are generally divided into three groups: high, upper medium and medium.
NJNG’s senior secured ratings and the commercial paper ratings fall into the
high group. NJR is not a rated entity.
NJNG
is not party to any lending agreements that would accelerate the maturity date
of any obligation caused by a failure to maintain any specific credit rating. A
rating set forth above is not a recommendation to buy, sell or hold the
Company’s or NJNG’s securities and may be subject to revision or withdrawal at
any time. Each rating set forth above should be evaluated independently of any
other rating.
The
timing and mix of any external financings will target a common equity ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.