UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM
TO
Commission
file number 1-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
|
|
22-2376465
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
1415
Wyckoff Road, Wall, New Jersey 07719
|
|
732-938-1480
|
(Address
of principal
executive
offices)
|
|
(Registrant’s
telephone number,
including
area code)
|
|
Securities
registered pursuant to Section 12 (b) of the
Act:
|
Common
Stock - $2.50 Par Value
|
|
New
York Stock Exchange
|
(Title
of each class)
|
|
(Name
of each exchange on which
registered)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes:
x
No:
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer:
x
Accelerated
filer:
o
Non-accelerated
filer:
o
Smaller
reporting company:
o
(Do not check if a smaller
reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes:
o
No:
x
The
number of shares outstanding of $2.50 par value Common Stock as of April 29,
2008 was 41,926,665
.
New
Jersey Resources Corporation
Part
I
TAB
LE OF CONTENTS
New
Jersey Resources Corporation
Part
I
INFO
RMATION CONCERNING FORWARD-LOOKING
STATEMENTS
|
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about
Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the
financial statements are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements can
also be identified by the use of forward-looking terminology such as “may,”
“intend,” “expect,” “believe” or “continue” or comparable terminology and are
made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market risk
and other matters for fiscal 2008 and thereafter include many factors that are
beyond the Company’s ability to control or estimate precisely, such as estimates
of future market conditions, the behavior of other market participants and
changes in the debt and equity capital markets. The factors that could cause
actual results to differ materially from NJR’s expectations include, but are not
limited to, those discussed in Risk Factors in Item 1A, as well as the
following:
Ÿ
|
weather
and economic conditions;
|
Ÿ
|
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
Ÿ
|
the
rate of NJNG customer growth;
|
Ÿ
|
volatility
of natural gas commodity prices and its impact on customer usage, NJR
Energy Services’ (NJRES) operations and on the Company’s risk management
efforts;
|
Ÿ
|
changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the Company;
|
Ÿ
|
increases
in borrowing costs associated with variable-rate debt;
|
Ÿ
|
commercial
and wholesale credit risks, including creditworthiness of customers and
counterparties;
|
Ÿ
|
the
ability to obtain governmental approvals and/or financing for the
construction, development and operation of certain non-regulated energy
investments;
|
Ÿ
|
risks
associated with the management of the Company’s joint ventures and
partnerships;
|
Ÿ
|
the
impact of governmental regulation (including the regulation of
rates);
|
Ÿ
|
fluctuations
in energy-related commodity prices;
|
Ÿ
|
conversion
activity and other marketing efforts;
|
Ÿ
|
actual
energy usage of NJNG’s customers;
|
Ÿ
|
the
pace of deregulation of retail gas markets;
|
Ÿ
|
access
to adequate supplies of natural gas;
|
Ÿ
|
the
regulatory and pricing policies of federal and state regulatory
agencies;
|
Ÿ
|
the
ultimate outcome of pending regulatory proceedings, in particular, the
base rate case filing;
|
Ÿ
|
changes
due to legislation at the federal and state level;
|
Ÿ
|
the
availability of an adequate number of appropriate counterparties in the
wholesale energy trading market;
|
Ÿ
|
sufficient
liquidity in the wholesale energy trading market and continued access to
the capital markets;
|
Ÿ
|
the
disallowance of recovery of environmental-related expenditures and other
regulatory changes;
|
Ÿ
|
environmental-related
and other litigation and other uncertainties;
|
Ÿ
|
the
effects and impacts of inflation on NJR and its subsidiaries
operations;
|
Ÿ
|
change
in accounting pronouncements issued by the appropriate standard setting
bodies; and
|
Ÿ
|
terrorist
attacks or threatened attacks on energy facilities or unrelated energy
companies.
|
While
the Company periodically reassesses material trends and uncertainties affecting
the Company’s results of operations and financial condition in connection with
its preparation of management’s discussion and analysis of results of operations
and financial condition contained in its Quarterly and Annual Reports, the
Company does not, by including this statement, assume any obligation to review
or revise any particular forward-looking statement referenced herein in light of
future events.
New
Jersey Resources Corporation
Part
I
ITEM 1
. FINANCIAL
STATEMENTS
|
CON
DENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands, except per share data)
|
2008
|
2007
|
2008
|
2007
|
|
|
As
Restated
(See
Note 1)
|
|
As
Restated
(See
Note 1)
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
$1,177,545
|
|
$1,029,043
|
|
$1,988,683
|
|
$1,766,444
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Gas
purchases
|
1,065,925
|
|
923,046
|
|
1,750,619
|
|
1,544,981
|
|
Operation
and maintenance
|
34,605
|
|
32,337
|
|
66,784
|
|
60,653
|
|
Regulatory
rider expenses
|
17,789
|
|
18,135
|
|
29,954
|
|
27,601
|
|
Depreciation
and amortization
|
9,517
|
|
8,986
|
|
18,920
|
|
17,888
|
|
Energy
and other taxes
|
29,374
|
|
30,268
|
|
47,534
|
|
44,220
|
|
Total
operating expenses
|
1,157,210
|
|
1,012,772
|
|
1,913,811
|
|
1,695,343
|
|
OPERATING
INCOME
|
20,335
|
|
16,271
|
|
74,872
|
|
71,101
|
|
Other
income
|
1,540
|
|
855
|
|
3,068
|
|
2,151
|
|
Interest
charges, net
|
6,692
|
|
7,091
|
|
14,502
|
|
14,966
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
15,183
|
|
10,035
|
|
63,438
|
|
58,286
|
|
Income
tax provision
|
3,394
|
|
2,552
|
|
21,888
|
|
21,786
|
|
Equity
in earnings of affiliates, net of tax
|
746
|
|
478
|
|
1,170
|
|
895
|
|
NET
INCOME
|
$12,535
|
|
$7,961
|
|
$42,720
|
|
$37,395
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE*
|
|
|
|
|
|
|
|
|
BASIC
|
$0.30
|
|
$0.19
|
|
$1.02
|
|
$0.90
|
|
DILUTED
|
$0.30
|
|
$0.19
|
|
$1.02
|
|
$0.89
|
|
DIVIDENDS
PER COMMON SHARE
|
$0.28
|
|
$0.25
|
|
$0.55
|
|
$0.50
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING*
|
|
|
|
|
|
|
|
|
BASIC
|
41,840
|
|
41,839
|
|
41,758
|
|
41,705
|
|
DILUTED
|
42,099
|
|
42,071
|
|
42,018
|
|
41,939
|
|
*
Share and per share data for the three and six months
ended March 31, 2007 have been retroactively adjusted to reflect a 3 for 2 stock
split effective March 3, 2008.
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources
Part
I
ITEM
1. FINANCIAL STATEMENTS (Continued)
|
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
March
31,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
As
Restated
(See
Note 1)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$
|
42,720
|
|
|
$
|
37,395
|
|
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments, net of tax
|
|
|
72,051
|
|
|
|
71,064
|
|
Depreciation
and amortization
|
|
|
19,070
|
|
|
|
18,039
|
|
Allowance
for funds used during construction
|
|
|
(755
|
)
|
|
|
—
|
|
Deferred
income taxes
|
|
|
(2,942
|
)
|
|
|
15,231
|
|
Manufactured
gas plant remediation costs
|
|
|
(7,958
|
)
|
|
|
(8,814
|
)
|
Equity
in earnings from investments, net of distributions
|
|
|
766
|
|
|
|
(342
|
)
|
Cost
of removal – asset retirement obligations
|
|
|
(355
|
)
|
|
|
(488
|
)
|
Contributions
to employee benefit plans
|
|
|
(381
|
)
|
|
|
(300
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Components
of working capital
|
|
|
30,396
|
|
|
|
96,121
|
|
Other
noncurrent assets
|
|
|
14,543
|
|
|
|
22,676
|
|
Other
noncurrent liabilities
|
|
|
565
|
|
|
|
(8,959
|
)
|
Cash
flows from operating activities
|
|
|
167,720
|
|
|
|
241,623
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Expenditures
for:
|
|
|
|
|
|
|
|
|
Utility
plant
|
|
|
(29,385
|
)
|
|
|
(24,540
|
)
|
Real
estate properties and other
|
|
|
(588
|
)
|
|
|
(1,822
|
)
|
Cost
of removal
|
|
|
(3,641
|
)
|
|
|
(2,736
|
)
|
Investments
in equity investees
|
|
|
(5,259
|
)
|
|
|
(52,500
|
)
|
Proceeds
from asset sales
|
|
|
—
|
|
|
|
1,792
|
|
Cash
flows used in investing activities
|
|
|
(38,873
|
)
|
|
|
(79,806
|
)
|
CASH
FLOWS FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
9,915
|
|
|
|
9,976
|
|
Tax
benefit from stock options exercised
|
|
|
568
|
|
|
|
2,138
|
|
Proceeds
from sale-leaseback transaction
|
|
|
7,485
|
|
|
|
5,482
|
|
Payments
of long-term debt
|
|
|
(2,310
|
)
|
|
|
(1,950
|
)
|
Purchases
of treasury stock
|
|
|
(11,040
|
)
|
|
|
—
|
|
Payments
of common stock dividends
|
|
|
(21,734
|
)
|
|
|
(20,605
|
)
|
Net
payments of short-term debt
|
|
|
(107,579
|
)
|
|
|
(153,700
|
)
|
Cash
flows used in financing activities
|
|
|
(124,695
|
)
|
|
|
(158,659
|
)
|
Change
in cash and temporary investments
|
|
|
4,152
|
|
|
|
3,158
|
|
Cash
and temporary investments at beginning of period
|
|
|
5,140
|
|
|
|
4,991
|
|
Cash
and temporary investments at end of period
|
|
$
|
9,292
|
|
|
$
|
8,149
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(262,259
|
)
|
|
$
|
(191,654
|
)
|
Inventories
|
|
|
193,659
|
|
|
|
204,313
|
|
Overrecovered
gas costs
|
|
|
1,352
|
|
|
|
13,330
|
|
Gas
purchases payable
|
|
|
116,692
|
|
|
|
90,970
|
|
Prepaid
and accrued taxes, net
|
|
|
83,474
|
|
|
|
67,402
|
|
Accounts
payable and other
|
|
|
(24,322
|
)
|
|
|
1,984
|
|
Restricted
broker margin accounts
|
|
|
(72,426
|
)
|
|
|
(43,411
|
)
|
Other
current assets
|
|
|
1,288
|
|
|
|
882
|
|
Other
current liabilities
|
|
|
(7,062
|
)
|
|
|
(47,695
|
)
|
Total
|
|
$
|
30,396
|
|
|
$
|
96,121
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
|
$14,302
|
|
|
|
$13,954
|
|
Income
taxes
|
|
|
$21,977
|
|
|
|
$28,319
|
|
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
|
|
March
31,
|
|
|
September
30,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
Utility
plant, at cost
|
|
$
|
1,330,609
|
|
|
|
$1,299,445
|
|
Real
estate properties and other, at cost
|
|
|
29,279
|
|
|
|
28,793
|
|
|
|
|
1,359,888
|
|
|
|
1,328,238
|
|
Accumulated
depreciation and amortization
|
|
|
(369,469
|
)
|
|
|
(357,367
|
)
|
Property,
plant and equipment, net
|
|
|
990,419
|
|
|
|
970,871
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and temporary investments
|
|
|
9,292
|
|
|
|
5,140
|
|
Customer
accounts receivable:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
349,058
|
|
|
|
132,444
|
|
Unbilled
|
|
|
55,273
|
|
|
|
8,895
|
|
Allowance
for doubtful accounts
|
|
|
(3,899
|
)
|
|
|
(3,166
|
)
|
Regulatory
assets
|
|
|
20,691
|
|
|
|
24,634
|
|
Gas
in storage, at average cost
|
|
|
245,054
|
|
|
|
439,168
|
|
Materials
and supplies, at average cost
|
|
|
5,488
|
|
|
|
5,033
|
|
Prepaid
state taxes
|
|
|
—
|
|
|
|
28,034
|
|
Derivatives,
at fair value
|
|
|
193,817
|
|
|
|
138,986
|
|
Broker
margin account
|
|
|
83,168
|
|
|
|
12,345
|
|
Other
|
|
|
8,824
|
|
|
|
8,353
|
|
Total
current assets
|
|
|
966,766
|
|
|
|
799,866
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investments
in equity investees
|
|
|
93,870
|
|
|
|
86,743
|
|
Regulatory
assets
|
|
|
264,147
|
|
|
|
312,369
|
|
Derivatives,
at fair value
|
|
|
35,621
|
|
|
|
44,306
|
|
Restricted
cash – construction fund
|
|
|
4,200
|
|
|
|
4,200
|
|
Other
|
|
|
12,619
|
|
|
|
12,390
|
|
Total
noncurrent assets
|
|
|
410,457
|
|
|
|
460,008
|
|
Total
assets
|
|
$
|
2,367,642
|
|
|
|
$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
|
|
March
31,
|
|
|
September
30,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
Common
stock equity
|
|
$
|
670,913
|
|
|
$
|
644,797
|
|
Long-term
debt
|
|
|
357,712
|
|
|
|
383,184
|
|
Total
capitalization
|
|
|
1,028,625
|
|
|
|
1,027,981
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
34,985
|
|
|
|
4,338
|
|
Short-term
debt
|
|
|
148,900
|
|
|
|
256,479
|
|
Gas
purchases payable
|
|
|
335,028
|
|
|
|
218,336
|
|
Accounts
payable and other
|
|
|
45,120
|
|
|
|
64,386
|
|
Dividends
payable
|
|
|
11,717
|
|
|
|
10,633
|
|
Deferred
and accrued taxes
|
|
|
58,225
|
|
|
|
9,031
|
|
Regulatory
liabilities
|
|
|
10,935
|
|
|
|
9,583
|
|
New
Jersey clean energy program
|
|
|
7,909
|
|
|
|
8,832
|
|
Derivatives,
at fair value
|
|
|
202,837
|
|
|
|
79,243
|
|
Broker
margin account
|
|
|
13,540
|
|
|
|
15,143
|
|
Customers’
credit balances and deposits
|
|
|
12,501
|
|
|
|
27,262
|
|
Total
current liabilities
|
|
|
881,697
|
|
|
|
703,266
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
171,094
|
|
|
|
216,258
|
|
Deferred
investment tax credits
|
|
|
7,353
|
|
|
|
7,513
|
|
Deferred
revenue
|
|
|
9,450
|
|
|
|
9,806
|
|
Derivatives,
at fair value
|
|
|
41,274
|
|
|
|
38,085
|
|
Manufactured
gas plant remediation
|
|
|
105,340
|
|
|
|
105,340
|
|
Postemployment
benefit liability
|
|
|
28,253
|
|
|
|
25,743
|
|
Regulatory
liabilities
|
|
|
62,179
|
|
|
|
61,270
|
|
New
Jersey clean energy and conservation incentive programs
|
|
|
1,007
|
|
|
|
3,992
|
|
Asset
retirement obligation
|
|
|
24,240
|
|
|
|
23,895
|
|
Other
|
|
|
7,130
|
|
|
|
7,596
|
|
Total
noncurrent liabilities
|
|
|
457,320
|
|
|
|
499,498
|
|
Total
capitalization and liabilities
|
|
$
|
2,367,642
|
|
|
$
|
2,230,745
|
|
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
The
condensed consolidated financial statements have been prepared without audit, as
of March 31, 2008 and for the three and six months ended March 31, 2008 and
2007, 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.
Common
Stock Equity
On
January 23, 2008, NJR’s Board of Directors approved a 3 for 2 stock split of the
Company’s common stock in the form of a dividend for the Company’s common stock
shareholders of record on February 8, 2008. The additional shares were issued on
March 3, 2008, resulting in an increase in average shares outstanding from
approximately 28 million to approximately 42 million. All share-related
information for prior periods has been adjusted throughout this report on a
retroactive basis to reflect the effects of the stock split.
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of:
|
March
31,
|
September
30,
|
($ in thousands)
|
2008
|
2007
|
|
|
|
|
|
|
|
|
|
|
NJNG
|
$108,601
|
|
31
|
%
|
|
$ 5,583
|
|
4
|
%
|
NJRES
|
233,295
|
|
67
|
|
|
120,274
|
|
91
|
|
NJRHS
and other
|
7,162
|
|
2
|
|
|
6,587
|
|
5
|
|
Total
|
$349,058
|
|
100
|
%
|
|
$132,444
|
|
100
|
%
|
Accounts
receivable related to estimated unbilled revenues and allowance for doubtful
accounts are associated with NJNG only.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 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.
On April
10, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (FSP FIN 39-1),
Amendment of FASB Interpretation No.
39.
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.
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
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
applicable
dividends declared by the Company for fiscal years beginning after December 15,
2007. There will be no impact from the adoption of EITF 06-11 on the Company’s
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.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities,
(SFAS 161). SFAS 161 requires
enhanced qualitative and quantitative disclosures on the objectives and
accounting for derivatives and related hedging activities, as well as their
impact to the financial statements. SFAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. Early application and as well
as comparative disclosures for earlier periods at initial adoption are
encouraged. The Company is currently evaluating the effect of adoption of SFAS
161 on its footnote disclosures.
Restatement
Subsequent
to the issuance of March 31, 2007 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 and six-month periods ended March 31, 2007.
Accordingly,
the following tables set forth the effects of the restatement on applicable line
items in the Condensed Consolidated Statements of Income and Condensed
Consolidated Statements of Cash Flows for the three and six months ended March
31, 2007. 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 the
three and six months ended March 31, 2007.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
Three
Months Ended
March
31,
2007
|
Six
Months Ended
March
31,
2007
|
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|
|
|
|
|
|
|
|
Operating
revenue
|
$1,024,636
|
$ 4,407
|
$1,029,043
|
|
$1,766,101
|
$ 343
|
$1,766,444
|
Gas
purchases
|
$ 795,469
|
$ 127,577
|
$ 923,046
|
|
$1,424,154
|
$ 120,827
|
$1,544,981
|
Total
operating expenses
|
$ 885,195
|
$ 127,577
|
$1,012,772
|
|
$1,574,516
|
$ 120,827
|
$1,695,343
|
Operating
Income
|
$ 139,441
|
$(123,170)
|
$ 16,271
|
|
$ 191,585
|
$(120,484)
|
$ 71,101
|
Other
income
|
$ 1,650
|
$ (795)
|
$ 855
|
|
$ 3,639
|
$ (1,488)
|
$ 2,151
|
Income
before income taxes and equity in earnings of affiliates
|
$ 134,000
|
$(123,965)
|
$ 10,035
|
|
$ 180,258
|
$(121,972)
|
$ 58,286
|
Income
tax provision
|
$ 53,473
|
$ (50,921)
|
$ 2,552
|
|
$ 71,607
|
$ (49,821)
|
$ 21,786
|
Equity
in earnings, net of tax
|
$ —
|
$ 478
|
$ 478
|
|
$ —
|
$ 895
|
$ 895
|
Net
Income
|
$ 80,527
|
$ (72,566)
|
$ 7,961
|
|
$ 108,651
|
$ (71,256)
|
$ 37,395
|
Basic
earnings per share*
|
$ 1.92
|
$ (1.73)
|
$ 0.19
|
|
$ 2.61
|
$ (1.71)
|
$ 0.90
|
Diluted
earnings per share*
|
$ 1.91
|
$ (1.72)
|
$ 0.19
|
|
$ 2.59
|
$ (1.70)
|
$ 0.89
|
* Share
and per share data for 2007 have been retroactively adjusted to reflect a 3 for
2 stock split effective March 3, 2008.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH
FLOWS FROM OPERATING ACTIVITIES
|
Six
Months Ended
March
31, 2007
|
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
|
|
|
|
|
|
|
Net
Income
|
$108,651
|
|
$(71,256
|
)
|
$37,395
|
|
Unrealized
loss (gain) on derivative instruments, net of tax
|
$ (192
|
)
|
$
71,256
|
|
$71,064
|
|
Equity
in earnings from investments, net of distributions
|
$ —
|
|
$ (342
|
)
|
$ (342
|
)
|
Other
noncurrent assets
|
$ 23,229
|
|
$ (553
|
)
|
$22,676
|
|
Other
noncurrent liabilities
|
$ (9,854
|
)
|
$ 895
|
|
$
(8,959
|
)
|
Filed
Base Rate Case
As a
result of increases in NJNG’s operation, 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 include hearings before the
Office of the Administrative Law Judge through July 2008. 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 over a one-year period 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 March 31, 2008, NJNG had a remaining liability of $1.0 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.
Ÿ
|
On
October 3, 2007, the BPU provisionally approved a decrease to NJNG’s BGSS
rate effective October 4, 2007, which resulted in a 3.6 percent decrease
to the average residential heating customer bill.
|
|
|
Ÿ
|
On
November 26, 2007, NJNG notified the BPU that it would provide refunds to
customers and subsequently issued a credit totaling $32 million in
December 2007, as a result of the decrease in the anticipated costs of
wholesale natural gas prices.
|
|
|
Ÿ
|
In
March 2008, NJNG, the BPU staff and the New Jersey Department of the
Public Advocate, Division of Rate Counsel (Rate Counsel) entered into a
stipulation to resolve certain matters related to its fiscal year 2007
BGSS filing, currently pending BPU approval. This stipulation resulted in
NJNG recording a non-recurring settlement charge to its BGSS costs of
$300,000.
|
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 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 the finalization of the base
rate case proceedings.
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 (MGP) 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:
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 the underrecovery of
prior fiscal year obligations (NJNG’s liability as of March 31, 2008 was
$7.9 million); and,
|
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Ÿ
|
a
decrease to the statewide USF recovery rate, which has a negligible impact
on customer rates.
|
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 gross
margin variations during the fiscal 2005 and 2006 winter periods.
In
February 2008, NJNG filed an application regarding its SBC. The overall request
would result in no change to the current rates approved in October
2007.
Regulatory
Assets & Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Condensed Consolidated Balance Sheets:
(Thousands)
|
March
31,
2008
|
September
30,
2007
|
Recovery
Period
|
Regulatory
assets–current
|
|
|
|
|
|
WNC
|
$ 2,456
|
|
$ 8,105
|
|
Less
than one year
(1)
|
CIP
|
18,235
|
|
16,529
|
|
Less
than one year
(2)
|
Total
current
|
$ 20,691
|
|
$ 24,634
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Note 12)
|
|
|
|
|
|
Expended,
net
|
$ 84,713
|
|
$ 85,071
|
|
(3)
|
Liability
for future expenditures
|
105,340
|
|
105,340
|
|
(4)
|
CIP
|
3,702
|
|
—
|
|
(5)
|
Deferred
income and other taxes
|
13,852
|
|
13,979
|
|
Various
(6)
|
Derivatives
(Note 3)
|
11,918
|
|
51,861
|
|
(7)
|
Postemployment
benefit costs (Note 9)
|
33,537
|
|
33,988
|
|
(8)
|
SBC
|
11,085
|
|
22,130
|
|
Various
(9)
|
Total
noncurrent
|
$264,147
|
|
$312,369
|
|
|
(1)
|
Recoverable
as a result of BPU approval in October 2007, without interest. This
balance reflects the net results for the winter period of fiscal 2006. No
new WNC activity is being recorded due to the existence of the
CIP.
|
(2)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $8.5 million relating to the weather component of
the calculation and approximately $9.7 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.
|
(3)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(4)
|
Estimated
future expenditures. Recovery will be included in rates when actual
expenditures are incurred.
|
(5)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $1.7 million relating to the weather component of
the calculation and approximately $2.0 million relating to the customer
usage component of the calculation.
|
(6)
|
Recoverable
without interest, subject to BPU approval.
|
(7)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(8)
|
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).
|
(9)
|
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)
|
March
31,
2008
|
|
September
30,
2007
|
Regulatory
liability–current
|
|
|
|
|
|
|
Overrecovered
gas costs
|
|
$
|
10,935
|
|
|
$
|
9,583
|
|
Total
current
|
|
$
|
10,935
|
|
|
$
|
9,583
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
|
|
|
|
Cost
of removal obligation
(1)
|
|
$
|
62,179
|
|
|
$
|
60,094
|
|
Market
development fund (MDF)
(2)
|
|
|
—
|
|
|
|
1,176
|
|
Total-noncurrent
|
|
$
|
62,179
|
|
|
$
|
61,270
|
|
(1)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately
$20.2 million, including accretion of $700,000 for the six-month period
ended March 31, 2008 of regulatory assets relating to asset retirement
obligations have been netted against the cost of removal obligation as of
March 31, 2008 (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.
|
3.
|
DERI
VATIVE
INSTRUMENTS
|
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 the changes in fair value of contracts entered
into after September 30, 2007 are now included currently in earnings, 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 gas
purchases 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 met the normal purchase normal sale scope exception,
continue to be accounted for under settlement accounting.
All of
the Company’s derivative financial instruments (financial futures, options or
swaps), are accounted for in accordance with SFAS 133 and recorded at fair
value in the Condensed Consolidated Balance Sheets. Changes in fair value, which
are referred to as unrealized gains and losses, are recorded as a component of
Gas purchases or Operating revenues, for NJRES and NJR Energy, respectively, in
the Condensed Consolidated Statements of Income. 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 derivative financial 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.
Unrealized
gains (losses) at NJRES related to physical commodity contracts and financial
instruments and realized gains (losses) at NJRES related to derivative
instruments that are included as a component of Gas purchases, and unrealized
gains (losses) at NJR Energy related to derivative financial instruments that
are included
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
as a
component of Operating revenues, for the three and six months ended March 31,
2008 and 2007, respectively, are as follows:
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
NJRES
(Included as part of Gas purchases):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains – Physical Commodity Contracts
|
|
$
|
(913
|
)
|
|
$
|
—
|
|
|
$
|
1,131
|
|
|
$
|
—
|
|
Unrealized
(losses) – Financial Instruments
|
|
|
(118,305
|
)
|
|
|
(126,383
|
)
|
|
|
(128,174
|
)
|
|
|
(117,867
|
)
|
Net
realized gains (losses) – Financial Instruments
|
|
|
5,889
|
|
|
|
(1,194
|
)
|
|
|
3,629
|
|
|
|
(2,960
|
)
|
Subtotal
NJRES
|
|
$
|
(113,329
|
)
|
|
$
|
(127,577
|
)
|
|
$
|
(123,414
|
)
|
|
$
|
(120,827
|
)
|
NJR
Energy (Included as part of Operating revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains – Financial Instruments
|
|
|
6,790
|
|
|
|
4,407
|
|
|
|
6,485
|
|
|
|
343
|
|
Total
NJRES and NJR Energy unrealized and realized (losses)
|
|
$
|
(106,539
|
)
|
|
$
|
(123,170
|
)
|
|
$
|
(116,929
|
)
|
|
$
|
(120,484
|
)
|
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)
|
March
31,
2008
|
September 30,
2007
|
NJNG
broker margin deposit
|
$
39
|
|
$
12,345
|
|
NJNG
broker margin (liability)
|
$(13,540
|
)
|
$ —
|
|
NJRES
broker margin deposit (liability)
|
$
83,129
|
|
$(15,143
|
)
|
4.
|
I
NVE
STMENTS IN EQUITY
INVESTEES
|
NJR’s
Investments in equity investees include the following investments:
(Thousands)
|
March
31,
2008
|
September 30,
2007
|
Steckman
Ridge
|
$63,861
|
|
$56,726
|
|
Iroquois
|
22,051
|
|
22,073
|
|
Other
|
7,958
|
|
7,944
|
|
Total
|
$93,870
|
|
$86,743
|
|
NJR uses
the equity method of accounting for its investments in Steckman Ridge and
Iroquois.
Other
investments represent immaterial aggregate investments in equity securities of
publicly traded energy companies, 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 tables set forth the financial information for Iroquois for the
periods as indicated:
|
|
Three
Months Ended
March
31,
|
|
Six
Months Ended
March
31,
|
(Thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Operating
revenues
|
|
$
|
44,701
|
|
|
$
|
43,074
|
|
|
$
|
83,455
|
|
|
$
|
82,593
|
|
Operating
income
|
|
$
|
26,050
|
|
|
$
|
21,691
|
|
|
$
|
45,348
|
|
|
$
|
41,712
|
|
Net
income
|
|
$
|
11,457
|
|
|
$
|
8,561
|
|
|
$
|
19,039
|
|
|
$
|
16,034
|
|
(Millions)
|
|
March
31,
2008
|
|
September 30,
2007
|
Total
assets
|
|
$
|
773.8
|
|
|
$
|
814.3
|
|
The
following table sets forth the calculation of the Company’s basic and diluted
earnings per share:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands,
except per share amounts)
|
2008
|
2007*
|
2008
|
2007*
|
Net
Income, as reported
|
$12,535
|
|
$7,961
|
|
$42,720
|
|
$37,395
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,840
|
|
41,839
|
|
41,758
|
|
41,705
|
|
Basic
earnings per common share
|
$0.30
|
|
$0.19
|
|
$1.02
|
|
$0.90
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,840
|
|
41,839
|
|
41,758
|
|
41,705
|
|
Incremental
shares **
|
259
|
|
232
|
|
260
|
|
234
|
|
Weighted
average shares of common stock outstanding–diluted ***
|
42,099
|
|
42,071
|
|
42,018
|
|
41,939
|
|
Diluted
earnings per common share
|
$0.30
|
|
$0.19
|
|
$1.02
|
|
$0.89
|
|
*
|
Share
and per share data for 2007 have been retroactively adjusted to reflect a
3 for 2 stock split effective March 3,
2008.
|
**
Incremental shares consist of stock options, stock awards and performance
units.
*** The
Company has no securities that are antidilutive for the three and six months
ended March 31, 2008.
NJR
On
December 13, 2007, NJR refinanced its prior senior credit facility, scheduled to
expire on December 16, 2007, for a new $325 million, five-year, revolving,
unsecured credit facility. The new credit facility permits the borrowing of
revolving loans and swing loans, as well as the issuance of letters of credit.
Swing loans are loans made available on a same day basis for an aggregate
principal amount of up to $50 million and repayable in full within a maximum of
seven days of borrowing. 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. Borrowings under the new 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 used the initial
borrowings under the new credit facility to refinance its prior credit facility
and pay all related fees and expenses. In addition, certain of NJR’s
non-regulated subsidiaries have guaranteed to the lenders all of NJR’s
obligations under the new credit facility.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
As of
March 31, 2008, NJR had three letters of credit outstanding, totaling $6.5
million, on behalf of NJRES. Two letters of credit, totaling $4.5 million, were
issued in conjunction with a long-term natural gas storage agreement, one which
was cancelled on April 1, 2008 and the other expires on December 31, 2008. The
other, which totals $2 million, is used for margin requirements for natural gas
transactions and expires on June 30, 2008.
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.
On
February 15, 2008 NJR entered into a new agreement for a stand-alone letter of
credit that may be drawn upon through February 15, 2009 for up to $15 million.
No amounts have been drawn under this letter of credit as of March 31,
2008.
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.
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.
In
October 2007, NJNG entered into a new agreement for a stand-alone letter of
credit that may be drawn upon through December 15, 2009 for up to $50 million.
As of March 31, 2008, there was a $8.5 million letter of credit drawn upon this
agreement, 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.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series,
when an auction is held for the purposes of determining the interest rate of the
securities. The interest rate associated with the NJNG variable-rate debt is
based on the rates on the EDA ARS. Currently, the auctions surrounding the EDA
ARS have failed, resulting in the bonds bearing interest at their maximum rates,
as defined in the EDA ARS, as the lesser of (i) 175 percent of 30-day LIBOR or
(ii) 10 to 12 percent per annum, as applicable to such series of ARS. As of
March 31, 2008, the 30-day LIBOR rate was 2.7 percent. While the failure of the
ARS auctions does not signify or constitute a default on NJNG, the EDA ARS does
impact NJNG’s borrowing costs of the variable-rate debt. As such, NJNG currently
has a weighted average interest rate of 4.6 percent as of March 31, 2008,
compared with a weighted average interest rate of 3.9 percent as of September
30, 2007. There can be no assurance that the ARS securities of the EDA will have
enough market liquidity to return interest rates below their maximum
rate.
Neither
NJNG nor the results of its operations are obligated or pledged to support the
NJR or NJRES credit facilities.
NJRES
As of
March 31, 2008 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 March 31, 2008.
Consolidated
There
were no issuances or redemptions of long-term debt securities for NJR, NJNG or
NJRES during the six months ended March 31, 2008.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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:
|
|
March
31,
|
|
September
30,
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
NJR
|
|
|
|
|
|
|
Long
- term debt
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
Bank
credit facilities
|
|
$
|
325,000
|
|
|
$
|
325,000
|
|
Amount
outstanding at end of period
|
|
$
|
83,300
|
|
|
$
|
40,250
|
|
Weighted
average interest rate at end of period
|
|
|
3.02
|
%
|
|
|
6.17
|
%
|
NJNG
(1)
|
|
|
|
|
|
|
|
|
Long
- term debt
(2)
|
|
$
|
254,800
|
|
|
$
|
254,800
|
|
Bank
credit facilities
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Amount
outstanding at end of period
|
|
$
|
65,600
|
|
|
$
|
175,700
|
|
Weighted
average interest rate at end of period
|
|
|
2.96
|
%
|
|
|
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)
|
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 September 30, 2007, is $10.5 million related to an uncommitted
credit facility.
|
(2)
|
Long-term
debt excludes lease obligations of $57.9 million
and $53.3 million
at March
31, 2008 and September 30, 2007,
respectively.
|
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
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
AFUDC
– Utility plant
|
$549
|
|
$358
|
|
$1,085
|
|
$737
|
|
Weighted
average rate
|
8.31
|
%
|
5.36
|
%
|
8.31
|
%
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$28.6
|
|
$86
|
|
$65
|
|
$129
|
|
Weighted
average interest rates
|
3.86
|
%
|
5.37
|
%
|
4.46
|
%
|
5.46
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$832
|
|
$211
|
|
$1,686
|
|
$211
|
|
Weighted
average interest rates
|
5.63
|
%
|
5.40
|
%
|
5.81
|
%
|
5.40
|
%
|
On
October 1, 2007, NJNG included 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 and six months ended March 31, 2007, 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
).
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 includes $690,000 and $709,000 of
interest related to these SBC program costs for the three months ended March 31,
2008 and 2007, respectively, and $1.4 million and $1.6 million for the six
months ended March 31, 2008 and 2007, respectively.
8.
|
STO
CK-BASED
COMPENSATION
|
On
November 14, 2007, the Company granted 61,980 performance units, which are
market condition awards that vest in September 2010, and 61,980 shares of
restricted stock, which vest in equal installments over three years, subject to
certain conditions. On the same date, the Company also granted 35,385 restricted
shares that vested immediately. All shares noted above have been adjusted to
reflect the additional shares distributed related to NJR’s 3 for 2 stock split
on March 3, 2008.
During
the first six months of fiscal 2008, included in operation and maintenance
expense is $1.3 million related to stock-based compensation. As of March 31,
2008 there remains $4.2 million of deferred compensation related to unvested
shares and options, which is expected to be recognized over the next 3
years.
9.
|
EMP
LOYEE BENEFIT
PLANS
|
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
March
31,
|
Six
Months
Ended
March
31,
|
Three
Months
Ended
March
31,
|
Six
Months
Ended
March
31,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service
cost
|
$ 729
|
|
$ 733
|
|
$1,457
|
|
$1,466
|
|
$436
|
|
$ 454
|
|
$ 924
|
|
$ 909
|
|
Interest
cost
|
1,649
|
|
1,554
|
|
3,297
|
|
3,108
|
|
810
|
|
757
|
|
1,631
|
|
1,514
|
|
Expected
return on plan assets
|
(2,182
|
)
|
(2,052
|
)
|
(4,365
|
)
|
(4,104
|
)
|
(627
|
)
|
(541
|
)
|
(1,210
|
)
|
(1,081
|
)
|
Recognized
actuarial loss
|
276
|
|
399
|
|
551
|
|
798
|
|
181
|
|
266
|
|
443
|
|
531
|
|
Prior
service cost amortization
|
14
|
|
21
|
|
28
|
|
42
|
|
19
|
|
20
|
|
39
|
|
39
|
|
Transition
obligation amortization
|
—
|
|
|
|
—
|
|
—
|
|
89
|
|
89
|
|
178
|
|
179
|
|
Net
periodic cost
|
$ 486
|
|
$ 655
|
|
$ 968
|
|
$1,310
|
|
$908
|
|
$1,045
|
|
$2,005
|
|
$2,091
|
|
For
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.
10.
|
ASSE
T 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.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The
following is an analysis of the change in the ARO liability for the period ended
March 31, 2008, (in thousands):
Balance
at October 1, 2007
|
$23,895
|
|
Accretion
|
700
|
|
Additions
|
—
|
|
Retirements
|
(355
|
)
|
Balance
at March 31, 2008
|
$24,240
|
|
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.
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 $2.2 million, as well
as the additional amount recognized associated with the adoption of FIN 48, are
included as a component of Deferred and accrued taxes in the Current
classification of the Condensed Consolidated Balance Sheets. The following table
represents the increase in liability with respect to the adoption of FIN
48:
|
As
of October 1,
|
($
in millions)
|
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)
|
$ 3.1
|
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.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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,
Connecticut, Texas and Louisiana. 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; however, all
periods subsequent to those ended September 30, 2003 are all statutorily open to
examination. As previously disclosed, NJNG was party to a case pending
before the Tax Court of New Jersey (the “Tax Court.”) In that
case, NJNG disputed the State of New Jersey’s (the “State”) application of its
tax apportionment rules. On April 15, 2008 the Tax Court issued a
decision in favor of the State. The obligation under this decision, plus
penalties and interest totals approximately $3.1 million, which was previously
fully reserved for under FIN 48, and is anticipated to be paid within the next
twelve months to the State. The effect of the Tax Court’s decision will
not impact the Company’s effective tax rate, as this amount had been fully
reserved for and was reflected as a component of current Deferred and accrued
taxes in the Condensed Consolidated Balance Sheets.
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 $91.4 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 March 31, 2008, NJRES had contractual obligations for current demand
charges related to storage contracts and pipeline capacity contracts of $27.6
million and $55.5 million, respectively.
As of
March 31, 2008, there were NJR guarantees covering approximately $384 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.
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
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
NJRES
|
|
|
$31.5
|
|
|
|
$38.8
|
|
|
|
$59.0
|
|
|
|
$4.1
|
|
NJNG
|
|
|
19.5
|
|
|
|
19.0
|
|
|
|
38.2
|
|
|
|
38.2
|
|
Total
|
|
|
$51.0
|
|
|
|
$57.8
|
|
|
|
$97.2
|
|
|
|
$12.3
|
|
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJNG’s
capital expenditures are estimated at $79.0 million for fiscal 2008, of which
approximately $35.5 million has been recognized, 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 $3.2 million annually for the next five years and $2.1 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 June 30, 2006. As of March 31, 2008, $84.7 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
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.
New
Jersey Resources Corporation
Part
I
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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.
13.
|
BUS
INESS SEGMENT DATA
|
Information
related to the Company’s various business segments, which are presented in the
Condensed Consolidated Statements of Income, 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
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$
476,818
|
|
$ 450,811
|
|
$
761,178
|
|
$ 690,218
|
|
Energy
Services
|
687,912
|
|
568,388
|
|
1,208,123
|
|
1,064,175
|
|
Retail
and Other
|
12,859
|
|
9,915
|
|
19,490
|
|
12,191
|
|
Subtotal
|
1,177,589
|
|
1,029,114
|
|
1,988,791
|
|
1,766,584
|
|
(1)
|
|
|
|
|
|
|
|
|
Intersegment
revenues
|
(44
|
)
|
(71
|
)
|
(108
|
)
|
(140
|
)
|
Total
|
$
1,177,545
|
|
$1,029,043
|
|
$
1,988,683
|
|
$1,766,444
|
|
Operating
Income
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$
59,211
|
|
$ 58,736
|
|
$ 90,813
|
|
$ 95,452
|
|
Energy
Services
|
(45,303
|
)
|
(46,167
|
)
|
(22,740
|
)
|
(24,571
|
)
|
Retail
and Other
|
6,427
|
|
3,702
|
|
6,799
|
|
220
|
|
Total
|
$
20,335
|
|
$ 16,271
|
|
$
74,872
|
|
$ 71,101
|
|
Net
Income
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$
34,170
|
|
$ 33,226
|
|
$
50,840
|
|
$ 53,134
|
|
Energy
Services
|
(25,947
|
)
|
(27,983
|
)
|
(12,797
|
)
|
(16,459
|
)
|
Retail
and Other
|
4,312
|
|
2,718
|
|
4,677
|
|
720
|
|
Total
|
$
12,535
|
|
$ 7,961
|
|
$
42,720
|
|
$ 37,395
|
|
(1)
|
Consists
of transactions between subsidiaries that are eliminated in
consolidation.
|
At March
31, 2008, there were 41,852,235 shares of common stock outstanding, which were
adjusted to include the additional shares distributed on March 3, 2008, as a
result of a 3 for 2 stock split. As of March 31, 2008 the book value per share
was $16.03.
New
Jersey Resources Corporation
Part
I
ITEM 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
comprises the Energy Services segment. 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.
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 three and six month periods ended
March 31, 2007 related to a correction in the accounting for certain derivative
financial instruments. See
Note 1. General,
herein.
Net
income (loss) by business segment is as follows:
|
|
Six
Months Ended
March
31,
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$
|
50,840
|
|
|
119
|
%
|
|
$
|
53,134
|
|
|
142
|
%
|
Energy
Services
|
|
|
(12,797
|
)
|
|
(30
|
)
|
|
|
(16,459
|
)
|
|
(44
|
)
|
Retail
and Other
|
|
|
4,677
|
|
|
11
|
|
|
|
720
|
|
|
2
|
|
Total
|
|
$
|
42,720
|
|
|
100
|
%
|
|
$
|
37,395
|
|
|
100
|
%
|
NJRES and
NJR Energy account for certain of their 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, for contracts executed on or after 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 and are
reflected in Net income.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 natural gas
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’
reported 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) in the Energy Services
segment of $(77.6) million and $(69.7) million, after taxes, for the six-month
period ended March 31, 2008 and 2007, respectively. Also included in Net income
in the table above are realized gains and (losses) of $2.2 and $(1.7) million,
after taxes, for the six-month period ended March 31, 2008 and 2007,
respectively, which are related to derivative instruments that have settled and
are designed to economically hedge natural gas that is still in storage
inventory.
Included
in Net income above are unrealized gains in the Retail and Other segment of $3.8
million and $202,000, after taxes, for the six month periods ended March 31,
2008 and 2007, 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 in its natural gas
distribution system, as well as recovery of all prudently incurred costs
in order to provide safe and reliable service throughout NJNG’s service
territory.
Based
upon increases in NJNG’s operation, 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. Contingent on
statutory time frames and potential regulatory lag, it is unlikely that
any modification to its delivery rates would become effective during
fiscal 2008;
|
|
|
Ÿ
|
Working
with the BPU 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 new customer growth rate, which is expected to be approximately 1.6
percent for fiscal 2008;
|
|
|
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.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 March 31, 2008 and September 30, 2007,
the obligation to fund these conservation programs was recorded at its present
value of $1.0 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. Through March 31, 2008, NJNG has recovered $5.6
million of these previously deferred amounts.
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.
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
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;
|
|
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 financial margin; and
|
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
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.
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 transaction 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 its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 operate under a
tariff structure that have either a regulated or market-based rate and that can
provide a significant growth opportunity for the Company. To that end, NJR has
acquired an interest in Iroquois (regulated rate) and Steckman Ridge
(anticipated market based rate), 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
145,000 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
March 31, 2008, excluding capitalized interest and other direct costs, NJR has
invested $60.2 million in the Steckman Ridge natural gas storage facility. Total
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 upon completion of the construction and development of
its facilities, thereby potentially reducing the final expected recourse
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
Instruments
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.
In
providing its unregulated wholesale energy services, NJRES 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 settlement 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 and throughout the term of the contract while considering
certain factors such as expected future demand. NJRES will continue to enter
into these contracts with the intention
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 gas purchases
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 quarter ended March 31, 2008 increased by 57.5 percent to $12.5
million, compared with $8.0 million for the same period last fiscal year. Basic
and diluted earnings per share (EPS) increased by 57.9 percent to $0.30,
compared with $0.19 for the same period last fiscal year.
Net
income for the six months ended March 31, 2008, increased 14.2 percent to $42.7
million, compared with $37.4 million for the same period last fiscal year. Basic
EPS increased 13.3 percent to $1.02, compared with $0.90 for the same period
last fiscal year, and diluted EPS increased 14.6 percent to $1.02, compared with
$0.89 for the same period last fiscal year.
Prior
period basic and diluted earnings per share noted above have been retroactively
adjusted to reflect NJR’s 3 for 2 stock split distributed on March 3,
2008.
The
increase in earnings for the three months ended March 31, 2008, as compared with
the same period in the prior fiscal year, was due primarily to improved
incentive margin results at NJNG, lower unrealized losses at NJRES, increased
unrealized gains at NJR Energy, lower aggregate interest costs and a tax benefit
associated with a state tax rate change at NJRES, partially offset by higher
operation and maintenance expense across the company primarily driven by higher
employee compensation costs associated with both growth and performance. For the
six months ended March 31, 2008, the increase in earnings as compared with the
same period in the prior fiscal year, was due primarily to the same factors
noted above.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
The
Company’s Operating revenues and Gas purchases are as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
($
in Thousands)
|
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
Operating
revenues
|
$1,177,545
|
|
$1,029,043
|
|
14.4
|
%
|
$1,988,683
|
|
$1,766,444
|
|
12.6
|
%
|
Gas
purchases
|
$1,065,925
|
|
$ 923,046
|
|
15.5
|
%
|
$1,750,619
|
|
$1,544,981
|
|
13.3
|
%
|
Operating
revenues increased $148.5 million in the three months ended March 31, 2008,
compared with the same period of the prior fiscal year due primarily to moderate
increases in customer growth, as well as greater off-system sales, partially
offset by reduced customer usage at NJNG, as well as, lower volumes of natural
gas sold at NJRES. For the six months ended March 31, 2008, Operating revenues
increased $222.2 million compared with the same period of the prior fiscal year
due primarily to the same factors that were noted above.
The
reasons that resulted in the increase in revenues described above were similar
factors that affected an increase of $142.9 million and $205.6 million in Gas
purchases for the three and six months ended March 31, 2008, respectively, as
compared to the same periods in the prior fiscal year, due to the same factors
described above in operating revenues.
Natural
Gas Distribution Operations
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 482,000 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
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
476,818
|
|
|
$
|
450,811
|
|
|
$
|
761,178
|
|
|
$
|
690,218
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
purchases
|
|
|
337,988
|
|
|
|
312,863
|
|
|
|
528,136
|
|
|
|
463,856
|
|
Energy
and other taxes
|
|
|
27,744
|
|
|
|
28,778
|
|
|
|
44,106
|
|
|
|
41,298
|
|
Regulatory
rider expense
|
|
|
17,788
|
|
|
|
18,135
|
|
|
|
29,954
|
|
|
|
27,601
|
|
Total
Utility Gross Margin
|
|
$
|
93,298
|
|
|
$
|
91,035
|
|
|
$
|
158,982
|
|
|
$
|
157,463
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
and commercial
|
|
$
|
85,414
|
|
|
$
|
84,847
|
|
|
$
|
144,610
|
|
|
$
|
143,214
|
|
Transportation
|
|
|
5,865
|
|
|
|
5,181
|
|
|
|
10,799
|
|
|
|
9,747
|
|
Total
Utility Firm Gross Margin
|
|
|
91,279
|
|
|
|
90,028
|
|
|
|
155,409
|
|
|
|
152,961
|
|
Incentive
programs
|
|
|
2,191
|
|
|
|
905
|
|
|
|
3,611
|
|
|
|
4,184
|
|
Interruptible
|
|
|
128
|
|
|
|
102
|
|
|
|
262
|
|
|
|
318
|
|
BPU
settlement (included in Gas purchases above)
|
|
|
(300
|
)
|
|
|
—
|
|
|
|
(300
|
)
|
|
|
—
|
|
Total
Utility Gross Margin
|
|
|
93,298
|
|
|
|
91,035
|
|
|
|
158,982
|
|
|
|
157,463
|
|
Operation
and maintenance expense
|
|
|
23,901
|
|
|
|
22,692
|
|
|
|
47,780
|
|
|
|
42,947
|
|
Depreciation
and amortization
|
|
|
9,332
|
|
|
|
8,848
|
|
|
|
18,565
|
|
|
|
17,586
|
|
Other
taxes not reflected in utility gross margin
|
|
|
854
|
|
|
|
759
|
|
|
|
1,824
|
|
|
|
1,478
|
|
Operating
Income
|
|
$
|
59,211
|
|
|
$
|
58,736
|
|
|
$
|
90,813
|
|
|
$
|
95,452
|
|
Other
income
|
|
|
1,450
|
|
|
|
838
|
|
|
|
2,682
|
|
|
|
1,885
|
|
Interest
charges, net
|
|
|
5,376
|
|
|
|
5,244
|
|
|
|
11,495
|
|
|
|
10,637
|
|
Income
tax provision
|
|
|
21,115
|
|
|
|
21,104
|
|
|
|
31,160
|
|
|
|
33,566
|
|
Net
Income
|
|
$
|
34,170
|
|
|
$
|
33,226
|
|
|
$
|
50,840
|
|
|
$
|
53,134
|
|
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, and may not be comparable to the definition of gross
margin used by others in the natural gas distribution business and other
industries. Utility gross margin is comprised of three major categories which
include utility firm gross margin, incentive programs and utility gross margin
from interruptible customers. 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.
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 increased by $26.0 million, or 5.8 percent, and Gas purchases
increased by $25.1 million, or 8.0 percent, for the three months ended March 31,
2008, respectively, compared with same period in the prior fiscal year as a
result of:
Ÿ
|
an
increase in Operating revenue and Gas purchases related to off system
sales in the amount of $37.6 million and $36.3 million, respectively,
which increased as a result of higher volumes as well as an increase in
average sales prices;
|
|
|
Ÿ
|
a
BGSS customer refund provided to residential and small commercial
customers of $21.3 million, inclusive of sales tax refunds of $1.4
million, in March 2007 that did not recur in fiscal
2008;
|
|
|
Ÿ
|
an
increase in Gas purchases of $300,000 as a result of a non-recurring
charge to the BGSS associated with a settlement agreement, pending BPU
approval, related to a BGSS filing for fiscal 2007;
|
|
|
Ÿ
|
a
decrease of $32 million, in both Operating revenue and Gas purchases, as a
result of a decrease in therms sold as well as the average BGSS price per
therm.
|
NJNG’s
Operating revenues increased by $71.0 million, or 10.3 percent, and gas
purchases increased by $64.3 million, or 13.9 percent, respectively, for the six
months ended March 31, 2008, compared with the same period in the prior fiscal
year, respectively, primarily as a result of:
Ÿ
|
an
increase in Operating revenue and Gas purchases related to off-system
sales in the amount of $38.9 million and $37.2 million, respectively,
which increased as a result of higher volumes as well as an increase in
higher average sale prices;
|
Ÿ
|
the
BGSS customer refunds provided to residential and small commercial
customers of $55.1 million and $21.3 million, inclusive of sales tax
refunds of, $3.6 million and $1.4, in March 2007 and December, 2006,
respectively, which were partially offset by BGSS customer refunds
provided in December 2007 of $32.1 million, inclusive of sales tax refunds
of $2.1 million. These customer refunds were the result of anticipated
reductions in cost to acquire wholesale natural gas, as compared to the
current established rate included in NJNG’s BGSS
tariff;
|
|
|
Ÿ
|
the
$300,000 charge associated with the pending non-recurring settlement as
noted above;
|
|
|
Ÿ
|
a
decrease of $18.9 million as a result of a decrease in therms sold as well
as the average BGSS price per
therm.
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Condensed Consolidated Statements of Income, totaled $44.1
million and $41.3 million for the six months ended, and $27.7 million and $28.8
million for the three months ended, March 31, 2008 and 2007, respectively. For
the six months ended March 31, 2008, sales tax and TEFA increased as a result of
the increase in Operating revenue, as compared to the same period in the prior
fiscal year. For the three months ended March 31, 2008, sales tax and TEFA
decreased due primarily to a decrease in TEFA as a result of the decrease in
customer usage.
Regulatory
rider expenses totaled $30.0 million and $27.6 million for the six months ended
March 31, 2008 and 2007, respectively, and $17.8 million and $18.1 million
for the three months ended March 31, 2008 and 2007, respectively. As
regulatory rider expenses are calculated on a per-therm basis, the increase in
Regulatory rider expenses for the six months ended March 31, 2008 over the same
period in the prior fiscal year is a result of an increase in sales. The
decrease in Regulatory rider expenses for the three months ended March 31, 2008
over the same period in the prior fiscal year is a result of a decrease in
sales.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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.
Total
utility firm gross margin increased $1.3 million, or 1.4 percent, for the three
months, and $2.4 million, or 1.6 percent, for the six months ended, March 31,
2008, compared with the same periods in the prior fiscal year. The changes were
due primarily to an increase in firm and transport customers of 3,000 and 2,000,
respectively over the same period in the prior fiscal year. Gross margin
associated with firm customers increased $567,000 and $1.4 million for the three
and six months ended March 31, 2008 and 2007, respectively.
Gross
margin associated with transportation customers increased $1.1 million, or 10.8
percent, for the six months ended March 31, 2008, and $684,000 or 13.2 percent
for the three months ended March 31, 2008, respectively, compared with the same
periods in the prior fiscal year. NJNG transported 6.6 Bcf and 6.3 Bcf for the
six months ended March 31, 2008 and 2007, respectively, and 3.8 Bcf for the
three months ended March 31, 2008 and 2007. The increase in utility firm gross
margin was due primarily to an increase of 2,000 transportation customers over
the same periods in the prior fiscal year.
The
weather for the six months ended March 31, 2008 was 7.3 percent warmer than
normal, which resulted in an accrual of utility gross margin under the CIP of
$7.4 million, compared with 6.6 percent warmer than normal weather for the same
period last fiscal year, which resulted in an accrual of utility gross margin of
$8.4 million. In addition, customer usage was lower than the established
benchmark during the six months ended March 31, 2008, which resulted
in an additional accrual of utility gross margin under the CIP of $8.8 million
compared to $5.9 million for the same period in fiscal
2007.
NJNG had
10,181 and 8,665 residential customers and 5,112 and 4,494 commercial customers
using its transportation service at March 31, 2008 and 2007, respectively. The
increase in transportation customers was due primarily to an increase in
marketing activity by third party natural gas service providers in NJNG’s
service territory.
NJNG
added 3,125 and 4,333 new customers during the six months ended March 31, 2008
and 2007, respectively. In addition, NJNG converted 374 and 230 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 0.43
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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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.
NJNG’s
incentive programs totaled 11.5 Bcf and generated $2.2 million of utility gross
margin for the three months ended March 31, 2008, compared with 9.8 Bcf and
$905,000 of utility gross margin in the same period in the prior fiscal year.
For the three month period ended March 31, 2008, the increase is due primarily
to the increase in margin associated with off system sales as a result of higher
average sales prices as well as higher sales volumes.
NJNG’s
incentive programs totaled 21.2 Bcf and generated $3.6 million of utility gross
margin for the six months ended March 31, 2008, compared with 20.3 Bcf and $4.2
million of utility gross margin, for the same period in the prior fiscal year.
For the six month periods ended March 31, 2008, the decrease in incentive
program was due primarily to:
Ÿ
|
a
decrease in margin from the FRM program as a result of tighter natural gas
option spreads, coupled with slightly decreased volumes and a decrease in
the sharing percentage;
|
|
|
Ÿ
|
a
decrease in margin from the storage program as a result of timing
variations of storage incentive transactions; partially offset
by
|
|
|
Ÿ
|
an
increase in higher average sales prices as well as an increase in sales
volumes, which resulted in an 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 from an
average of $6.662/dth for the six months ended March 31, 2007 to $7.499/dth for
the six months ended March 31, 2008, which represent a 12.6 percent increase,
while the average off-system price was higher by 20.5 percent from an average of
$7.595/dth for the six months ended March 31, 2007 to $9.152/dth for the six
months ended March 31, 2008.
Interruptible
Tariff Revenues
As of
March 31, 2008, NJNG serves 44 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 3.8 percent of total
throughput for the six months ended March 31, 2008, and 2.5 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 governed these sales through October 2007.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 2.6 and 1.9 Bcf
for the six months ended March 31, 2008, and 2007, respectively. In addition,
NJNG transported 1.7 Bcf and 1.5 Bcf for the six months ended March 31, 2008 and
2007, 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 (O&M) expense increased $1.2 million, or 5.3 percent, for
the three months ended March 31, 2008, compared with the same period in the
prior fiscal year. The increase was due primarily to:
Ÿ
|
higher
compensation costs of $1.1 million as a result of an increase in the
number of employees and overtime labor as well as annual wage
increases;
|
|
|
Ÿ
|
an
increase of $238,000 due primarily to consulting fees related to various
tax positions.
|
Operation
and maintenance (O&M) expense increased $4.8 million, or 11.3 percent, for
the six months ended March 31, 2008, compared with the same period in the prior
fiscal year. The increase was due primarily to:
Ÿ
|
higher
compensation costs of $3.7 million as a result of an increase in the
number of employees and overtime labor as well as annual wage
increases;
|
|
|
Ÿ
|
an
increase in materials and supplies expense of $407,000 due primarily to an
increase in high pressure meter relocations and a higher number of meter
exchanges on non-standard residential meters;
|
|
|
Ÿ
|
an
increase of $320,000 due primarily to consulting fees related to various
tax positions.
|
Operating
Income
Operating
income increased $475,000, or 0.8 percent, for the three months ended March 31,
2008, compared with the same period in the prior fiscal year. The increase was
due primarily to:
Ÿ
|
an
increase in Utility gross margin of $2.3 million as discussed above;
partially offset by
|
|
|
Ÿ
|
an
increase in Operation and maintenance expenses of $1.2 million;
and
|
|
|
Ÿ
|
an
increase in Depreciation expense of $484,000, as a result of greater
utility plant being placed into
service.
|
Operating
income decreased $4.6 million, or 4.9 percent, for the six months ended March
31, 2008, compared with the same period in the prior fiscal year. The decrease
was due primarily to:
Ÿ
|
an
increase in Operation and maintenance expenses of $4.8 million, as
discussed above;
|
|
|
Ÿ
|
an
increase in Depreciation expense of $979,000, as a result of greater
utility plant being placed into service; partially offset
by
|
|
|
Ÿ
|
an
increase in total Utility gross margin of $1.5 million, as
discussed above.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Interest
Charges
Interest
charges increased $132,000 for the three months ended March 31, 2008, as
compared to the same period in the prior fiscal year, due primarily
to:
Ÿ
|
an
increase of $386,000 in interest related to NJNG’s variable rate debt,
which is correlated to the long-term auction rate securities issued by the
Economic Development Authority of New Jersey (EDA), as a result of higher
interest rates clearing at the auctions due primarily to reduced liquidity
in the credit markets;
|
|
|
Ÿ
|
an
increase of $190,000 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; partially offset by
|
|
|
Ÿ
|
a
decrease of $415,000 driven by a lower average interest rate of 3.8
percent on its commercial paper borrowings compared to 5.3 percent in the
prior year, offset by a slight increase in average short-term debt
balances.
|
Interest
charges increased $858,000 for the six months ended March 31, 2008, as compared
to the same period in the prior fiscal year, due primarily to:
Ÿ
|
an
increase of $672,000 in interest related to NJNG’s variable rate debt, as
a result of higher interest rates clearing at the auctions, as described
above;
|
|
|
Ÿ
|
an
increase in BGSS interest of $154,000, due to customers balances
associated with overrecovered gas costs;
|
|
|
Ÿ
|
an
increase of $407,000 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; partially offset by
|
|
|
Ÿ
|
a
decrease of $297,000 due to lower average interest rates on short-term
borrowings of 4.1 percent during fiscal 2008 compared to 5.3 percent in
fiscal 2007.
|
Net
Income
Net
income increased $944,000, or 2.8 percent, for the three months ended March 31,
2008, as compared to the same periods in the prior fiscal year, due primarily to
an increase in Operating income as discussed above and a benefit of $612,000 as
a result of capitalizing an equity component, commencing in fiscal year 2008,
associated with its AFUDC.
Net
income decreased $2.3 million, or 4.3 percent, in the six months ended March 31,
2008, as compared to the same periods in the prior fiscal year, due primarily to
a decrease in Operating income of $4.6 million as discussed above, partially
offset by a benefit of $755,000 associated with the capitalization of an equity
component of its AFUDC rates and lower income tax expense of $2.3 million as a
result of the lower income.
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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 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 establish economic hedges that 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 September 30, 2007 are recorded as part of
Gas purchases 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 Gas
purchases in the Condensed Consolidated Statements of Income 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 also 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
NJRES’
financial results are summarized as follows:
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating
revenues
|
|
$
|
687,912
|
|
|
$
|
568,388
|
|
|
$
|
1,208,123
|
|
|
$
|
1,064,175
|
|
Gas
purchases
|
|
|
727,937
|
|
|
|
610,183
|
|
|
|
1,222,483
|
|
|
|
1,081,125
|
|
Gross
(loss)
|
|
|
(40,025
|
)
|
|
|
(41,795
|
)
|
|
|
(14,360
|
)
|
|
|
(16,950
|
)
|
Operation
and maintenance expense
|
|
|
5,026
|
|
|
|
4,150
|
|
|
|
7,866
|
|
|
|
7,153
|
|
Depreciation
and amortization
|
|
|
53
|
|
|
|
54
|
|
|
|
106
|
|
|
|
108
|
|
Other
taxes
|
|
|
199
|
|
|
|
168
|
|
|
|
408
|
|
|
|
360
|
|
Operating
(loss)
|
|
|
(45,303
|
)
|
|
|
(46,167
|
)
|
|
|
(22,740
|
)
|
|
|
(24,571
|
)
|
Other
income (loss)
|
|
|
22
|
|
|
|
(20
|
)
|
|
|
152
|
|
|
|
115
|
|
Interest
(charges)
|
|
|
(887
|
)
|
|
|
(1,316
|
)
|
|
|
(1,764
|
)
|
|
|
(3,027
|
)
|
Income
tax benefit
|
|
|
20,221
|
|
|
|
19,520
|
|
|
|
11,555
|
|
|
|
11,024
|
|
Net
(loss)
|
|
$
|
(25,947
|
)
|
|
$
|
(27,983
|
)
|
|
$
|
(12,797
|
)
|
|
$
|
(16,459
|
)
|
Gross
loss of $(40.0) million for the three months ended March 31, 2008 was comparable
to the same period in the prior fiscal year. The losses stemmed from financial
derivatives that were impacted by higher commodity prices for natural gas. NJRES
incurred aggregate unrealized and realized losses of $(113.3) million and
$(127.6) million for the three months ended March 31, 2008 and 2007,
respectively, as a result of its portfolio mix of open financial derivative
positions. NJRES' portfolio of financial derivatives are designed to establish
economic hedges on
future cash flows from
forecasted storage injections and withdrawals of the natural gas commodity
costs, as well as, the related transportation capacity. The majority of the
unrealized losses are from financial derivatives associated with forecasted
storage withdrawals, which inherently lose value during periods of rising market
prices. The average market price on these positions within NJRES' portfolio
increased by approximately 30 percent, from $7.85 per dekatherm (dth) from
December 31, 2007 to $10.16 per dth as of March 31, 2008, whereas the same
period in the prior fiscal year experienced price increases of approximately 19
percent.. The decrease in unrealized losses was offset by lower margins during
the current period due to fewer storage arbitrage opportunities to optimize
existing assets, as compared to the prior year, which experienced more favorable
market conditions for generating margin.
NJRES had
a gross loss of $(14.4) million and $(17.0) million for the six months ended
March 31, 2008 and 2007, respectively. Financial derivatives incurred aggregate
unrealized and realized losses of $(123.4) million and $(120.8) million for the
six months ended March 31, 2008 and 2007, respectively, as a result of rising
market prices for natural gas. The financial derivatives that comprise NJRES'
portfolios are designed to offset a majority of the commodity price risk, by
providing an economic hedge for forecasted physical gas transactions (i.e. the
delivery of natural gas to a customer, primarily from a storage location).
NJRES' current portfolio mix of financial derivatives is subject to unrealized
losses during periods of rising market prices for natural gas. The average
market price on the positions within NJRES' portfolio increased by approximately
35 percent, from $7.52 per dth as of October 1, 2007 to $10.16 per dth as of
March 31, 2008.
As part
of its lower net loss, NJRES’ state income tax benefit decreased due to a
reduction in its effective state income tax, fully offset by revaluing its
beginning of the fiscal year deferred tax liabilities by the lower effective
state tax rate, which resulted in a benefit of approximately $1.8 million. The
reduction in the rate is due to a change in the apportionment of its taxable
income for state tax purposes. These changes and revaluation of deferred tax
liabilities resulted in an effective tax benefit of 47.5 percent for the six
months ended March 31, 2008 as compared to an effective tax benefit of 41.1
percent for the six months ended March 31, 2007.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating
revenues
|
|
$
|
687,912
|
|
|
$
|
568,388
|
|
|
$
|
1,208,123
|
|
|
$
|
1,064,175
|
|
Less:
Gas purchases
|
|
|
727,937
|
|
|
|
610,183
|
|
|
|
1,222,483
|
|
|
|
1,081,125
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments
|
|
|
119,218
|
|
|
|
126,383
|
|
|
|
127,043
|
|
|
|
117,867
|
|
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
|
|
(5,889
|
)
|
|
|
1,194
|
|
|
|
(3,629
|
)
|
|
|
2,960
|
|
Financial
margin
|
|
$
|
73,304
|
|
|
$
|
85,782
|
|
|
$
|
109,054
|
|
|
$
|
103,877
|
|
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 loss, the closest GAAP financial
measurement, to the Financial margin of NJRES is as
follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Operating
loss
|
$(45,303
|
)
|
$(46,167
|
)
|
$(22,740
|
)
|
$(24,571
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
5,026
|
|
4,150
|
|
7,866
|
|
7,153
|
|
Depreciation
and amortization
|
53
|
|
54
|
|
106
|
|
108
|
|
Other
taxes
|
199
|
|
168
|
|
408
|
|
360
|
|
Subtotal
– Gross loss
|
$(40,025
|
)
|
$(41,795
|
)
|
$(14,360
|
)
|
$(16,950
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments
|
119,218
|
|
126,383
|
|
127,043
|
|
117,867
|
|
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
(5,889
|
)
|
1,194
|
|
(3,629
|
)
|
2,960
|
|
Financial
margin
|
$
73,304
|
|
$
85,782
|
|
$109,054
|
|
$103,877
|
|
A
reconciliation of Net loss to Net financial earnings is as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Net
loss
|
$(25,947
|
)
|
$(27,983
|
)
|
$(12,797
|
)
|
$(16,459
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments, net of taxes
|
73,013
|
|
74,459
|
|
77,623
|
|
69,714
|
|
Realized
(gain) loss from derivative instruments related to natural gas inventory,
net of taxes
|
(3,549
|
)
|
704
|
|
(2,217
|
)
|
1,744
|
|
Net
financial earnings
|
$
43,517
|
|
$
47,180
|
|
$
62,609
|
|
$
54,999
|
|
NJRES'
financial margin decreased $12.5 million for the three months ended March 31,
2008, compared to the same period last fiscal year, due primarily to fewer
storage arbitrage opportunities to optimize existing assets partially offset by
new transportation capacity contracts. The current winter season provided fewer
opportunities to capture additional margins on market positions, as compared to
the three months ended March 31, 2007 where additional margin was generated from
a large volume of storage withdrawal activity that was prompted by below normal
temperatures during a brief period within a single month during the three month
period ended March 31, 2007, which accounted for approximately $20.5 million of
financial margin that did not recur in fiscal 2008. Total storage activity was
comparable in both fiscal periods, with average margin spreads becoming more
narrow in the current fiscal year as they moved from an average spread (defined
as difference between the market price of natural gas less the cost to acquire
and transport it) of $1.351 per dth for the three months ended March 31, 2007 to
$0.873 per dth for the three months ended March 31, 2008.
NJRES'
financial margin increased $5.2 million for the six months ended March 31, 2008,
compared to the same period last fiscal year. The increase in margin is due
primarily to new transportation capacity contracts acquired during the first
quarter of fiscal 2008 for the Northeast market region. The new asset
capacity contracts enabled NJRES to transport greater volumes within that market
region, which experienced favorable spreads that contributed to higher margins.
The higher first quarter margins were partially offset by lower margin
performance during the second quarter of the current fiscal year, which had
fewer storage arbitrage opportunities due to overall normal weather conditions
within NJRES' market regions.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
NJRES'
operation and maintenance expense increased by $876,000 and $713,000 for the
three and six months ended March 31, 2008, respectively, compared with the same
periods last fiscal year. The increase was due primarily to increased salary and
wages costs as a result of increased staffing and an increase in incentive
compensation costs.
Contributing
to greater net financial earnings is a reduction of $2.2 million in state income
tax expense as a result of a reduction in NJRES’ effective state income tax
rate. The reduction in the rate is due to a change in the apportionment of its
taxable income for state tax purposes. The new rate also resulted in a one time
current period benefit of approximately $1.8 million from the effect of
revaluing its deferred tax liabilities at the beginning of the fiscal year. As a
result of this state income tax rate change and the revaluation of its deferred
tax liabilities, NJRES has an effective rate of 37.1 percent for the six months
ended March 31, 2008 compared with 41.1 percent for the six months ended March
31, 2007. Excluding the $1.8 million one-time benefit, the effective
tax rate is 38.9 percent.
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.
Retail
and Other Operations
The
consolidated financial results of Retail and Other are summarized as
follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Operating
revenues
|
$12,859
|
|
$9,915
|
|
$19,490
|
|
$12,191
|
|
Operation
and maintenance expense
|
$5,678
|
|
$5,495
|
|
$11,138
|
|
$10,553
|
|
Equity
in earnings, net of tax
|
$746
|
|
$478
|
|
$1,170
|
|
$895
|
|
Net
income
|
$4,312
|
|
$2,718
|
|
$4,677
|
|
$720
|
|
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 gains associated with these derivative
instruments of $6.8 million and $4.4 million, for the three months ended March
31, 2008 and 2007, respectively, which are recorded, pre-tax, as a component of
Operating revenues. On an after-tax basis, these unrealized gains are $4.0
million and $2.6 million for the three months ended March 31, 2008 and 2007,
respectively.
For the
six month period, unrealized gains associated with these derivative instruments
are $6.5 million and $343,000, for March 31, 2008 and 2007, respectively. On an
after-tax basis, these unrealized gains are $3.8 million and $202,000 for the
six months ended March 31, 2008 and 2007, respectively.
Operating
revenue for the three months and six months ended March 31, 2008, increased $2.9
million and $7.3 million, respectively as compared to last fiscal year, due
primarily to greater unrealized gains at NJR Energy, which are the result of an
increase in average market prices, partially offset by partial settlement of
these swap contracts. The portfolio of swaps is comprised primarily of long
positions, which increase in value during periods of rising market
prices.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Operation
and maintenance expenses for the three months and the six months ended March 31,
2008, increased $183,000 and $585,000, respectively as compared to last fiscal
year due primarily to due to higher compensation costs resulting from an
increase in the number of employees as well as annual wage
increases.
Taxes
netted in Equity in earnings from Iroquois are $481,000 and $317,000 and are
included in the Condensed Consolidated Statements of Income for the three months
ended March 31, 2008 and 2007, respectively. For the six months ended March
2008, taxes netted in Equity in earnings from Iroquois are $763,000 and $593,000
and are included in the Condensed Consolidated Statements of Income. 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 and six months ended March 31, 2008, increased $1.6
million and $4.0 million, respectively compared to the same period in fiscal
2007 due primarily to the increased operating revenue at NJR Energy and
increased earnings from the investment in Iroquois.
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.
NJR’s
consolidated capital structure was as follows:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
Common
stock equity
|
55
|
%
|
50
|
%
|
Long-term
debt
|
30
|
|
30
|
|
Short-term
debt
|
15
|
|
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.
On
January 23, 2008, NJR’s Board of Directors approved a 3 for 2 stock split in the
form of a dividend for the Company’s common stock shareholders of record on
February 8, 2008. The additional shares were issued on March 3, 2008 resulting
in an increase in average shares outstanding from 28 million to 42
million.
The
Company has a share repurchase program that provides for the repurchase of up to
6.8 million shares on a split adjusted basis. As of March 31, 2008, the Company
repurchased approximately 5.4 million of those shares and has the ability to
repurchase an additional 1.4 million shares under the approved
program.
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
March 31, 2008, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $450 million available under these facilities (see
Note 6.
Debt).
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
NJR
believes that as of March 31, 2008, NJR, NJNG and NJRES were, and currently are,
in compliance with all debt covenants.
NJR
believes that existing borrowing availability 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 BPU has
approved the issuance of up to $125 million of medium-term notes to satisfy a
portion of NJNG’s financing requirements, which is expected to be issued in the
third fiscal quarter.
NJR
On
December 13, 2007, NJR refinanced its prior senior credit facility, which was
scheduled to expire on December 16, 2007, for a new $325 million, five-year,
revolving, unsecured credit facility. The new credit facility permits the
borrowing of revolving loans and swing loans, as well as the issuance of letters
of credit. Swing loans are loans made available on a same day basis for an
aggregate principal amount of up to $50 million and repayable in full within a
maximum of 7 days of borrowing. 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. Borrowings under the new 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 used the initial
borrowings under the new credit facility to refinance its prior credit facility
and pay all related fees and expenses. In addition, certain of NJR’s
non-regulated subsidiaries have guaranteed to the lenders all of NJR’s
obligations under the new credit facility.
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 March 31,
2008, NJR’s effective rate was 3.02 percent on outstanding borrowings of $83.3
million under this credit facility.
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 $65.6 million and $175.7 million of commercial paper borrowings
supported by the credit facility as of March 31, 2008 and September 30, 2007,
respectively.
NJNG has
a 3-year, $30 million uncommitted credit facility with a multinational financial
institution. As of March 31, 2008, NJNG had no borrowings outstanding under this
facility.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series,
when an auction is held for the
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
purposes
of determining the interest rate of the securities. The interest rate associated
with the NJNG variable-rate debt is based on the rates on the EDA ARS.
Currently, the auctions surrounding the EDA ARS have failed, resulting in the
bonds bearing interest at their maximum rates, as defined in the EDA ARS, as the
lesser of (i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as
applicable to such series of ARS. As of March 31, 2008, the 30-day LIBOR rate
was 2.7 percent. While the failure of the ARS auctions does not signify or
constitute a default on NJNG, the EDA ARS does impact NJNG’s borrowing costs of
the variable-rate debt. As such, NJNG currently has a weighted average interest
rate of 4.6 percent as of March 31, 2008, compared with a weighted average
interest rate of 3.9 percent as of September 30, 2007. There can be no assurance
that the ARS securities of the EDA will have enough market liquidity to return
interest rates below their maximum rate.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
As of
March 31, 2008 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 March 31, 2008.
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 March 31,
2008.
(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)
|
$552,390
|
|
$71,773
|
|
$48,868
|
|
$26,806
|
|
$404,943
|
|
Capital
lease obligations
(1)
|
88,483
|
|
8,813
|
|
18,015
|
|
19,154
|
|
42,501
|
|
Operating
leases
|
11,295
|
|
3,159
|
|
4,186
|
|
1,836
|
|
2,114
|
|
Short-term
debt
(1)
|
148,900
|
|
148,900
|
|
—
|
|
—
|
|
—
|
|
New
Jersey Clean Energy Program
(1)
|
7,909
|
|
7,909
|
|
—
|
|
—
|
|
—
|
|
Construction
obligations
|
652
|
|
652
|
|
—
|
|
—
|
|
—
|
|
Obligations
for uncertain tax positions
(
1
)
(2)
|
3,062
|
|
3,062
|
|
—
|
|
—
|
|
—
|
|
Remediation
expenditures
(3)
|
105,340
|
|
19,000
|
|
17,900
|
|
10,200
|
|
58,240
|
|
Natural
gas supply purchase obligations–NJNG
|
232,371
|
|
203,791
|
|
28,580
|
|
—
|
|
—
|
|
Demand
fee commitments - NJNG
|
580,353
|
|
91,394
|
|
202,600
|
|
164,376
|
|
121,983
|
|
Natural
gas supply purchase obligations–NJRES
|
999,559
|
|
708,513
|
|
291,046
|
|
—
|
|
—
|
|
Demand
fee commitments - NJRES
|
188,231
|
|
83,084
|
|
70,335
|
|
26,377
|
|
8,435
|
|
Total
contractual cash obligations
|
$2,918,545
|
|
$1,350,050
|
|
$681,530
|
|
$248,749
|
|
$638,216
|
|
|
(1) These
obligations include an interest component, as defined under the related
governing agreements or in accordance with the applicable tax
statute.
|
|
(2) This
table only includes known obligations for uncertain tax positions. See
Note 11. Adoption of FIN 48 for a description of all uncertain tax
positions, of which the ultimate amount and timing of settlement cannot be
reasonably estimated.
|
(3) Expenditures
are estimated.
For
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
March 31, 2008, there were NJR guarantees covering approximately $384 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 the
facility once construction activities are completed, therefore potentially
reducing the aggregate recourse amount funded by NJR. 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 $79.0 million, including
cash payments of $30.1 million during the six months ended March 31,
2008.
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
generated from operating activities totaled $167.7 million for the six months
ended March 31, 2008, compared with cash flow from operations of $241.6 million
for the same period in fiscal 2007. Net income was higher for the six month
period ending March 31, 2008 as compared to the same period in fiscal 2007,
primarily driven by lower net unrealized losses as a result of changes in
volumes and prices of derivative financial instruments. The decrease in
Operating cash flows was primarily due to variations in working capital, which
are a function of the seasonality of NJR’s business and fluctuations in
wholesale natural gas prices. The components of working capital that contributed
to the decrease in operating cash flows for the six months ended March 31, 2008
as compared to the same period in fiscal 2007 are as follows:
Ÿ
|
At
NJNG, increased receivables as a result of higher volumes and sales prices
in off-system sales as well as lower BGSS customer credits during fiscal
2008; and
|
|
|
Ÿ
|
At
NJRES, lower storage reductions of 2.3 Bcf in the current period as
compared to 8.6 bcf during the six months ended March 31, 2007;
and
|
|
|
Ÿ
|
An
increase in broker margin balances as a result of the impact of adverse
market price movements on NJRES’ futures positions; partially offset
by
|
|
|
Ÿ
|
An
increase in gas purchases payable, primarily at NJRES as a result of a 31
percent increase in the cost per dth of natural gas, driven by increasing
market prices, compared to the same period in fiscal
2007.
|
NJNG’s
MGP expenditures are currently expected to total $25.3 million in fiscal 2008
(see
Note 12. Commitments and
Contingent Liabilities).
Investing
Activities
Cash
flows used in investing activities totaled $38.9 million for the six months
ended March 31, 2008, compared with $79.8 million in the same period in fiscal
2007. The decrease was due primarily to a reduction in the investments in
Steckman Ridge offset by increases in utility plant expenditures during 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 March
31, 2008, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 $60.2
million was expended through March 31, 2008.
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 once construction
of the facility is complete; however, there can be no assurances that this will
occur. NJR is obligated to fund up to its maximum of $125 million for the
construction and development of Steckman Ridge regardless of the ability of
Steckman Ridge, NJR or its partner to secure non-recourse
financing.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2008.
Financing
Activities
Cash flow
used in financing activities totaled $124.7 million for the six months ended
March 31, 2008, compared with $158.7 million for the same period in the prior
fiscal year. Financing cash flows are seasonal in nature. Cash requirements are
lower as inventory levels decline toward the end of the withdrawal season.
Inventory levels were lower at the end of the second quarter of fiscal 2008
compared to the same period last year resulting in a reduction in short term
borrowings during fiscal 2008. This decrease in cash used was offset by payments
for treasury stock of $11.0 million, of which $7.7 million is related to settled
purchases made during the fourth quarter of fiscal 2007.
NJNG
provides funding for certain of its infrastructure projects through tax exempt
variable rate debt, which has been issued to back six series of auction rate
securities (ARS) through the Economic Development Authority of New Jersey (EDA),
and are based on the borrowing costs of the ARS. During periods of reduced
liquidity for ARS, NJNG’s rate on its variable rate debt could default to a
maximum rate of the lesser of (i) 175 percent of the 30-day LIBOR or (ii) 10 to
12 percent, as applicable to a particular series of ARS. NJNG is currently
reviewing alternatives that include the refinancing of these bonds to eliminate
any increase in interest rate risk.
NJNG
received $7.5 million during the first quarter of fiscal 2008, in connection
with the sale-leaseback of its gas meters. This sale-leaseback program will
continue on an annual basis.
Credit
Ratings
The table
below summarizes NJNG’s current credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc.
(Moody’s):
|
Standard
and Poor’s
|
Moody’s
|
Corporate Rating
|
A
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
A+
|
Aa3
|
Ratings
Outlook
|
Negative
|
Stable
|
On April
3, 2008, S&P adjusted NJNG’s corporate credit rating from A+ to
A.
NJNG’s
S&P and Moody’s ratings are investment-grade ratings. S&P and Moody’s
give NJNG’s commercial paper the highest rating within the Commercial Paper
investment-grade category. 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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets.
The prices on the NYMEX and over-the-counter markets generally reflect the
notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations, in the price of
natural gas. To economically hedge against such fluctuations, the Company and
its subsidiaries have entered into futures contracts, options agreements and
swap agreements. To manage these derivative instruments, the Company has
well-defined risk management policies and procedures that include daily
monitoring of volumetric limits and monetary guidelines. The Company’s natural
gas businesses are conducted through three of its operating subsidiaries. First,
NJNG is a regulated utility that uses futures, options and swaps to economically
hedge against price fluctuations and its recovery of natural gas costs is
governed by the BPU. Second, NJRES uses futures, options and swaps to
economically hedge purchases and sales of natural gas. Finally, NJR Energy has
entered into two swap transactions related to an 18-year fixed-price contract,
expiring in October 2010 to sell remaining volumes of approximately 6.6 Bcf of
natural gas (Gas Sales Contract) to an energy marketing
company.
The
following table reflects the changes in the fair market value of financial
derivatives related to natural gas purchases and sales from March 31,
2008:
(Thousands)
|
Balance
September
30,
2007
|
Increase
(Decrease)
in
Fair
Market Value
|
Less
Amounts
Settled
|
Balance
March
31,
2008
|
NJNG
|
$(51,861
|
)
|
$28,856
|
|
$(11,087
|
)
|
$(11,918
|
)
|
NJRES
|
89,446
|
|
(46,044
|
)
|
82,129
|
|
(38,727
|
)
|
NJR
Energy
|
28,353
|
|
7,939
|
|
1,454
|
|
34,838
|
|
Total
|
$
65,938
|
|
$(9,249
|
)
|
$72,496
|
|
$(15,807
|
)
|
There
were no changes in methods of valuations during the quarter ended March 31,
2008.
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at March 31, 2008, by method of valuation and by
maturity for each fiscal year period:
(Thousands)
|
|
2008
|
|
|
2009
|
|
|
|
2010-2012
|
|
|
After
2012
|
|
|
Total
Fair Value
|
|
Price
based on NYMEX
|
|
|
$9,479
|
|
|
|
$(12,312
|
)
|
|
|
$(4,706
|
)
|
|
|
—
|
|
|
|
$
(7,539
|
)
|
Price
based on other external data
|
|
|
(3,421
|
)
|
|
|
(3,749
|
)
|
|
|
(1,098
|
)
|
|
|
—
|
|
|
|
(8,268
|
)
|
Total
|
|
|
$6,058
|
|
|
|
$(16,061
|
)
|
|
|
$(5,804
|
)
|
|
|
—
|
|
|
|
$(15,807
|
)
|
The
following is a summary of financial derivatives by type as of March 31,
2008:
|
|
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included
in
Derivatives (Thousands)
|
NJNG
|
Futures
|
1.5
|
|
$7.19
- $10.54
|
$
13,711
|
|
|
Swaps
|
7.5
|
|
$4.19
- $10.07
|
$(25,629
|
)
|
|
Options
|
0.6
|
|
$7.50
- $ 7.50
|
$ —
|
|
NJRES
|
Futures
|
(14.2
|
)
|
$7.04
- $10.99
|
$(30,629
|
)
|
|
Swaps
|
(57.7
|
)
|
$6.74
- $14.18
|
$ (8,375
|
)
|
|
Options
|
3.4
|
|
$7.48
- $13.25
|
$ 277
|
|
NJR
Energy
|
Swaps
|
6.6
|
|
$3.22
- $ 4.41
|
$
34,838
|
|
Total
|
|
|
|
|
$(15,807
|
)
|
The
following table reflects the changes in the fair market value of physical
commodity contracts from March 31, 2008:
(Thousands)
|
Balance
September
30,
2007
|
Increase
(Decrease)
in Fair
Market Value
|
Less
Amounts
Settled
|
Balance
March
31,
2008
|
NJRES
|
—
|
|
$15,629
|
|
$14,498
|
|
$1,131
|
|
The
Company uses a value-at-risk (VaR) model to assess the market risk of its net
futures, options and swap positions. VaR represents the potential loss in value
of NJRES’ trading portfolio due to adverse market movements over a defined time
horizon (NJRES utilizes holding periods of 1 day and 10 days) with a specified
confidence level (NJRES utilizes either a 95 percent or 99 percent confidence
level). As an example, utilizing a 1 day holding period with a 95 percent
confidence level would indicate that there is a 5 percent chance that the
liquidation value of the NJRES portfolio would fall below the expected trading
value by an amount at least as large as the calculated VaR.
The VaR
at March 31, 2008, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $1.2 million. The VaR with a 99
percent confidence level and a 10-day holding period was $5.3 million. The
calculated VaR represents an estimate of the potential change in the value of
the net positions. These estimates may not be indicative of actual results
because actual market fluctuations may differ from forecasted
fluctuations.
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors and
manages the credit risk of its wholesale marketing operations through credit
policies and procedures that management believes reduce overall credit risk.
These policies include a review and evaluation of prospective counterparties’
financial statements and/or credit ratings, daily monitoring of counterparties’
credit limits, daily communication with traders regarding credit status and the
use of credit mitigation measures, such as minimum margin requirements,
collateral requirements and netting agreements. Examples of collateral include
letters of credit and cash received for either prepayment or margin
deposit.
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit
risk management policies and procedures. The RMC is comprised of individuals
from NJR-affiliated companies that meet twice a month and, among other things,
evaluates the effectiveness of existing credit policies and procedures, reviews
material transactions and discusses emerging issues.
The
following is a summary of gross and net credit exposures, grouped by investment
and noninvestment grade counterparties, as of March 31, 2008. Gross credit
exposure is defined as the unrealized fair value of derivative and energy
trading contracts plus any outstanding receivable for the value of natural gas
delivered for which payment has not yet been received. Net credit exposure is
defined as gross credit exposure reduced by collateral received from
counterparties and/or payables, where netting agreements exist. The amounts
presented below exclude accounts receivable for retail natural gas sales and
services.
Unregulated
counterparty credit exposure as of March 31, 2008 is as follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$262,278
|
|
|
$143,073
|
|
Noninvestment
grade
|
3,850
|
|
|
—
|
|
Internally
rated investment grade
|
24,772
|
|
|
17,995
|
|
Internally
rated noninvestment grade
|
4,618
|
|
|
—
|
|
Total
|
$295,518
|
|
|
$161,068
|
|
NJNG’s
counterparty credit exposure as of March 31, 2008 is as follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$53,608
|
|
|
$45,975
|
|
Noninvestment
grade
|
1,254
|
|
|
6
|
|
Internally
rated investment grade
|
5,927
|
|
|
5,627
|
|
Internally
rated noninvestment grade
|
—
|
|
|
—
|
|
Total
|
$60,789
|
|
|
$51,608
|
|
Due to
the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then the
Company could sustain a loss. This loss would comprise the loss on natural gas
delivered but not paid for and/or the cost of replacing natural gas not
delivered at a price higher than the price in the original contract. Any such
loss could have a material impact on the Company’s financial condition, results
of operations or cash flows.
Interest
Rate Risk–Long-Term Debt
As of
March 31, 2008, the Company (excluding NJNG) had no variable-rate long-term
debt.
As of
March 31, 2008, NJNG is obligated with respect to loan agreements securing six
series of auction rate bonds totaling approximately $97.0 million of
variable-rate debt backed by securities issued by the EDA. The EDA bonds are ARS
and have an interest rate reset every 7 or 35 days, depending upon the
applicable series, when an auction is held for the purposes of determining the
interest rate pricing of the securities. The interest rate
associated
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
with the
NJNG variable-rate debt is based on the rates the EDA receives from its ARS.
Currently, the auctions surrounding the EDA ARS have failed, resulting in the
securities bearing interest at their maximum rates, as defined in the ARS, as
the lesser of (i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per
annum, as applicable to such series of ARS. While the failure of the ARS
auctions has no default impact on NJNG’s variable-rate debt, it does impact its
borrowing costs of the variable-rate debt. As such, NJNG currently has a
weighted average interest rate of 4.6 percent as of March 31, 2008. There can be
no assurance that the ARS securities of the EDA will have enough market
liquidity to return interest rates below their maximum rate.
Effects
of Inflation
Although
inflation rates have been relatively low to moderate in recent years, any change
in price levels has an effect on operating results due to the capital-intensive
and regulated nature of the Company’s utility subsidiary. The Company attempts
to minimize the effects of inflation through cost control, productivity
improvements and regulatory actions where appropriate.
ITEM 4. CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
the principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e))
under the Exchange Act, as of the end of the period covered by this report.
Based on this evaluation, the Company’s principal executive officer and
principal financial officer concluded that, as of end of the period covered by
this report, the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to the
Company’s management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
In
connection with the Company’s preparation of its consolidated financial
statements for the fiscal year ended September 30, 2007, the Company reassessed
its accounting treatment and disclosures for its derivative instruments under
Statement of Financial Accounting Standards 133
Accounting for Derivative
Instruments and Hedging Activities
(as interpreted and amended, “SFAS
133”). As a result of this accounting assessment, the Company determined that
certain of its derivative instruments have not qualified as cash flow hedges
under SFAS 133 as they did not meet the definition for “critical-terms-match,”
as defined under paragraph 65 of SFAS 133 and related authoritative accounting
literature issued by various standard setting bodies and their related
interpretations for all fiscal periods. As the Company has determined the
hedging relationships did not meet the “critical-terms-match,” the related
derivative instruments did not qualify as cash flow hedges and the unrealized
gains or losses on the derivative instruments are required to be reflected in
the Consolidated Statement of Income for each period rather than recorded in
Comprehensive Income and included as a component of “accumulated other
comprehensive income,” a component of Total Common Stock Equity in the
Consolidated Balance Sheets, until the forecasted transaction is settled.
Therefore, because of this material weakness, the Company amended and restated
certain of its historical consolidated financial statements and made appropriate
changes in the preparation of its consolidated financial statements for the year
ended September 30, 2007, including the Condensed Consolidated Statements of
Income and of Cash flows for the six months ended March 31, 2007. As set forth
in Public Company Accounting Oversight Board Auditing Standard No. 5, a material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company's annual or interim financial statements
will not be prevented or detected on a timely basis.
New
Jersey Resources Corporation
Part
I
ITEM
4. CONTROLS AND PROCEDURES (Continued)
|
The
Company continually reviews its disclosure controls and procedures and makes
changes, as necessary, to ensure the quality of its financial reporting. As
detailed below, the Company has implemented certain additional controls that it
believes will significantly reduce the potential for similar issues to arise in
the future.
Changes
in Internal Control over Financial Reporting
Management
and the Board of Directors are committed to the remediation of the material
weakness set forth above as well as the continued improvement of the Company’s
overall system of internal control over financial reporting. Management
continues to of actively address and remediate the material weakness in internal
control over financial reporting described above. In connection with the
material weakness in internal control over financial reporting detailed above,
the Company implemented or is in the process of implementing the following
controls designed to substantially reduce the risk of a similar material
weakness occurring in the future:
Ÿ
|
improving
training, education and accounting reviews for all relevant personnel
involved in the accounting treatment and disclosures for the Company’s
derivative instruments to ensure compliance with generally accepted
accounting principles, including SFAS 133 and its related
interpretations;
|
|
|
Ÿ
|
ensuring
the Company has the accounting technical expertise requirements necessary
for compliance with SFAS 133;
|
|
|
Ÿ
|
initiating
a thorough review of the design of the internal control over financial
reporting related to the accounting of derivative instruments, which will
incorporate an analysis of the current staffing levels, job assignments
and the design of all internal control processes for the accounting for
derivative instruments and implement new and improved processes and
controls, if warranted; and
|
|
|
Ÿ
|
increasing
the level of review and discussion of significant accounting matters and
supporting documentation with senior finance
management.
|
In
addition, as part of the Company’s fiscal 2008 assessment of internal control
over financial reporting, management will conduct sufficient testing and
evaluation of the controls to be implemented as part of this remediation plan to
ascertain that they operate effectively. The Company anticipates that these
remediation actions represent ongoing improvement measures. While the Company
has taken steps to remediate the material weakness, these steps may not be
adequate to fully remediate the material weakness, and additional measures may
be required. The effectiveness of its remediation efforts will not be known
until the Company can test those controls in connection with the management
tests of internal control over financial reporting that the Company will perform
as of September 30, 2008. The Company believes, however, these measures will
fully remediate the above identified material weakness in its internal control
over financial reporting.
These
were the only changes in the Company’s internal control over financial reporting
(as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during
the quarter ended March 31, 2008, that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
New
Jersey Resources Corporation
Part
II
ITEM 1. LEGAL
PROCEEDINGS
|
Inf
ormation regarding reportable legal proceedings is contained in
Part I, "Item 3. Legal Proceedings" in NJR’s Annual Report on Form 10-K for the
year ended September 30, 2007, and is set forth in Part I, Item 1, Note 12,
Commitment and Contingent
Liabilities—Legal Proceedings
. No legal proceedings became reportable
during the quarter ended March 31, 2008 and there have been no material
developments during such quarter regarding any previously reported legal
proceedings, which have not been previously disclosed.
While we
attempt to identify, manage and mitigate risks and uncertainties associated with
our business to the extent practical, under the circumstances, some level of
risk and uncertainty will always be present. Part I, Item 1A, "Risk
Factors," of NJR’s 2007 Annual Report on Form 10-K includes a detailed
discussion of NJR’s risk factors. These risks and uncertainties have the
potential to materially affect our financial condition and results of
operations. We do not believe that there has been any material
changes to the risk factors previously disclosed in Part I, Item 1A, “Risk
Factors” of NJR’s 2007 Annual Report on Form 10-K with the exception
of the following additional risk factor:
Continued
Failures in the Market for Auction Rate Securities Could Have a Negative Impact
on NJNG’s Financial Condition
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series,
when an auction is held for the purposes of determining the interest rate of the
securities. The interest rate associated with the NJNG variable-rate debt is
based on the rates on the EDA ARS. All of the ARS are Aaa/AAA rated by Moody’s
Investor Services and Standard & Poor’s, respectively, based on bond
insurance provided by Ambac Assurance Corporation. NJNG has recently experienced
several failed auctions on the EDA ARS, resulting in the inability of security
holders desiring to sell these securities at auction to do so. The result of a
failed auction, which does not signify a default by NJNG, is that the EDA ARS
continue to pay interest in accordance with their terms until there is a
successful auction or until such time as other markets for the EDA ARS develop.
However, upon an ARS auction failure, the interest rates do not reset at a
market rate established at an auction, but instead reset based upon a formula
contained within the EDA ARS, otherwise known as a “maximum auction rate,” which
may be materially higher than the previous auction rate. The “maximum auction
rate” for the EDA ARS is the lesser of (i) 175 percent of one-month LIBOR or
(ii) either 10 percent or 12 percent per annum, as applicable to such series of
the ARS. Should future auctions fail and interest rates on the EDA ARS continue
to be established at the maximum auction rate, NJNG’s average cost of borrowing
could rise above historic levels, which could materially and adversely affect
both the Company’s and NJNG’s cash flows, results of operations and financial
condition. Although the Company is reviewing alternative methods for refinancing
the EDA ARS at NJNG on a continuing basis, the Company cannot assure that
alternative sources of financing can be implemented in a timely
manner.
New
Jersey Resources Corporation
Part
II
ITEM 2. UNREGISTERED
SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In 1996,
the NJR’s Board of Directors (“Board”) authorized the Company to implement a
share repurchase program, which has been expanded several times since the
inception of the program. On November 14, 2007, the Board authorized an increase
to the plan to permit the repurchase, in the open market or in privately
negotiated transactions, of 1.5 million shares, bringing the total permitted
repurchases to 6.8 million shares as of that date. As of March 31,
2008, the Company has 1.4 million shares of its common stock still available for
repurchase.
The
following table sets forth NJR’s repurchase activity for the quarter ended March
31, 2008:
Period
|
|
Total
Number of Shares
(or
Units) Purchased
|
|
Average
Price Paid per Share (or Unit)
|
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
|
Maximum
Number
(or
Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased
Under the Plans or Programs
|
01/01/08
– 01/31/08
|
|
31,950
|
|
$30.343
|
|
—
|
|
1,409,171
|
02/01/08
– 02/29/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
03/01/08
– 03/31/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
Total
|
|
31,950
|
|
$30.343
|
|
—
|
|
1,409,171
|
Share
and per share data have been retroactively adjusted to reflect a 3 for 2 stock
split effective March 3, 2008.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
(a) An
annual meeting of shareholders was held on January 23, 2008 and information
regarding such meeting was included in the Company’s Quarterly Report on Form
10-Q for the quarter ended December 31, 2007, which is incorporated herein by
reference.
31.1
|
Certification
of the Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act*
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act*
|
*This
certificate accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of
Section 18 or any other provision of the Securities Exchange Act of 1934, as
amended.
New
Jersey Resources Corporation
SIGN
ATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
NEW
JERSEY RESOURCES CORPORATION
|
|
(Registrant)
|
|
|
Date:
April 30,
2008
|
|
|
By
:
/s/ Glenn C.
Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
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