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 JUNE 30, 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 August 1,
2008
was 42,034,445.
New
Jersey Resources Corporation
TAB
LE OF CONTENTS
New
Jersey Resources Corporation
Part
I
INF
ORMATION 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
|
UN
AUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands, except per share data)
|
2008
|
2007
|
2008
|
2007
|
|
|
As
Restated
(See
Note 1)
|
|
As
Restated
(See
Note 1)
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
$1,000,439
|
|
$662,218
|
|
$2,989,122
|
|
$2,428,662
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Gas
purchases
|
945,629
|
|
554,917
|
|
2,696,248
|
|
2,099,898
|
|
Operation
and maintenance
|
34,187
|
|
33,969
|
|
100,971
|
|
94,622
|
|
Regulatory
rider expenses
|
5,925
|
|
6,226
|
|
35,879
|
|
33,827
|
|
Depreciation
and amortization
|
9,680
|
|
9,080
|
|
28,600
|
|
26,968
|
|
Energy
and other taxes
|
10,711
|
|
11,478
|
|
58,245
|
|
55,698
|
|
Total
operating expenses
|
1,006,132
|
|
615,670
|
|
2,919,943
|
|
2,311,013
|
|
OPERATING
(LOSS) INCOME
|
(5,693
|
)
|
46,548
|
|
69,179
|
|
117,649
|
|
Other
income
|
237
|
|
1,081
|
|
3,305
|
|
3,232
|
|
Interest
expense, net
|
5,182
|
|
5,387
|
|
19,684
|
|
20,353
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
(10,638
|
)
|
42,242
|
|
52,800
|
|
100,528
|
|
Income
tax provision
|
(2,663
|
)
|
17,272
|
|
19,225
|
|
39,058
|
|
Equity
in earnings of affiliates, net of tax
|
378
|
|
407
|
|
1,548
|
|
1,302
|
|
NET
(LOSS) INCOME
|
$ (7,597
|
)
|
$ 25,377
|
|
$ 35,123
|
|
$ 62,772
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
EARNINGS PER COMMON SHARE*
|
|
|
|
|
|
|
|
|
BASIC
|
$(0.18
|
)
|
$0.60
|
|
$0.84
|
|
$1.50
|
|
DILUTED
|
$(0.18
|
)
|
$
0.60
|
|
$0.84
|
|
$1.49
|
|
DIVIDENDS
PER COMMON SHARE
|
$
0.28
|
|
$0.26
|
|
$0.83
|
|
$0.76
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING*
|
|
|
|
|
|
|
|
|
BASIC
|
41,949
|
|
42,015
|
|
41,822
|
|
41,808
|
|
DILUTED
|
41,949
|
|
42,323
|
|
42,037
|
|
42,084
|
|
*
Share and per share data for the three and nine months ended June 30, 2007 have
been retroactively adjusted to reflect a 3 for 2 stock split effective March 3,
2008.
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS (Continued)
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
|
|
As
Restated
(See Note
1
)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net
income
|
$ 35,123
|
|
$ 62,772
|
|
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
Unrealized
loss on derivative instruments, net of tax
|
75,095
|
|
40,618
|
|
Depreciation
and amortization
|
29,369
|
|
27,194
|
|
Deferred
income taxes
|
8,203
|
|
16,194
|
|
Manufactured
gas plant remediation costs
|
(13,263
|
)
|
(15,346
|
)
|
Equity
in earnings from investments, net of distributions and tax
|
388
|
|
(749
|
)
|
Cost
of removal – asset retirement obligations
|
(888
|
)
|
(1,461
|
)
|
Contributions
to employee benefit plans
|
(521
|
)
|
(450
|
)
|
Changes
in:
|
|
|
|
|
Components
of working capital
|
(31,657
|
)
|
4,705
|
|
Other
noncurrent assets
|
24,850
|
|
38,794
|
|
Other
noncurrent liabilities
|
17,596
|
|
(11,669
|
)
|
Cash
flows from operating activities
|
144,295
|
|
160,602
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
Expenditures
for:
|
|
|
|
|
Utility
plant
|
(51,472
|
)
|
(37,325
|
)
|
Real
estate properties and other
|
(888
|
)
|
(2,485
|
)
|
Cost
of removal
|
(5,775
|
)
|
(3,685
|
)
|
Investments
in equity investees
|
(16,595
|
)
|
(52,500
|
)
|
Proceeds
from asset sales
|
—
|
|
1,792
|
|
Cash
flows used in investing activities
|
(74,730
|
)
|
(94,203
|
)
|
CASH
FLOWS FINANCING ACTIVITIES
|
|
|
|
|
Proceeds
from issuance of common stock
|
13,072
|
|
13,947
|
|
Proceeds
from long-term debt
|
125,000
|
|
—
|
|
Tax
benefit from stock options exercised
|
677
|
|
2,565
|
|
Proceeds
from sale-leaseback transaction
|
7,485
|
|
5,482
|
|
Payments
of long-term debt
|
(3,977
|
)
|
(2,822
|
)
|
Purchases
of treasury stock
|
(11,040
|
)
|
—
|
|
Payments
of common stock dividends
|
(33,451
|
)
|
(31,220
|
)
|
Net
payments of short-term debt
|
(146,579
|
)
|
(53,621
|
)
|
Cash
flows used in financing activities
|
(48,813
|
)
|
(65,669
|
)
|
Change
in cash and temporary investments
|
20,752
|
|
730
|
|
Cash
and temporary investments at beginning of period
|
5,140
|
|
4,991
|
|
Cash
and temporary investments at end of period
|
$ 25,892
|
|
$ 5,721
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
Receivables
|
$(211,448
|
)
|
$
(65,769
|
)
|
Inventories
|
73,666
|
|
123,177
|
|
(Under)/overrecovered
gas costs
|
(18,037
|
)
|
13,113
|
|
Gas
purchases payable
|
199,407
|
|
(21,460
|
)
|
Prepaid
and accrued taxes, net
|
21,075
|
|
(235
|
)
|
Accounts
payable and other
|
(8,871
|
)
|
4,610
|
|
Restricted
broker margin accounts
|
(73,016
|
)
|
6,913
|
|
Customers’
credit balances and deposits
|
(11,632
|
)
|
(44,207
|
)
|
Other
current assets
|
(2,801
|
)
|
(11,437
|
)
|
Total
|
$
(31,657
|
)
|
$ 4,705
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$17,972
|
|
$18,618
|
|
Income
taxes
|
$25,477
|
|
$37,595
|
|
See
Notes to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS (Continued)
|
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
June
30,
|
|
|
September
30,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
Utility
plant, at cost
|
|
$
|
1,347,117
|
|
|
|
$1,299,445
|
|
Real
estate properties and other, at cost
|
|
|
29,579
|
|
|
|
28,793
|
|
|
|
|
1,376,696
|
|
|
|
1,328,238
|
|
Accumulated
depreciation and amortization
|
|
|
(374,391
|
)
|
|
|
(357,367
|
)
|
Property,
plant and equipment, net
|
|
|
1,002,305
|
|
|
|
970,871
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and temporary investments
|
|
|
25,892
|
|
|
|
5,140
|
|
Customer
accounts receivable:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
343,148
|
|
|
|
132,444
|
|
Unbilled
|
|
|
10,352
|
|
|
|
8,895
|
|
Allowance
for doubtful accounts
|
|
|
(3,879
|
)
|
|
|
(3,166
|
)
|
Regulatory
assets
|
|
|
31,821
|
|
|
|
24,634
|
|
Gas
in storage, at average cost
|
|
|
365,105
|
|
|
|
439,168
|
|
Materials
and supplies, at average cost
|
|
|
5,430
|
|
|
|
5,033
|
|
Prepaid
state taxes
|
|
|
36,570
|
|
|
|
28,034
|
|
Derivatives,
at fair value
|
|
|
291,196
|
|
|
|
138,986
|
|
Broker
margin account
|
|
|
75,640
|
|
|
|
12,345
|
|
Other
|
|
|
12,186
|
|
|
|
8,353
|
|
Total
current assets
|
|
|
1,193,461
|
|
|
|
799,866
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investments
in equity investees
|
|
|
107,292
|
|
|
|
86,743
|
|
Regulatory
assets
|
|
|
282,020
|
|
|
|
312,369
|
|
Derivatives,
at fair value
|
|
|
65,751
|
|
|
|
44,306
|
|
Restricted
cash – construction fund
|
|
|
4,200
|
|
|
|
4,200
|
|
Other
|
|
|
12,998
|
|
|
|
12,390
|
|
Total
noncurrent assets
|
|
|
472,261
|
|
|
|
460,008
|
|
Total
assets
|
|
$
|
2,668,027
|
|
|
|
$2,230,745
|
|
See Notes
to Unaudited
Condensed
Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS (Continued)
|
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION
AND LIABILITIES
|
|
June
30,
|
|
|
September
30,
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
Common
stock equity
|
|
$
|
657,745
|
|
|
|
$
644,797
|
|
Long-term
debt
|
|
|
481,613
|
|
|
|
383,184
|
|
Total
capitalization
|
|
|
1,139,358
|
|
|
|
1,027,981
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
35,037
|
|
|
|
4,338
|
|
Short-term
debt
|
|
|
109,900
|
|
|
|
256,479
|
|
Gas
purchases payable
|
|
|
417,743
|
|
|
|
218,336
|
|
Accounts
payable and other
|
|
|
53,086
|
|
|
|
64,386
|
|
Dividends
payable
|
|
|
11,750
|
|
|
|
10,633
|
|
Deferred
and accrued taxes
|
|
|
42,250
|
|
|
|
9,031
|
|
Regulatory
liabilities
|
|
|
—
|
|
|
|
9,583
|
|
New
Jersey clean energy program
|
|
|
4,186
|
|
|
|
8,832
|
|
Derivatives,
at fair value
|
|
|
340,632
|
|
|
|
79,243
|
|
Broker
margin account
|
|
|
5,422
|
|
|
|
15,143
|
|
Customers’
credit balances and deposits
|
|
|
15,632
|
|
|
|
27,262
|
|
Total
current liabilities
|
|
|
1,035,638
|
|
|
|
703,266
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
170,388
|
|
|
|
216,258
|
|
Deferred
investment tax credits
|
|
|
7,272
|
|
|
|
7,513
|
|
Deferred
revenue
|
|
|
9,270
|
|
|
|
9,806
|
|
Derivatives,
at fair value
|
|
|
77,047
|
|
|
|
38,085
|
|
Manufactured
gas plant remediation
|
|
|
105,340
|
|
|
|
105,340
|
|
Postemployment
benefit liability
|
|
|
29,429
|
|
|
|
25,743
|
|
Regulatory
liabilities
|
|
|
62,232
|
|
|
|
61,270
|
|
New
Jersey clean energy and conservation incentive programs
|
|
|
914
|
|
|
|
3,992
|
|
Asset
retirement obligation
|
|
|
24,146
|
|
|
|
23,895
|
|
Other
|
|
|
6,993
|
|
|
|
7,596
|
|
Total
noncurrent liabilities
|
|
|
493,031
|
|
|
|
499,498
|
|
Total
capitalization and liabilities
|
|
$
|
2,668,027
|
|
|
|
$2,230,745
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
NO
TES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared by New Jersey Resources Corporation (NJR or the Company) in accordance
with 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 the Company. These unaudited 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
unaudited 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. 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. Retail Holdings’
two principal subsidiaries are NJR Home Services (NJRHS) and Commercial Realty
& Resources (CR&R).
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments necessary for a fair presentation
of the results of the interim periods presented. 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:
|
June
30,
|
September
30,
|
($ in thousands)
|
2008
|
2007
|
NJNG
|
$ 45,523
|
|
13
|
%
|
|
$ 5,583
|
|
4
|
%
|
NJRES
|
289,371
|
|
84
|
|
|
120,274
|
|
91
|
|
NJRHS
and other
|
8,254
|
|
3
|
|
|
6,587
|
|
5
|
|
Total
|
$343,148
|
|
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 UNAUDITED CONDENSED 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 and Income
Taxes
.
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, for which the
Company chooses to apply the fair value option, 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 applicable dividends declared by the
Company for fiscal years beginning after December 15, 2007. The Company is
currently evaluating the potential impact on its statement of financial position
and results of operations.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
On
December 4, 2007, the FASB issued SFAS No. 160,
Non-controlling 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 non-controlling interest in one or more
subsidiaries. SFAS 160 clarifies that a non-controlling 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 June 30, 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
Unaudited 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 nine-month periods ended June 30, 2007.
Accordingly,
the following tables set forth the effects of the restatement on applicable line
items in the Unaudited Condensed Consolidated Statements of Income and Unaudited
Condensed Consolidated Statements of Cash Flows for the three and nine months
ended June 30, 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 nine months ended June 30, 2007.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
Three
Months Ended
June
30, 2007
|
Nine
Months Ended
June
30, 2007
|
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
Operating
revenue
|
$665,358
|
$ (3,140)
|
$662,218
|
$2,431,459
|
$ (2,797)
|
$2,428,662
|
Gas
purchases
|
$610,178
|
$(55,261)
|
$554,917
|
$2,034,332
|
$ 65,566
|
$2,099,898
|
Total
operating expenses
|
$670,931
|
$(55,261)
|
$615,670
|
$2,245,447
|
$ 65,566
|
$2,311,013
|
Operating
(Loss) Income
|
$
(5,573)
|
$ 52,121
|
$ 46,548
|
$ 186,012
|
$(68,363)
|
$ 117,649
|
Other
income
|
$ 1,758
|
$ (677)
|
$ 1,081
|
$ 5,397
|
$ (2,165)
|
$ 3,232
|
(Loss)
Income before income taxes and equity in earnings of
affiliates
|
$
(9,202)
|
$ 51,444
|
$ 42,242
|
$ 171,056
|
$
(70,528)
|
$ 100,528
|
(Loss)
Income tax provision
|
$
(4,250)
|
$ 21,522
|
$ 17,272
|
$ 67,357
|
$
(28,299)
|
$ 39,058
|
Equity
in earnings, net of tax
|
$ —
|
$ 407
|
$ 407
|
$ —
|
$ 1,302
|
$ 1,302
|
Net
(Loss) Income
|
$
(4,952)
|
$ 30,329
|
$ 25,377
|
$ 103,699
|
$
(40,927)
|
$ 62,772
|
Basic
(loss)earnings per share*
|
$ (0.18)
|
$ 0.78
|
$ 0.60
|
$ 3.72
|
$ (2.22)
|
$ 1.50
|
Diluted
(loss) earnings per share*
|
$ (0.18)
|
$ 0.78
|
$ 0.60
|
$ 3.70
|
$ (2.21)
|
$ 1.49
|
* Per
share data for 2007 has been retroactively adjusted to reflect a 3 for 2 stock
split effective March 3, 2008.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
Nine
Months Ended
June
30, 2007
|
|
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
Net
Income
|
|
$
|
103,699
|
|
|
$
|
(40,927
|
)
|
|
$
|
62,772
|
|
Unrealized
loss (gain) on derivative instruments, net of tax
|
|
$
|
(309
|
)
|
|
$
|
40,927
|
|
|
$
|
40,618
|
|
Equity
in earnings from investments, net of distributions and tax
|
|
$
|
—
|
|
|
$
|
(749
|
)
|
|
$
|
(749
|
)
|
Other
noncurrent assets
|
|
$
|
39,347
|
|
|
$
|
(553
|
)
|
|
$
|
38,794
|
|
Other
noncurrent liabilities
|
|
$
|
(12,971
|
)
|
|
$
|
1,302
|
|
|
$
|
(11,669
|
)
|
Filed
Base Rate Case and Signed Stipulation
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
request 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.
On July
30, 2008, NJNG and the Department of the Public Advocate, Division of Rate
Counsel (Rate Counsel) signed an agreement that stipulated the principal
financial terms of a settlement of its petitioned rate increase. Pending final
review and approval by the BPU, NJNG would receive a revenue increase to its
base rates of approximately $32.5 million, which is inclusive of an approximate
$13 million impact of a change to the conservation incentive program baseline
usage level, receive an allowed return on equity component of 10.3 percent,
reduce its depreciation expense component from 3.0 percent to 2.34 percent, and
reduce its depreciation expense by $1.6 million annually as a result of the
amortization of previously recovered asset retirement obligations, all of which
are expected to commence on or about October 1, 2008.
As a
result of the signed stipulation, NJNG recorded an aggregate after-tax charge in
the third quarter of fiscal 2008 of approximately $1.5 million, as it determined
that certain regulatory assets were no longer recoverable in future rates from
customers (approximately $769,000) and changed its computation for its allowance
for funds used during construction (approximately $744,000).
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.
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.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
On May
30, 2008, NJNG filed a petition with the BPU for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2008 and to adjust its CIP
recovery rates effective October 1, 2008. This petition is asking to recover an
additional $6.8 million.
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 June 30, 2008, NJNG had a remaining liability of $914,000 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 for 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. On June 24, 2008, the
Administrative Law Judge in this proceeding approved a settlement of the
parties to make the provisional rates final. The Judge’s decision is
currently pending final approval before the BPU.
|
|
|
Ÿ
|
On
November 26, 2007, NJNG notified the BPU that it would provide refunds to
customers and subsequently issued a credit totaling $32.0 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 NJNG’s fiscal year 2007
BGSS filing. This stipulation was approved by the BPU on May 9, 2008 and
resulted in NJNG recording a non-recurring settlement charge to its BGSS
costs of $300,000.
|
|
|
Ÿ
|
On
May 30, 2008, NJNG filed for an increase to the periodic BGSS factor to be
effective October 1, 2008 that would increase an average residential
customer’s bill by approximately 18.0 percent due to an increase in the
price of wholesale natural gas. A public hearing on this issue is
scheduled for July 31, 2008.
|
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 20.0 percent to 15.0 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. Pending final review and approval by the BPU, the July
30, 2008 agreement among NJNG and Rate Counsel provides for the extension of the
incentive programs through October 31, 2011, along with a moderate expansion of
the storage incentive and FRM programs.
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 June 30, 2008 was
$4.2 million); and,
|
Ÿ
|
a
decrease to the statewide USF recovery rate, which has a negligible impact
on customer rates.
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
In
addition, the BPU approved an increase of $8.1 million, or 0.9 percent, to the
WNC rate to recover the net amounts deferred relating to weather-related gross
margin variations incurred during the fiscal 2005 and 2006 winter periods. In
its May 30, 2008 CIP filing with the BPU, NJNG has proposed decreasing its
current WNC rate to fully recover its remaining balance of approximately $1.5
million.
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.
In June
2008, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to increase the statewide USF recovery rate effective October 1,
2008. NJNG believes the increase will have a negligible impact on
customers.
Regulatory
Assets & Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
June
30,
2008
|
September
30,
2007
|
Recovery
Period
|
Regulatory
assets–current
|
|
|
|
|
|
WNC
|
$ 1,454
|
|
$ 8,105
|
|
Less
than one year
(1)
|
Underrecovered
gas costs
|
8,454
|
|
—
|
|
Less
than one year
(2)
|
CIP
|
21,913
|
|
16,529
|
|
Less
than one year
(3)
|
Total
current
|
$ 31,821
|
|
$ 24,634
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Note 12)
|
|
|
|
|
|
Expended,
net
|
$ 87,415
|
|
$ 85,071
|
|
(4)
|
Liability
for future expenditures
|
105,340
|
|
105,340
|
|
(5)
|
CIP
|
2,476
|
|
—
|
|
(6)
|
Deferred
income and other taxes
|
12,726
|
|
13,979
|
|
Various
(7)
|
Derivatives
(Note 3)
|
30,133
|
|
51,861
|
|
(8)
|
Postemployment
benefit costs (Note 9)
|
33,463
|
|
33,988
|
|
(9)
|
SBC
|
10,467
|
|
22,130
|
|
Various
(10)
|
Total
noncurrent
|
$282,020
|
|
$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,
subject to BPU approval, through BGSS, without
interest.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $10.2 million relating to the weather component of
the calculation and approximately $11.7 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.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated
future expenditures. Recovery will be included in rates when actual
expenditures are incurred.
|
(6)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $0.7 million relating to the weather component of
the calculation and approximately $1.7 million relating to the customer
usage component of the calculation.
|
(7)
|
Recoverable
without interest, subject to BPU approval.
|
(8)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(9)
|
Recoverable
or refundable, subject to BPU approval, without interest. Includes
unrecognized service costs recorded in accordance with SFAS No. 158,
Employers’ Accounting for
Defined Benefit Pension and Other Postemployment Plans
that NJNG
has determined are recoverable in rates charged to customers (see
Note 9. Employee Benefit
Plans).
|
(10)
|
Recoverable
with interest, subject to BPU
approval.
|
If there
are any changes in regulatory positions that indicate the recovery of regulatory
assets is not probable, the related cost would be charged to income in the
period of such determination.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The
Company had the following regulatory liabilities, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
|
June
30,
2008
|
|
September
30,
2007
|
Regulatory
liability–current
|
|
|
|
|
|
|
Overrecovered
gas costs
|
|
$
|
—
|
|
|
$
|
9,583
|
|
Total
current
|
|
$
|
—
|
|
|
$
|
9,583
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
|
|
|
|
Cost
of removal obligation
(1)
|
|
$
|
62,232
|
|
|
$
|
60,094
|
|
Market
development fund (MDF)
(2)
|
|
|
—
|
|
|
|
1,176
|
|
Total-noncurrent
|
|
$
|
62,232
|
|
|
$
|
61,270
|
|
(1)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately
$20.6 million, including accretion of $1.1 million for the nine-month
period ended June 30, 2008 of regulatory assets relating to asset
retirement obligations have been netted against the cost of removal
obligation as of June 30, 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.
The
Company and its subsidiaries are involved in the wholesale purchase and sale of
natural gas. Under EITF 03-11,
Reporting Realized Gains and Losses
on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not
"Held for Trading Purposes" as Defined in Issue No 02-3,
NJR has
concluded that this is non-trading activity, and therefore, to the extent the
natural gas is physically delivered, NJR presents its revenues and cost of gas
on a gross basis in the Unaudited Condensed Consolidated Statements of Income.
Changes in the fair values of financial derivative transactions as well as
certain physical commodity contracts, as described below, are recognized as a
component of Gas purchases in the Unaudited Condensed Consolidated Statements of
Income.
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 Unaudited Condensed Consolidated
Balance Sheets, with changes in fair value being reflected as a component of gas
purchases on the Unaudited 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 and were designated under 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 Unaudited 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 Unaudited 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 Unaudited 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.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The
Company enters into financial derivative instruments as an economic hedge of the
sale of natural gas. The derivatives are marked at fair value and recognized in
the Unaudited Condensed Consolidated Statements of Income, as a component of Gas
purchases, in the current period; however, the change in value of the natural
gas is recognized only when that natural gas has been sold, which is normally in
a future period. Therefore, the realized gains or losses that result from the
settlement of these derivative instruments prior to the actual sale of the
natural gas that is being economically hedged create volatility in the results
of NJR; volatility is also created, in the opposite direction, when the actual
sale of the natural gas occurs at a later date. The true economic result will
remain unchanged regardless of the settlement of the derivative instrument
relative to the ultimate sale of the natural gas.
Unrealized
gains (losses) at NJRES related to physical commodity contracts and financial
instruments and certain 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 as a component of Operating revenues, for the three and nine months
ended June 30, 2008 and 2007, respectively, are as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
NJRES
(Included as part of Gas purchases):
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains – Physical Commodity Contracts
|
$ (918
|
)
|
$ —
|
|
$ 213
|
|
$ —
|
|
Unrealized
(losses) gains – Financial Instruments
|
(37,796
|
)
|
53,459
|
|
(165,970
|
)
|
(64,408
|
)
|
Certain
net realized gains (losses) – Financial Instruments (economic
hedge)
|
22,428
|
|
1,802
|
|
26,057
|
|
(1,158
|
)
|
Subtotal
NJRES
|
$(16,286
|
)
|
$55,261
|
|
$(139,700
|
)
|
$(65,566
|
)
|
NJR
Energy (Included as part of Operating revenues):
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) – Financial Instruments
|
10,872
|
|
(3,140
|
)
|
17,357
|
|
(2,797
|
)
|
Total
NJRES and NJR Energy unrealized and realized (losses)
gains
|
$ (5,414
|
)
|
$52,121
|
|
$(122,343
|
)
|
$(68,363
|
)
|
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)
|
June
30,
2008
|
September 30,
2007
|
NJNG
broker margin deposit
|
$
38
|
|
$ 12,345
|
|
NJNG
broker margin (liability)
|
$
(5,422
|
)
|
$
—
|
|
NJRES
broker margin deposit (liability)
|
$75,602
|
|
$(15,143)
|
|
4.
|
I
NVE
STMENTS IN EQUITY
INVESTEES
|
NJR’s
Investments in equity investees include the following investments:
(Thousands)
|
June
30,
2008
|
September 30,
2007
|
Steckman
Ridge
|
$ 76,118
|
|
$56,726
|
|
Iroquois
|
22,713
|
|
22,073
|
|
Other
|
8,461
|
|
7,944
|
|
Total
|
$107,292
|
|
$86,743
|
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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.
The
following tables set forth the financial information for Iroquois for the
periods as indicated:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Operating
revenues
|
$40,854
|
|
$39,830
|
|
$124,309
|
|
$122,423
|
|
Operating
income
|
$20,609
|
|
$19,246
|
|
$ 65,957
|
|
$ 60,958
|
|
Net
income
|
$ 8,493
|
|
$ 7,281
|
|
$ 27,532
|
|
$ 23,315
|
|
(Millions)
|
June
30,
2008
|
September 30,
2007
|
Total
assets
|
$771.1
|
$814.3
|
The
following table sets forth the calculation of the Company’s basic and diluted
earnings per share:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands,
except per share amounts)
|
2008
|
2007*
|
2008
|
2007*
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income, as reported
|
$(7,597
|
)
|
$25,377
|
|
$35,123
|
|
$62,772
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,949
|
|
42,015
|
|
41,822
|
|
41,808
|
|
Basic
(loss) earnings per common share
|
$(0.18
|
)
|
$0.60
|
|
$0.84
|
|
$1.50
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,949
|
|
42,015
|
|
41,822
|
|
41,808
|
|
Incremental
shares **
|
—
|
|
308
|
|
215
|
|
276
|
|
Weighted
average shares of common stock outstanding–diluted ***
|
41,949
|
|
42,323
|
|
42,037
|
|
42,084
|
|
Diluted
(loss) earnings per common share
|
$(0.18
|
)
|
$0.60
|
|
$0.84
|
|
$1.49
|
|
*
|
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
incremental shares noted above were not included in the computation of
diluted loss per common share for the three months ended June 30, 2008 as
their effect would have been
anti-dilutive.
|
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
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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.
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 June 30,
2008.
As of
June 30, 2008, NJR had one letter of credit outstanding, totaling $500,000, on
behalf of NJRES. It was issued in conjunction with a long-term natural gas
storage agreement and expires on December 31, 2008. This letter of credit
reduces the amount available under NJR’s committed credit facility by the same
amount. NJR does not anticipate that this letter of credit will be drawn upon by
the counterparties and expects that the letter of credit will be renewed as
necessary.
NJNG
In
October 2007, NJNG entered into a new agreement for standby letters of credit
that may be drawn upon through December 15, 2009 for up to $50 million. As of
June 30, 2008, letters of credit totaling $26.0 million have been issued under
this agreement. These letters of credit do not reduce the amount available to be
borrowed under NJNG’s credit facility. NJNG does not anticipate that these
letters of credit will be drawn upon by the counterparty, and the agreement will
be renewed as necessary, upon its expiration.
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 May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018
(Notes) in the private placement market pursuant to a note purchase agreement.
The notes are secured until the release date (which is the date at which the
security provided by the pledge under NJNG’s mortgage indenture would no longer
be available to holders of any outstanding series of NJNG’s senior secured notes
and such indebtedness would become senior unsecured indebtedness) by an equal
amount of NJNG first mortgage bonds (Series LL), and interest is payable on the
Notes semi-annually. The proceeds from the Notes were used to refinance
short-term debt and will fund capital expenditure requirements.
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. As of June 30, 2008, most of the auctions
surrounding the EDA ARS have failed, resulting in those bonds bearing interest
at their maximum rates, 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 June 30, 2008, the 30-day LIBOR rate was 2.5 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 4.1 percent as of
June 30, 2008, compared with a weighted average interest rate of 3.9 percent as
of September 30, 2007. There can be no assurance that the EDA ARS 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.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJRES
As of
June 30, 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 June 30, 2008.
Consolidated
There
were no issuances or redemptions of long-term debt securities for NJR or NJRES
or redemptions for NJNG during the nine months ended June 30, 2008.
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:
|
June
30,
|
September
30,
|
(Thousands)
|
2008
|
2007
|
NJR
|
|
|
|
|
Long
- term debt
(1)
|
$ 75,000
|
|
$ 75,000
|
|
Bank
credit facilities
|
$325,000
|
|
$325,000
|
|
Amount
outstanding at end of period
|
$109,900
|
|
$ 40,250
|
|
Weighted
average interest rate at end of period
|
2.73
|
%
|
6.17
|
%
|
NJNG
|
|
|
|
|
Long
- term debt
(2)
|
$379,800
|
|
$254,800
|
|
Bank
credit facilities
|
$250,000
|
|
$250,000
|
(3)
|
Amount
outstanding at end of period
|
—
|
|
$175,700
|
|
Weighted
average interest rate at end of period
|
—
|
|
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)
|
Amounts
are comprised of $25.0 million issued in March 2004 and $50.0 million
issued in September 2007.
|
(2)
|
Long-term
debt excludes lease obligations of $61.8 million
and $57.6 million
at June
30, 2008 and September 30, 2007,
respectively.
|
(3)
|
Amount
includes only committed credit facilities for NJNG short-term borrowings.
Also included in short-term debt on the Unaudited Condensed Consolidated
Balance Sheet as of September 30, 2007, is $10.5 million related to an
uncommitted credit facility.
|
7.
|
CAP
ITALIZED FINANCING COSTS AND DEFERRED
INTEREST
|
Allowance
for Funds used during Construction, (AFUDC) included in Utility plant, and
capitalized interest included in Real estate properties and other and
Investments in equity investees on the Unaudited Condensed Consolidated Balance
Sheets, are as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
AFUDC
– Utility plant
|
$244
|
|
$321
|
|
$ 871
|
|
$1,058
|
|
Weighted
average rate
|
4.8
|
%
|
5.37
|
%
|
4.8
|
%
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$ 14
|
|
$ 86
|
|
$ 79
|
|
$ 216
|
|
Weighted
average interest rates
|
3.01
|
%
|
5.34
|
%
|
3.99
|
%
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$827
|
|
$716
|
|
$2,513
|
|
$ 927
|
|
Weighted
average interest rates
|
5.58
|
%
|
5.35
|
%
|
5.73
|
%
|
5.36
|
%
|
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The AFUDC
amounts shown in the table above for three and nine months ended June 30, 2008
and 2007, represent an interest cost component only, as agreed to in NJNG’s
signed stipulation with Rate Counsel as discussed in Note 2.
Regulation – Filed Base Rate Case
and Signed Stipulation
.
NJR,
through its CR&R subsidiary, capitalizes interest associated with the
development and construction of its commercial buildings. Interest is also
capitalized associated with the acquisition, development and construction of a
natural gas storage facility through NJR’s equity investment in Steckman Ridge
(see
Note 4. Investments in
Equity Investees
).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures. Accordingly, Other income includes $515,000 and $698,000 of
interest related to these SBC program costs for the three months ended June 30,
2008 and 2007, respectively, and $1.9 million and $2.3 million for the nine
months ended June 30, 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 and have a split adjusted grant date fair value of
$31.84.
During
the first nine months of fiscal 2008, included in operation and maintenance
expense is $2.0 million related to stock-based compensation. As of June 30, 2008
there remains $3.4 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
June
30,
|
Nine
Months
Ended
June
30,
|
Three
Months
Ended
June
30,
|
Nine
Months
Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service
cost
|
$ 728
|
|
$ 733
|
|
$
2,185
|
|
$
2,200
|
|
$
436
|
|
$ 454
|
|
$1,360
|
|
$
1,364
|
|
Interest
cost
|
1,648
|
|
1,554
|
|
4,945
|
|
4,661
|
|
810
|
|
757
|
|
2,441
|
|
2,271
|
|
Expected
return on plan assets
|
(2,183
|
)
|
(2,052
|
)
|
(6,548
|
)
|
(6,156
|
)
|
(627
|
)
|
(541
|
)
|
(1,837
|
)
|
(1,622
|
)
|
Recognized
actuarial loss
|
275
|
|
399
|
|
826
|
|
1,197
|
|
181
|
|
266
|
|
624
|
|
797
|
|
Prior
service cost amortization
|
14
|
|
21
|
|
42
|
|
63
|
|
19
|
|
20
|
|
58
|
|
59
|
|
Transition
obligation amortization
|
—
|
|
—
|
|
—
|
|
—
|
|
89
|
|
89
|
|
267
|
|
268
|
|
Net
periodic cost
|
$ 482
|
|
$ 655
|
|
$
1,450
|
|
$
1,965
|
|
$
908
|
|
$1,045
|
|
$2,913
|
|
$
3,137
|
|
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.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 pipelines out of
service.
The
following is an analysis of the change in the ARO liability for the period ended
June 30, 2008, (in thousands):
Balance
at October 1, 2007
|
$23,895
|
|
Accretion
|
1,050
|
|
Additions
|
89
|
|
Retirements
|
(888
|
)
|
Balance
at June 30, 2008
|
$24,146
|
|
Accretion
amounts are not reflected as an expense on NJR’s Unaudited 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 Unaudited Condensed Consolidated Balance Sheet.
11.
|
ADO
PTION OF FIN 48 AND INCOME
TAXES
|
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 $2.2 million, as well
as the additional amount recognized associated with the adoption of FIN 48, are
included as a component of Deferred and accrued taxes in the Current
classification of the Unaudited Condensed Consolidated Balance Sheets. The
following table represents the increase in liability with respect to the
adoption of FIN 48:
|
As
of October 1,
|
($
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 are
$1.7 million of state taxes included in the balance of unrecognized tax benefits
as of October 1, 2007. If they were to be recognized, it would affect the
effective tax rate, as this amount had previously been fully reserved for, and
was fully reflected as a component of current Deferred and accrued taxes in the
Unaudited Condensed Consolidated Balance Sheets.
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 fixed assets at NJNG. The Company filed an automatic
change in method of accounting, which is currently under audit with the
Internal
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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
Unaudited Condensed Consolidated Statements of Income.
The
Company and one or more of its subsidiaries files, or expects to file, income
and or franchise 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.
Included
in the Unaudited Condensed Consolidated Statement of Operations, as part of
Income tax expense, is a one-time after-tax interest charge of $0.98 million to
correct a previously taken tax position associated with utility property at
NJNG.
The
Company is not currently under examination in any state; however, all periods
subsequent to those ended September 30, 2003 are statutorily open to examination
with the exception of New York, in which all periods subsequent to September 30,
2004 are statutorily open to examination. As previously disclosed, NJNG was
party to a case pending before the Tax Court of New Jersey (Tax Court). In that
case, NJNG disputed the State of New Jersey’s (State) application of its tax
apportionment rules. On April 15, 2008 the Tax Court issued a decision in favor
of the State. On June 19, 2008, NJNG filed an appeal with the Appellate Division
of the Superior Court of New Jersey. The obligation under this decision, plus
penalties and interest totals approximately $3.1 million, which was previously
fully reserved for under FIN 48. To prevent the accrual of additional interest,
it is expected that NJNG will pay the obligation and convert the filing to a
claim for refund. 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 Unaudited
Condensed Consolidated Balance Sheets.
12.
|
COMMI
TMENTS 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 $98.4 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 June 30, 2008, NJRES had contractual obligations for current demand
charges related to storage contracts and pipeline capacity contracts of $22.7
million and $43.0 million, respectively.
As of
June 30, 2008, there were NJR guarantees covering approximately $443 million of
natural gas purchases and demand fee commitments of NJRES and NJNG not yet
reflected in Accounts payable on the Unaudited Condensed Consolidated Balance
Sheet. Commitments as of June 30, 2008 for natural gas purchases and
future
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
demand
fees, for the next five fiscal year periods, are as follows:
(Thousands)
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
NJRES
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas purchases
|
$303,137
|
|
$479,657
|
|
$189,877
|
|
$ —
|
|
$ —
|
|
$ —
|
Storage
demand fees
|
7,465
|
|
19,489
|
|
11,520
|
|
8,310
|
|
5,846
|
|
3,022
|
Pipeline
demand fees
|
16,235
|
|
32,721
|
|
19,107
|
|
16,249
|
|
6,809
|
|
9,017
|
Sub-total
NJRES
|
$326,837
|
|
$531,867
|
|
$220,504
|
|
$24,559
|
|
$12,655
|
|
$ 12,039
|
NJNG
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas purchases
|
$116,271
|
|
$ 56,802
|
|
$ 18,016
|
|
$ 1,529
|
|
$ —
|
|
$ —
|
Storage
demand fees
|
6,123
|
|
21,938
|
|
22,175
|
|
15,563
|
|
7,853
|
|
11,731
|
Pipeline
demand fees
|
13,733
|
|
73,898
|
|
81,765
|
|
80,441
|
|
74,422
|
|
156,341
|
Sub-total
NJNG
|
$136,127
|
|
$152,638
|
|
$121,956
|
|
$97,533
|
|
$82,275
|
|
$168,072
|
Total
|
$462,964
|
|
$684,505
|
|
$342,460
|
|
$122,092
|
|
$94,930
|
|
$180,111
|
Costs for
storage and pipeline demand fees, included as a component of Gas purchases on
the Unaudited Condensed Consolidated Statements of Income, are as
follows:
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
NJRES
|
|
|
$29.4
|
|
|
|
$29.5
|
|
|
|
$
88.4
|
|
|
|
$106.9
|
|
NJNG
|
|
|
17.9
|
|
|
|
17.8
|
|
|
|
56.0
|
|
|
|
56.0
|
|
Total
|
|
|
$47.3
|
|
|
|
$47.3
|
|
|
|
$144.4
|
|
|
|
$162.9
|
|
NJNG’s
capital expenditures are estimated at $81.8 million for fiscal 2008, of which
approximately $57.2 million has been incurred to date, 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), 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 June 30, 2008, $87.4 million
of previously incurred remediation costs, net of recoveries from customers and
insurance proceeds, are included in Regulatory assets on the Unaudited Condensed
Consolidated Balance Sheet.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
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 Unaudited 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.
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.
|
BUSI
NESS SEGMENT DATA
|
Information
related to the Company’s various business segments, which are presented in the
Unaudited 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 investments in energy and mid-stream assets, appliance and
installation services, commercial real estate development and other corporate
activities.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$ 179,511
|
|
$180,980
|
|
$ 940,689
|
|
$ 871,198
|
|
Energy
Services
|
801,628
|
|
476,383
|
|
2,009,751
|
|
1,540,558
|
|
Retail
and Other
|
19,344
|
|
4,926
|
|
38,834
|
|
17,117
|
|
Subtotal
|
1,000,483
|
|
662,289
|
|
2,989,274
|
|
2,428,873
|
|
Intersegment
revenues
(1)
|
(44
|
)
|
(71
|
)
|
(152
|
)
|
(211
|
)
|
Total
|
$
1,000,439
|
|
$662,218
|
|
$
2,989,122
|
|
$2,428,662
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$ 7,552
|
|
$ 7,562
|
|
$ 98,365
|
|
$ 103,014
|
|
Energy
Services
|
(25,952
|
)
|
40,158
|
|
(48,692
|
)
|
15,587
|
|
Retail
and Other
|
12,707
|
|
(1,172
|
)
|
19,506
|
|
(952
|
)
|
Total
|
$ (5,693
|
)
|
$ 46,548
|
|
$
69,179
|
|
$ 117,649
|
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$ 147
|
|
$ 2,602
|
|
$ 50,987
|
|
$ 55,736
|
|
Energy
Services
|
(15,546
|
)
|
23,264
|
|
(28,343
|
)
|
6,805
|
|
Retail
and Other
|
7,802
|
|
(489
|
)
|
12,479
|
|
231
|
|
Total
|
$ (7,597
|
)
|
$ 25,377
|
|
$ 35,123
|
|
$ 62,772
|
|
(1)
|
Consists
of transactions between subsidiaries that are eliminated in
consolidation.
|
As of
June 30, 2008, NJRES’ assets have increased more than 5 percent as compared to
September 30, 2007, primarily due to higher Accounts receivable balances as a
result of greater volumes and prices of wholesale natural gas sales. NJRES’
Accounts receivable balance as of June 30, 2008 has been fully
collected.
During
the nine months ending June 30, 2008, NJRES had one customer, Hess Corporation,
an investment grade rated corporation, whose sales represented more than 10
percent of its total Operating revenue.
At June
30, 2008, there were 41,968,713 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 June 30, 2008 the book value per share
was $15.67.
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).
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 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, which is being
jointly developed and constructed with a partner in western Pennsylvania; NJR
Investment, which makes energy-related equity investments; NJR Home Services
(NJRHS), which provides service, sales and installation of appliances;
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 nine month periods ended
June 30, 2007 related to a correction in the accounting for certain derivative
financial instruments. See
Note 1. General
in the
Unaudited Condensed Consolidated Financial Statements.
Net
income by business segment is as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$ 147
|
|
(2
|
)%
|
$ 2,602
|
|
10
|
%
|
$
50,987
|
|
145
|
%
|
$55,736
|
|
89
|
%
|
Energy
Services
|
(15,546
|
)
|
205
|
%
|
23,264
|
|
92
|
%
|
(28,343
|
)
|
(81
|
)%
|
6,805
|
|
11
|
%
|
Retail
and Other
|
7,802
|
|
(103
|
)%
|
(489
|
)
|
(2
|
)
%
|
12,479
|
|
36
|
%
|
231
|
|
—
|
%
|
Total
|
$ (7,597
|
)
|
100
|
%
|
$25,377
|
|
100
|
%
|
$
35,123
|
|
100
|
%
|
$62,772
|
|
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 current period results.
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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 (loss) income in the table above are unrealized (losses) gains in the
Energy Services segment of $(23.6) million, $31.1 million, after taxes, for the
three months ended June 30, 2008 and 2007, respectively, and $(101.2) million
and $(38.6) million, after taxes, for the nine months ended June 30, 2008 and
2007, respectively. Also included in Net (loss) income in the table above are
realized gains and (losses) of $13.7 million, $1.1 million, after taxes, for the
three months ended June 30, 2008 and 2007, respectively, and $15.9 million and
$(0.7) million, after taxes, for the nine months ended June 30, 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 (loss) income above are unrealized gains (losses) in the Retail and Other
segment of $6.4 million, $(1.9) million, after taxes, for the three months ended
June 30, 2008 and 2007, respectively, and $10.2 million and $(1.6) million,
after taxes, for the nine months ended June 30, 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.
On
July 30, 2008, NJNG and the Department of Public Advocate, Division
of Rate Counsel (Rate Counsel) signed an agreement that stipulated the
principal financial terms of a settlement of its petitioned rate increase.
Pending final review and approval by the BPU, NJNG would receive a revenue
increase to its base rates of approximately $32.5 million, which is
inclusive of an approximate $13 million impact of a change to the
conservation incentive program baseline usage rate, receive an allowed
return on equity component of 10.3 percent, reduce its depreciation
expense component from 3.0 percent to 2.34 percent, and reduce its
depreciation expense by $1.6 million annually as a result of the
amortization of previously recovered asset retirement obligations, all of
which are expected to commence on or about October 1, 2008.
As
a result of the signed stipulation, NJNG recorded an aggregate after-tax
charge in the third quarter of fiscal 2008 of approximately $1.5 million,
as it determined that certain regulatory assets were no longer recoverable
in future rates from customers (approximately $769,000) and changed its
computation for its allowance for funds used during construction
(approximately $744,000).
|
Ÿ
|
Working
with the BPU and 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;
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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’ Basic Gas Supply Service (BGSS) rates as
stable as possible.
|
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
The CIP
pilot program was implemented effective October 1, 2006 to allow NJNG to recover
utility gross margin variations related to both weather and customer usage.
Recovery of such margin variations is subject to additional conditions including
an earnings test, which includes a return on equity component of 10.5 percent,
and an evaluation of 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
utility gross margin amounts.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of June 30, 2008 and September 30, 2007, the
obligation to fund these conservation programs was recorded at its present value
of $914,000 and $1.4 million, respectively, on the Unaudited 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 June 30, 2008, NJNG has recovered $6.7
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 of the United
States 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;
|
|
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Ÿ
|
Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers by identifying the lowest cost alternative with the
natural gas supply, transportation availability and markets to which NJRES
is able to access through its business footprint and contractual asset
portfolio;
|
|
|
Ÿ
|
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate 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 natural gas at a later date to return 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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
various
counterparties. The Risk Management Committee (RMC) of NJR oversees compliance
with these established guidelines.
Retail
and Other Segment
In the
Retail and Other segment, NJR utilizes a subsidiary, NJR Energy Holdings, to
develop its investments in natural gas “mid-stream” assets. Mid-stream assets
are 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 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 148,000
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.
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. It is anticipated that construction on Steckman Ridge will be
completed during the first quarter of fiscal 2010. As of June 30, 2008, NJR has
invested $71.6 million in Steckman Ridge. This amount excludes capitalized
interest and other direct costs. Total project costs related to the development
of the storage facility have been revised from the original estimate of
approximately $250 million to approximately $265 million, of which NJR is
obligated to fund 50 percent, or approximately $132.5 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
Unaudited 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.
New
Jersey Resources Corporation
Part
I
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
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 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 Unaudited Condensed Consolidated Balance Sheet, with changes in fair value
being recorded as a component of Gas purchases in the Unaudited 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 Unaudited 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 Unaudited 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.
If there is any change
in this recovery amount, NJNG would record a charge for the unrecovered portion
on its Unaudited Condensed Consolidated Income Statement.
As
discussed in
Note 2.
Regulation – Filed Base Rate
Case and Signed Stipulation
in the Unaudited Condensed Consolidated
Financial Statements, as part of the agreement that stipulates the terms of a
settlement of NJNG’s petitioned rate increase, NJNG agreed to change its
computation of AFUDC for fiscal year 2008. As a result of this agreement, NJNG
recorded a post-tax aggregate charge of approximately $744,000 in the third
quarter of fiscal 2008. This charge represents the aggregate adjustment of
previously recorded equity component amounts under its AFUDC calculation and
recording deferred interest costs as its sole component of AFUDC through June
30, 2008 as a result of the disallowance of the equity component. NJNG
anticipates that, as rates are approved by the BPU as outlined in the
stipulation agreement, that its AFUDC calculation, effective October 1, 2008,
would include both a debt component and an equity component. The equity
component portion of the calculation would be based on an allowed fixed equity
rate, applicable only during periods when its short-term debt balances are lower
than its construction work-in-progress balances.
Recently
Issued Accounting Standards
Refer to
Note 1. General
in the
Unaudited Condensed Consolidated Financial Statements, for discussion of
recently issued accounting standards.
Results
of Operations
Consolidated
Net loss
for the quarter ended June 30, 2008 was $(7.6) million, compared with net income
of $25.4 million for the same period last fiscal year. Basic and diluted
earnings per share (EPS) decreased to a loss per share of $(0.18), compared with
earnings per share of $0.60 for the same period last fiscal year.
Net
income for the nine months ended June 30, 2008, decreased 44.0 percent to $35.1
million, compared with $62.8 million for the same period last fiscal year. Basic
EPS decreased 44.0 percent to $0.84, compared with $1.50 for the same period
last fiscal year, and diluted EPS decreased 43.6 percent to $0.84, compared with
$1.49 for the same period last fiscal year.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Prior
period basic and diluted earnings per share noted above have been retroactively
adjusted to reflect NJR’s 3 for 2 stock split distributed on March 3,
2008.
The
decrease in earnings for the three months ended June 30, 2008, as compared with
the same period in the prior fiscal year, was due primarily to increased gas
purchases costs at NJRES, primarily driven by unrealized losses in its financial
and physical contracts, offset by unrealized gains at NJREC, lower aggregate
interest costs, and a tax benefit associated with a state tax rate change at
NJRES. For the nine months ended June 30, 2008, the decrease in earnings as
compared with the same period in the prior fiscal year was due primarily to the
same factors noted above.
The
Company’s Operating revenues and Gas purchases are as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
($
in Thousands)
|
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
Operating
revenues
|
$1,000,439
|
|
$662,218
|
|
51.1
|
%
|
$2,989,122
|
|
$2,428,662
|
|
23.1
|
%
|
Gas
purchases
|
$ 945,629
|
|
$554,917
|
|
70.4
|
%
|
$2,696,248
|
|
$2,099,898
|
|
28.4
|
%
|
Operating
revenues increased $338.2 million during the three months ended June 30, 2008,
compared with the same period of the prior fiscal year due primarily to an
increase in transaction volume at NJRES, as well as moderate increases in
customer growth and greater off-system sales, partially offset by reduced
customer usage at NJNG. For the nine months ended June 30, 2008, Operating
revenues increased $560.5 million compared with the same period of the prior
fiscal year due primarily to the same factors that were noted
above.
The
factors that resulted in the increase in revenues described above similarly
affected an increase of $391.0 million and $596.4 million in Gas purchases for
the three and nine months ended June 30, 2008, respectively, as compared with
the same periods in the prior fiscal year.
Natural
Gas Distribution Operations
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 483,000 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
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$179,511
|
|
$180,980
|
|
$940,689
|
|
$871,198
|
|
Less:
|
|
|
|
|
|
|
|
|
Gas
purchases
|
125,060
|
|
124,867
|
|
653,196
|
|
588,723
|
|
Energy
and other taxes
|
9,031
|
|
9,899
|
|
53,137
|
|
51,197
|
|
Regulatory
rider expense
|
5,925
|
|
6,226
|
|
35,879
|
|
33,827
|
|
Total
Utility Gross Margin
|
$ 39,495
|
|
$ 39,988
|
|
$198,477
|
|
$197,451
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
Residential
and commercial
|
$ 33,535
|
|
$
33,405
|
|
$178,145
|
|
$176,619
|
|
Transportation
|
4,639
|
|
4,159
|
|
15,438
|
|
13,906
|
|
Total
Utility Firm Gross Margin
|
38,174
|
|
37,564
|
|
193,583
|
|
190,525
|
|
Incentive
programs
|
1,225
|
|
2,242
|
|
4,836
|
|
6,426
|
|
Interruptible
|
96
|
|
182
|
|
358
|
|
500
|
|
BPU
settlement (included in Gas purchases above)
|
—
|
|
—
|
|
(300
|
)
|
—
|
|
Total
Utility Gross Margin
|
39,495
|
|
39,988
|
|
198,477
|
|
197,451
|
|
Operation
and maintenance expense
|
21,637
|
|
22,716
|
|
69,417
|
|
65,663
|
|
Depreciation
and amortization
|
9,488
|
|
8,940
|
|
28,053
|
|
26,526
|
|
Other
taxes not reflected in utility gross margin
|
818
|
|
770
|
|
2,642
|
|
2,248
|
|
Operating
Income
|
$ 7,552
|
|
$ 7,562
|
|
$ 98,365
|
|
$103,014
|
|
Other
income
|
(41
|
)
|
772
|
|
2,641
|
|
2,657
|
|
Interest
expense, net
|
4,146
|
|
4,700
|
|
15,641
|
|
15,337
|
|
Income
tax provision
|
3,218
|
|
1,032
|
|
34,378
|
|
34,598
|
|
Net
Income
|
$ 147
|
|
$ 2,602
|
|
$ 50,987
|
|
$ 55,736
|
|
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 Unaudited 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 decreased by $1.5 million, or 0.8 percent, and Gas purchases
increased by $193,000, or 0.2 percent, for the three months ended June 30, 2008,
respectively, compared with same period in the prior fiscal year as a result
of:
Ÿ
|
a
decrease for both Operating revenue and Gas purchases related to firm
sales in the amount of $12.4 million, which was the result of lower
volumes and a decrease in the average BGSS rate to $0.975 per therm in the
third quarter of fiscal 2008 as compared with $1.0256 per therm in the
third quarter of fiscal 2007;
|
|
|
Ÿ
|
offset
by an increase in Operating revenue and Gas purchases related to
off-system sales in the amount of $7.5 million and $7.4 million,
respectively, as a result of increased sales prices of 45 percent to
$11.845 per dekatherm (dth) for the three months ending June 30, 2008 as
compared to $8.167 per dth for the three months ending June 30, 2007 as a
result of the change in the wholesale price of natural
gas;
|
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to storage
incentive revenue in the amount of $1.5 million and $2.4 million,
respectively, as a result of opportunities available in the wholesale
energy market; and
|
|
|
Ÿ
|
an
increase in both Operating revenue and Gas purchases related to
interruptible sales in the amount of $1.3 million, due to an increase in
sales to electric co-generation
customers.
|
NJNG’s
Operating revenues increased by $69.5 million, or 8.0 percent, and Gas purchases
increased by $64.5 million, or 11.0 percent, respectively, for the nine months
ended June 30, 2008, compared with the same period in the prior fiscal year,
primarily as a result of:
Ÿ
|
an
increase in Operating revenue and Gas purchases related to off-system
sales in the amount of $46.3 million and $44.6 million, respectively, as a
result of the change in the wholesale price of natural
gas;
|
|
|
Ÿ
|
a
reduction in BGSS customer refunds provided to residential and small
commercial customers of $44.3 million, inclusive of sales tax refunds of
$2.9 million. For the nine months ended June 30, 2008 BGSS customer
refunds were $32.1 million, as compared to the same period in the prior
fiscal year of $76.4 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
|
an
increase of $5.0 million in Operating revenue due an increase of the
amounts accrued through the CIP program as a result of lower customer
usage, as described below;
|
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to interruptible
sales in the amount of $3.9 million and $3.6 million, respectively, due to
an increase in sales to electric co-generation
customers;
|
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to storage
incentive revenue in the amount of $1.5 million and $3.8 million,
respectively, as a result of opportunities available in the wholesale
energy market;
|
|
|
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 related to a
BGSS filing for fiscal 2007;
|
|
|
Ÿ
|
an
increase in Gas purchases of $1.0 million related to decreased amounts
received through capacity release and FRM of $559,000 in fiscal 2008 as
compared to $1.6 million in fiscal 2007; partially offset
by
|
|
|
Ÿ
|
a
decrease in firm sales of $31.4 million for both Operating revenue and Gas
purchases as a result of a decrease in therms sold as well as the average
BGSS price per therm.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Unaudited Condensed Consolidated Statements of Income, totaled
$9.0 million and $9.9 million and $53.1 million and $51.2 million for the three
and nine months ended, June 30, 2008 and 2007, respectively. For the three
months ended June 30, 2008, sales tax and TEFA decreased due primarily to a
decrease in customer usage. For the nine months ended June 30, 2008, sales tax
increased as a result of the increase in Operating revenue, as compared to the
same period in the prior fiscal year.
Regulatory
rider expenses totaled $5.9 million and $6.2 million and $35.9 million and $33.8
million for the three and nine months ended June 30, 2008 and 2007,
respectively. As Regulatory rider expenses are calculated on a per-therm basis,
the decrease in Regulatory rider expenses for the three months ended June 30,
2008 compared with the same period in the prior fiscal year is a result of a
decrease in sales offset by an increase in the rider rate charged to customers.
The increase in Regulatory rider expenses for the nine months ended June 30,
2008 over the same period in the prior fiscal year is a result of an increase in
the rider rate charged offset by a decrease in therms sold to customers as a
result of reduced usage.
Utility
Firm Gross Margin
Utility
firm gross margin is earned from residential and commercial customers who
receive natural gas service from NJNG through either sales or transportation
tariffs.
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 $610,000, or 1.6 percent, for the three
months, and $3.1 million, or 1.6 percent, for the nine months ended, June 30,
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 3,800 and 2,000,
respectively over the same period in the prior fiscal year. Gross margin
associated with firm customers increased $130,000 and $1.5 million for the three
and nine months ended June 30, 2008, respectively, as compared to the same
period in the prior fiscal year.
Gross
margin associated with transportation customers increased $480,000, or 11.5
percent, for the three months ended June 30, 2008, and $1.5 million or 11.0
percent for the nine months ended June 30, 2008, respectively, compared with the
same periods in the prior fiscal year. NJNG transported 1.4 Bcf and 1.5 Bcf for
the three months ended June 30, 2008 and 2007, respectively, and 8.0 Bcf and 7.8
Bcf for the nine months ended June 30, 2008 and 2007, respectively. The increase
in utility firm gross margin was due primarily to an increase of 2,000
transportation customers over the same period in the prior fiscal
year.
The
weather for the three months ended June 30, 2008 was 15.6 percent warmer than
normal, which resulted in an accrual of utility gross margin under the CIP of
$1.7 million, compared with 15.1 percent warmer than normal weather for the same
period last fiscal year, which resulted in a reduction of the accrual of utility
gross margin under the CIP of $225,000. The weather for the nine months ended
June 30, 2008 was 8.3 percent warmer than normal,
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
which
resulted in an accrual of utility gross margin under the CIP of $9.1 million,
compared with 1.6 percent warmer than normal weather for the same period last
fiscal year, which resulted in an accrual of utility gross margin of $8.2
million. Under the provisions of the CIP, accruals related to the weather
portion are dependent on the occurrence of degree days and the magnitude of the
variance in relation to the normal degree day.
Customer
usage was lower than the established benchmark during the nine months ended June
30, 2008, which resulted in an additional accrual of utility gross margin under
the CIP of $11.5 million compared with $7.4 million for the same period in
fiscal 2007.NJNG had 10,697 and 9,197 residential customers and 5,179 and 4,637
commercial customers using its transportation service at June 30, 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 4,896 and 5,645 new customers during the nine months ended June 30, 2008
and 2007, respectively. In addition, NJNG converted 505 and 357 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 0.67 Bcf in sales to firm customers, assuming
normal weather and usage.
Incentive
Programs
To reduce
the overall cost of its natural gas supply commitments, NJNG has entered into
contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system requirements. These
off-system sales enable NJNG to spread its fixed demand costs, which are charged
by pipelines to access their supplies year round, over a larger and more diverse
customer base. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to economically
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 established with the purchase of a portfolio of futures contracts
applicable to the April-through-October injection season, which is established
by the BPU.
NJNG’s
incentive programs totaled 5.6 Bcf and generated $1.2 million of utility gross
margin for the three months ended June 30, 2008, compared with 6.6 Bcf and $2.2
million of utility gross margin in the same period in the prior fiscal year. For
the three month period ended June 30, 2008, the decrease is due primarily to the
decrease in margin associated with the storage program as a result of timing
variations of storage incentive transactions.
NJNG’s
incentive programs totaled 26.8 Bcf and generated $4.8 million of utility gross
margin for the nine months ended June 30, 2008, compared with 26.9 Bcf and $6.4
million of utility gross margin, for the same period in the prior fiscal year.
For the nine month period ended June 30, 2008, the decrease in incentive program
was due primarily to:
Ÿ
|
a
decrease in margin from the storage incentive program as a result of
timing variations of storage incentive transactions; partially offset
by
|
|
|
Ÿ
|
more
favorable market spreads, which resulted in an increase in off-system
sales margin.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
New York
Mercantile Exchange (NYMEX) settlement prices for natural gas are a general
indication of the monthly market movements. NYMEX prices have increased to an
average of $8.641/dth for the nine months ended June 30, 2008 from $6.959/dth
for the nine months ended June 30, 2007, which represents a 24.2 percent
increase, while the average off-system price was higher by 29.1 percent at an
average of $10.050/dth for the nine months ended June 30, 2008 from an average
of $7.786/dth for the nine months ended June 30, 2007.
Interruptible
and Tariff Revenues
As of
June 30, 2008, NJNG serves 46 customers through interruptible sales and/or
transportation tariffs. Interruptible customers are those customers whose
service can be temporarily halted as they have the ability to utilize an
alternate fuel source. Although therms sold and transported to interruptible
customers represented 5 percent of total throughput for the nine months ended
June 30, 2008, and 4 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 as a result of the natural gas commodity cost being the
largest component of the sales price.
Interruptible
sales were 1.7 Bcf and 1.1 Bcf for the nine months ended June 30, 2008, and
2007, respectively. In addition, NJNG transported 2.5 Bcf and 2.3 Bcf for the
nine months ended June 30, 2008 and 2007, respectively, for its interruptible
customers.
An
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 decreased $1.1 million, or 4.7 percent, for
the three months ended June 30, 2008, compared with the same period in the prior
fiscal year. The decrease was due primarily to:
Ÿ
|
a
$1.4 million credit as a result of adjusting accrued medical premium
expenses to reflect lower costs based on actual claims;
|
|
|
Ÿ
|
lower
pipeline integrity costs of $722,000; partially offset
by
|
|
|
Ÿ
|
higher
compensation costs of $920,000 as a result of an increase in the number of
employees and overtime labor as well as annual wage
increases.
|
Operation
and maintenance expense increased $3.8 million, or 5.7 percent, for the nine
months ended June 30, 2008, compared with the same period in the prior fiscal
year. The increase was due primarily to:
Ÿ
|
higher
compensation costs of $4.2 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 $560,000 due primarily to an
increase in high pressure meter relocations and a greater number of meter
exchanges on non-standard residential meters;
|
|
|
Ÿ
|
an
increase of $1.1 million due primarily to an increase in NJNG’s shared
services expenses, including labor costs and consulting fees related to
various tax positions; partially offset by
|
|
|
Ÿ
|
a
$1.4 million credit as a result of adjusting accrued medical premium
expenses to reflect lower costs based on actual claims;
and
|
|
|
Ÿ
|
lower
pipeline integrity costs of
$885,000.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Operating
Income
Operating
income remained constant at $7.6 million for the three months ended June 30,
2008, compared with the same period in the prior fiscal year.
Operating
income decreased $4.6 million, or 4.5 percent, for the nine months ended June
30, 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 $3.8 million, as
discussed above;
|
|
|
Ÿ
|
an
increase in Depreciation expense of $1.5 million, as a result of greater
utility plant being placed into service; partially offset
by
|
|
|
Ÿ
|
an
increase in total Utility gross margin of $1.0 million, as discussed
above.
|
Interest
Expense
Interest
expense decreased $554,000 for the three months ended June 30, 2008, as compared
to the same period in the prior fiscal year, due primarily to:
Ÿ
|
a
decrease of $757,000 due to a lower average interest rate of 2.3 percent
on commercial paper borrowings as compared with 5.3 percent and lower
short-term borrowings;
|
|
|
Ÿ
|
a
decrease in BGSS interest of $714,000, as a result of no overrecovered gas
costs;
|
|
|
Ÿ
|
a
decrease of $220,000, which includes a year to date adjustment of $429,000
related to a change in the calculation of AFUDC (see
Note 2.
Regulation
in the
Unaudited Condensed Consolidated Financial Statements – Filed Base Rate
Case and Signed Stipulation); partially offset by
|
|
|
Ÿ
|
an
increase of $278,000 in interest related to NJNG’s variable rate debt,
which is correlated to the auction rate securities issued by the Economic
Development Authority of New Jersey (EDA), as a result of higher interest
rates due primarily to reduced liquidity in the credit markets along with
maximum rates being set for the auction rate securities that
failed;
|
|
|
Ÿ
|
an
increase of $928,000 for interest on fixed rate borrowings mostly related
to NJNG’s issuance of the $125 million notes due May 2018 which carry an
interest rate of 5.6 percent.
|
Interest
expense increased $304,000 for the nine months ended June 30, 2008, as compared
to the same period in the prior fiscal year, due primarily to:
Ÿ
|
an
increase of $1.0 million for interest on fixed rate borrowings mostly
related to NJNG’s issuance of the $125 million senior notes due May 2018,
as described above;
|
|
|
Ÿ
|
an
increase of $679,000 in interest related to NJNG’s variable rate debt, as
a result of higher interest rates as described above;
|
|
|
Ÿ
|
an
increase of $187,000 associated with lower amounts of capitalized
interest, based on lower short-term borrowing costs; partially offset
by
|
|
|
Ÿ
|
a
decrease of $1.1 million driven by a lower average interest rate of 3.6
percent on NJNG’s commercial paper borrowings compared to 5.3 percent in
the prior year;
|
|
|
Ÿ
|
a
decrease in BGSS interest of $560,000, due to the absence of overrecovered
gas costs from customers as a result of wholesale commodity prices for
natural gas being in excess of allowed amounts included in
rates.
|
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Net
Income
Net
income decreased $2.5 million, or 94.4 percent for the three months ended June
30, 2008 as compared with the same period in the prior fiscal year, due
primarily to a one-time net after-tax charge of $0.98 million to correct a tax
position surrounding utility property and approximately $1.5 million in
after-tax charges related to the signed agreement surrounding the stipulation of
NJNG’s base rate case filing as discussed in
Note 2.
Regulation – Filed Base Rate Case
and Signed Stipulation
in the Unaudited Condensed Consolidated Financial
Statements. Of this $1.5 million after-tax charge, approximately $0.7 million
represents an aggregate change in the computation of AFUDC and $0.8 million
represents the estimated non-recovery of previously deferred costs.
Net
income decreased $4.8 million, or 8.5 percent, for the nine months ended June
30, 2008, as compared with the same period in the prior fiscal year, due
primarily to a decrease in Operating income of approximately $4.6 million as
discussed above, partially offset by lower income tax expense of $0.8 million as
a result of the lower Operating income, offset by the one-time charge related to
the correction of a tax position as noted above.
Energy
Services Operations
NJRES
utilizes contractual assets that it controls for natural gas storage and
pipeline transportation to meet its various sale and delivery commitments to its
customers. NJRES purchases natural gas predominantly in the Gulf region of the
United States and Canada, and transports that gas, through the use of pipeline
contracts to which it has reserved capacity through the payment of a fixed
demand charge, to either storage facilities that it has reserved, primarily in
the Appalachian, Mid-Continent and Gulf regions of the United States and Canada
or directly to customers in various market areas including the Northeastern
region of the United States and eastern Canada.
NJRES
enters into contracts for delivery of physical natural gas and also enters into
derivative financial contracts at advantageous prices to establish an initial
financial margin for each of its forecasted transactions. Through the use of its
contracts for natural gas storage and pipeline capacity, NJRES is able to take
advantage of pricing differences between geographic locations, commonly referred
to as “locational spreads,” as well as over 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 not to use the normal purchase normal sale scope exception of SFAS 133,
and records these physical commodity contracts at fair value on the Unaudited
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 Unaudited 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 Unaudited 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 Unaudited 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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 Unaudited
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. These are normally varying over one to five years.
NJRES’
financial results are summarized as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Operating
revenues
|
$801,628
|
|
$476,383
|
|
$2,009,751
|
|
$1,540,558
|
|
Gas
purchases
|
820,568
|
|
430,050
|
|
2,043,051
|
|
1,511,175
|
|
Gross
(loss) margin
|
(18,940
|
)
|
46,333
|
|
(33,300
|
)
|
29,383
|
|
Operation
and maintenance expense
|
6,811
|
|
5,967
|
|
14,677
|
|
13,120
|
|
Depreciation
and amortization
|
50
|
|
53
|
|
156
|
|
161
|
|
Other
taxes
|
151
|
|
155
|
|
559
|
|
515
|
|
Operating
(loss) income
|
(25,952
|
)
|
40,158
|
|
(48,692
|
)
|
15,587
|
|
Other
income
|
92
|
|
228
|
|
244
|
|
343
|
|
Interest
expense, net
|
738
|
|
256
|
|
2,502
|
|
3,283
|
|
Income
tax benefit
|
(11,052
|
)
|
16,866
|
|
(22,607
|
)
|
5,842
|
|
Net
(loss) income
|
$(15,546
|
)
|
$ 23,264
|
|
$ (28,343
|
)
|
$ 6,805
|
|
NJRES
records its financial derivative instruments using fair market values. The
mark-to-market changes on these financial instruments are reflected as a
component of Gas purchases in the Unaudited Condensed Consolidated Income
Statement. As of June 30, 2008, NJRES’ portfolio of financial derivatives
instruments totaled 72.4 Bcf of net short positions, with an average portfolio
price of $11.60 per dth. NJRES’ portfolio at June 30, 2007 was also in a net
short position, which totaled 83.0 Bcf and had an average portfolio price of
$8.29 per dth. A portfolio of net short positions is subject to unrealized
losses during periods of rising market prices.
NJRES had
a gross loss of $18.9 million and gross margin of $46.3 million for the three
months ended June 30, 2008 and 2007, respectively. The decrease in gross margin
of approximately 141 percent is due primarily to losses stemming from financial
derivatives that were impacted by higher commodity market prices for natural
gas. NJRES incurred realized gains of $22.4 million and unrealized losses of
$38.7 million in the current fiscal period, as compared to realized and
unrealized gains of $1.8 million and $53.5 million, respectively, in the prior
fiscal period. These gains and losses were incurred by NJRES' portfolio mix of
open financial derivative positions, which are utilized to provide an economic
hedge, in order to secure a fixed price on forecasted natural gas storage
injections and withdrawals. The average market price on these positions within
NJRES' portfolio increased by approximately 32 percent, from $10.06 per dth as
of March 31, 2008 to $13.30 per dth as of June 30, 2008, whereas during the same
period in the prior fiscal year the positions experienced price decreases of
approximately 9 percent.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
NJRES had
a gross loss of $33.3 million and gross margin of $29.4 million for the nine
months ended June 30, 2008 and 2007, respectively. The decrease in gross margin
of approximately 214 percent is due primarily to increasing market prices for
natural gas, which resulted in unrealized losses on its financial instruments.
The financial derivatives incurred aggregate realized gains of $26.1 million and
unrealized losses of $165.8 million, respectively, for the nine months ended
June 30, 2008 as compared to realized and unrealized losses of $1.2 million and
$64.4 million, respectively, in the prior fiscal period. 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. NJRES' current portfolio mix of net short 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 77 percent, from $7.52 per dth as of
September 30, 2007 to $13.30 per dth as of June 30, 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 $1.7 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 44.3 percent for the nine
months ended June 30, 2008 as compared to an effective tax benefit of 41.1
percent for the nine months ended June 30, 2007.
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 from its storage inventory. 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
The
following table is a computation of financial margin of NJRES:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Operating
revenues
|
$801,628
|
|
$476,383
|
|
$2,009,751
|
|
$1,540,558
|
|
Less:
Gas purchases
|
820,568
|
|
430,050
|
|
2,043,051
|
|
1,511,175
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
38,714
|
|
(53,459
|
)
|
165,757
|
|
64,408
|
|
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
(22,428
|
)
|
(1,802
|
)
|
(26,057
|
)
|
1,158
|
|
Financial
margin
|
$ (2,654
|
)
|
$ (8,928
|
)
|
$ 106,400
|
|
$ 94,949
|
|
A
reconciliation of Operating loss, the closest GAAP financial measurement, to the
Financial margin of NJRES is as follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Operating
(loss) income
|
$(25,952
|
)
|
$40,158
|
|
$(48,692
|
)
|
$15,587
|
|
Add:
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
6,811
|
|
5,967
|
|
14,677
|
|
13,120
|
|
Depreciation
and amortization
|
50
|
|
53
|
|
156
|
|
161
|
|
Other
taxes
|
151
|
|
155
|
|
559
|
|
515
|
|
Subtotal
– Gross (loss) margin
|
$(18,940
|
)
|
$46,333
|
|
$(33,300
|
)
|
$29,383
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments
|
38,714
|
|
(53,459
|
)
|
165,757
|
|
64,408
|
|
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
(22,428
|
)
|
(1,802
|
)
|
(26,057
|
)
|
1,158
|
|
Financial
(loss) margin
|
$ (2,654
|
)
|
$
(8,928
|
)
|
$106,400
|
|
$94,949
|
|
A
reconciliation of Net (loss) income to Net financial (loss) earnings is as
follows:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Net
(loss) income
|
$(15,546
|
)
|
$
23,264
|
|
$(28,343
|
)
|
$ 6,805
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of taxes
|
23,599
|
|
(31,117
|
)
|
101,222
|
|
38,597
|
|
Realized
(gain) loss from derivative instruments related to natural gas inventory,
net of taxes
|
(13,683
|
)
|
(1,062
|
)
|
(15,900
|
)
|
682
|
|
Net
financial (loss) earnings
|
$ (5,630
|
)
|
$ (8,915
|
)
|
$ 56,979
|
|
$46,084
|
|
NJRES had
a financial loss of $2.7 million and $8.9 million for the three months ended
June 30, 2008 and 2007, respectively. The $6.2 million reduction in net
financial losses compared with the prior fiscal period is due primarily to
improved margins of $8.9 million on natural gas storage transactions that
stemmed from warmer than normal weather in the Northeast market regions during
the current fiscal quarter. The warmer weather prompted market prices to
increase, resulting in more favorable storage spreads that averaged
approximately $0.173 per dth in the current fiscal period, as compared to $0.097
per dth in the prior fiscal period. Storage withdrawal volumes were also higher
during the current fiscal period, which decreased storage levels by 5.8 Bcf to
an ending balance of 20.8
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Bcf.
Additionally, NJRES experienced higher margins on its transport capacity serving
the Northeast market area during the month of June 2008, which had warmer than
normal temperatures in the region. These favorable margins were the result of
increased demand levels from electric cogeneration facilities, which were
purchasing higher volumes of natural gas, as a fuel source, in order to
accommodate their additional electric generation requirements during the month.
The reduction in net financial loss was partially offset by higher losses from
basis positions, which posted $3.5 million of additional losses in the current
fiscal period as compared to prior fiscal period. The higher losses from basis
positions were due primarily to increased demand costs of approximately $4.8
million over the prior fiscal period, that were associated with additional
transport capacity acquired during the first fiscal quarter, as well as,
fewer arbitrage opportunities due to overall market conditions within NJRES'
business regions.
NJRES'
financial margin increased $11.4 million for the nine months ended June 30,
2008, compared with the same period last fiscal year. The increase in financial
margin was due primarily to the acquisition of additional transport contracts
for the Northeast market region during the first quarter of fiscal 2008. The
additional transport contracts enabled NJRES to transact greater volumes in the
market region, which experienced favorable spreads that contributed to higher
margins. The overall increase in financial margin was partially offset by lower
spreads on storage assets, which decreased in the current fiscal year as
compared to prior fiscal year, when during the month of February 2007, optimal
pricing conditions enabled NJRES to transact a significant volume of favorable
storage spreads that contributed to higher margins. The average spread on
storage positions decreased from $0.710 per dth in the prior fiscal year period
to $0.422 per dth in the current fiscal year period.
NJRES'
Operation and maintenance expense increased by $844,000 and $1.6 million for the
three and nine months ended June 30, 2008, respectively, compared with the same
periods last fiscal year. The increases were due primarily to higher
compensation costs as a result of higher salary and accrued incentive costs and
increased accounting fees, support expenses and charitable
contributions.
Contributing
to greater net financial earnings is a reduction of $1.8 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 $1.7 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 had an effective rate of 37.8 percent for the nine months
ended June 30, 2008 compared with 41.1 percent for the nine months ended June
30, 2007. Excluding the $1.7 million one-time benefit, the effective tax rate
was 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
June
30,
|
Nine
Months Ended
June
30,
|
(Thousands)
|
2008
|
2007
|
2008
|
2007
|
Operating
revenues
|
$19,344
|
|
$4,926
|
|
$38,834
|
|
$17,117
|
|
Operation
and maintenance expense
|
$ 5,892
|
|
$5,286
|
|
$17,030
|
|
$15,839
|
|
Equity
in earnings, net of tax
|
$ 378
|
|
$ 407
|
|
$ 1,548
|
|
$ 1,302
|
|
Net
income (loss)
|
$ 7,802
|
|
$ (489
|
)
|
$12,479
|
|
$ 231
|
|
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
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
derivative
financial instruments (futures contracts) designed to economically hedge the
long-term fixed-price contract.
The
results of operations include unrealized gains (losses) associated with these
derivative instruments of $10.9 million and $(3.1) million, for the three months
ended June 30, 2008 and 2007, respectively, which are recorded, pre-tax, as a
component of Operating revenues. On an after-tax basis, these unrealized gains
(losses) are $6.4 million and $(1.9) million for the three months ended June 30,
2008 and 2007, respectively.
For the
nine month period, unrealized gains (losses) associated with these derivative
instruments are $17.4 million and $(2.8) million, for June 30, 2008 and 2007,
respectively. On an after-tax basis, these unrealized gains (losses) are $10.2
million and $(1.6) million for the nine months ended June 30, 2008 and 2007,
respectively.
Operating
revenue for the three months and nine months ended June 30, 2008, increased
$14.4 million and $21.7 million, respectively as compared to last fiscal year,
due primarily to greater unrealized gains at NJR Energy, which were 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.
Operation
and maintenance expenses for the three months and the nine months ended June 30,
2008, increased $606,000 and $1.2 million, respectively compared with 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 $264,000 and $270,000 and are
included in the Unaudited Condensed Consolidated Statements of Income for the
three months ended June 30, 2008 and 2007, respectively. For the nine months
ended June 30, 2008 and 2007 taxes netted in Equity in earnings from Iroquois
are $1.0 million and $863,000, respectively and are included in the Unaudited
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 nine months ended June 30, 2008, increased $8.3
million and $12.2 million, respectively compared with the same periods in fiscal
2007 due primarily to the increased operating revenue at NJR Energy, as
previously discussed 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:
|
June
30,
|
September
30,
|
|
2008
|
2007
|
Common
stock equity
|
51
|
%
|
50
|
%
|
Long-term
debt
|
38
|
|
30
|
|
Short-term
debt
|
11
|
|
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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 approximately 28 million to
approximately 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 June 30, 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
June 30, 2008, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $494.6 million available under these facilities (see
Note 6. Debt
in the
Unaudited Condensed Consolidated Financial Statements).
NJR
believes that as of June 30, 2008, NJR, NJNG and NJRES were, and currently are,
in compliance with all debt covenants.
NJR
believes that its existing borrowing availability and cash flow from operations
will be sufficient to satisfy its 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 and from the Company’s DRP.
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 June 30, 2008,
NJR’s effective rate was 2.7 percent on outstanding borrowings of $109.9 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
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 no commercial paper outstanding as of June 30, 2008 compared to
$175.7 million as of September 30, 2007.
NJNG has
a 3-year, $30 million uncommitted credit facility with a multinational financial
institution. As of June 30, 2008, NJNG had no borrowings outstanding under this
facility.
In May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018 in
the private placement market pursuant to a note purchase agreement. The notes
are secured until the release date (which is the date at which the security
provided by the pledge under NJNG’s mortgage indenture would no longer be
available to holders of any outstanding series of NJNG’s senior secured notes
and such indebtedness would become senior unsecured indebtedness) by an equal
amount of NJNG first mortgage bonds (Series LL), and interest is payable on the
Notes semi-annually. The proceeds from the notes were used to refinance or
retire short-term debt and will fund capital expenditure
requirements.
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. As of June 30, 2008, most of the auctions
surrounding the EDA ARS have failed, resulting in those 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 June 30, 2008, the 30-day LIBOR rate was 2.5 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 4.1
percent as of June 30, 2008, compared with a weighted average interest rate of
3.9 percent as of September 30, 2007. There can be no assurance that the EDA ARS
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
June 30, 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 June 30, 2008.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Contractual
Obligations
The
following table is a summary of NJR, NJNG and NJRES contractual cash obligations
and financial commitments and their applicable payment due dates as of June 30,
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)
|
$ 732,750
|
|
$ 77,620
|
|
$ 61,627
|
|
$ 39,908
|
|
$553,595
|
|
Capital
lease obligations
(1)
|
87,011
|
|
8,813
|
|
18,015
|
|
18,410
|
|
41,773
|
|
Operating
leases
|
10,039
|
|
2,913
|
|
3,672
|
|
1,489
|
|
1,965
|
|
Short-term
debt
(1)
|
109,900
|
|
109,900
|
|
—
|
|
—
|
|
—
|
|
New
Jersey Clean Energy Program
(1)
|
4,186
|
|
4,186
|
|
—
|
|
—
|
|
—
|
|
Construction
obligations
|
2,672
|
|
2,672
|
|
—
|
|
—
|
|
—
|
|
Obligations
for uncertain tax positions
(1)
(2)
|
3,130
|
|
3,130
|
|
—
|
|
—
|
|
—
|
|
Remediation
expenditures
(3)
|
105,340
|
|
19,000
|
|
17,900
|
|
10,200
|
|
58,240
|
|
Natural
gas supply purchase obligations–NJNG
|
192,618
|
|
168,530
|
|
24,088
|
|
—
|
|
—
|
|
Demand
fee commitments - NJNG
|
565,983
|
|
98,357
|
|
202,561
|
|
163,078
|
|
101,987
|
|
Natural
gas supply purchase obligations–NJRES
|
972,671
|
|
676,294
|
|
296,377
|
|
—
|
|
—
|
|
Demand
fee commitments - NJRES
|
155,790
|
|
65,729
|
|
60,308
|
|
22,525
|
|
7,228
|
|
Total
contractual cash obligations
|
$2,942,090
|
|
$1,237,144
|
|
$684,548
|
|
$255,610
|
|
$764,788
|
|
(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 and Income Taxes, in the Unaudited Condensed
Consolidated Financial Statements, 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
June 30, 2008, there were NJR guarantees covering approximately $443 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 Unaudited Condensed Consolidated Balance Sheet.
As a
result of an increase in the estimated total project costs of Steckman Ridge,
from an original cost estimate of approximately $250 million to a revised
estimate of approximately $265 million, the Company is obligated to fund up to
$132.5 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 $81.8 million, including
cash payments of $57.2 million during the nine months ended June 30,
2008.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Cash
Flow
Operating
Activities
As
presented in the Unaudited Condensed Consolidated Statements of Cash Flows, cash
flow generated from operating activities totaled $144.3 million for the nine
months ended June 30, 2008, compared with cash flow from operations of $160.6
million for the same period in fiscal 2007. Net income was lower for the nine
month period ending June 30, 2008 as compared with the same period in fiscal
2007, primarily driven by higher net unrealized losses as a result of changes in
volumes and prices of derivative financial instruments. In addition, decreases
in Operating cash flows are typically affected by variations in working capital,
which are a function of the seasonality of NJR’s business, fluctuations in
wholesale natural gas prices, management of the deferral and recovery of gas
costs, and the timing of storage injections and withdrawals, as well as the
collections of receivables and payments of current liabilities. The components
of working capital that contributed to the decrease in operating cash flows for
the nine months ended June 30, 2008 as compared with the same period in fiscal
2007 are as follows:
Ÿ
|
at
NJRES, an increase in natural gas inventory purchases for the nine months
ended June 30, 2008 at higher average prices compared with the same period
in the prior fiscal year to facilitate both increased storage inventory
and greater sales volumes during fiscal 2008.
|
|
|
Ÿ
|
an
increase in sales volumes at NJRES of approximately 4.6 Bcf in fiscal 2008
compared to 3.2 Bcf in prior fiscal year that resulted in an increase in
receivable balances as of June 30, 2008 as compared to September 30, 2007.
NJRES receivable balances, which are normally fully collected within 30
days and do not have any allowance for doubtful accounts, were impacted by
a 53.7 percent increase in the average sales price for the month of June
2008 as compared to June 2007, as a result of the increase in the
wholesale price of natural gas;
|
|
|
Ÿ
|
an
increase in broker margin balances as a result of the impact of adverse
market price movements on NJRES’ short (derivatives sold as an economic
hedge of forecasted sales of the underlying commodity) futures
positions.
|
These
decreases in cash were offset by:
Ÿ
|
at
NJRES, an increase in gas purchases payable related to natural gas storage
build and higher sales volumes during fiscal 2008; As of June 30, 2008,
the average cost of gas inventory increased to approximately $13 per
dekatherm from approximately $6 per dekatherm at the end of the prior
fiscal period;
|
|
|
Ÿ
|
an
increase in gas purchases payable at NJNG as a result of a slight increase
in commodity purchase volumes coupled with an average price increase of
40.6 percent;
|
|
|
Ÿ
|
a
decrease in LNG and underground storage volumes at NJNG, which is a result
of withdrawals through the winter heating season offset by lower volumes
of gas added to inventory during the current injection season compared to
the amount of gas injected during the same period in fiscal 2007. The
decrease in volumes were slightly offset by a 2.1 percent increase in
average inventory cost; and
|
|
|
Ÿ
|
at
NJNG, lower BGSS customer refunds during fiscal 2008 compared to fiscal
2007.
|
NJNG’s
MGP expenditures are currently expected to total $22.7 million in fiscal 2008
(see
Note 12. Commitments and
Contingent Liabilities
in the Unaudited Condensed Consolidated Financial
Statements
).
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Investing
Activities
Cash
flows used in investing activities totaled $74.7 million for the nine months
ended June 30, 2008, compared with $94.2 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 June 30,
2008, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
On June
5, 2008, the FERC issued Steckman Ridge, LP a certificate of public convenience
and necessity authorizing the ownership, construction and operation of a natural
gas storage facility and associated facilities (the Steckman Ridge Project) in
Bedford County, Pennsylvania.
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 $132.5 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. Through
June 30, 2008, NJR expended $71.6 million in acquisition and development costs.
NJR anticipates that construction on Steckman Ridge will be completed during the
first quarter of fiscal 2010.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2008.
Financing
Activities
Cash flow
used in financing activities totaled $48.8 million for the nine months ended
June 30, 2008, compared with $65.7 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 third 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.
New
Jersey Resources Corporation
Part
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
Credit
Ratings
The table
below summarizes NJNG’s 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 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 5.5 Bcf of natural gas (Gas Sales Contract) to an energy
marketing company.
New
Jersey Resources Corporation
Part
I
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK (Continued)
|
The
following table reflects the changes in the fair market value of financial
derivatives related to natural gas purchases and sales from September 30, 2007
to June 30, 2008:
(Thousands)
|
Balance
September
30,
2007
|
Increase
(Decrease)
in
Fair
Market Value
|
Less
Amounts
Settled
|
Balance
June
30,
2008
|
NJNG
|
$(51,861
|
)
|
$ 41,448
|
|
$19,720
|
|
$(30,133
|
)
|
NJRES
|
89,446
|
|
(137,124
|
)
|
28,845
|
|
(76,523
|
)
|
NJR
Energy
|
28,353
|
|
19,172
|
|
1,815
|
|
45,710
|
|
Total
|
$
65,938
|
|
$
(76,504
|
)
|
$50,380
|
|
$(60,946
|
)
|
There
were no changes in methods of valuations during the quarter ended June 30,
2008.
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at June 30, 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
|
$17,752
|
|
$(42,633)
|
$(10,555
|
)
|
—
|
|
$(35,436
|
)
|
Price
based on other external data
|
(8,115
|
)
|
(14,379)
|
(3,016
|
)
|
—
|
|
(25,510
|
)
|
Total
|
$ 9,637
|
|
$(57,012)
|
$(13,571
|
)
|
—
|
|
$(60,946
|
)
|
The
following is a summary of financial derivatives by type as of June 30,
2008:
|
|
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included
in
Derivatives (Thousands)
|
NJNG
|
Futures
|
(0.9
|
)
|
$7.43
- $13.05
|
$ 1,827
|
|
|
Swaps
|
(1.8
|
)
|
$4.19
- $16.59
|
$(31,960
|
)
|
NJRES
|
Futures
|
(3.0
|
)
|
$7.37
- $14.07
|
$(13,602
|
)
|
|
Swaps
|
(71.4
|
)
|
$6.74
- $18.01
|
$(61,708
|
)
|
|
Options
|
2.0
|
|
$7.50
- $13.25
|
$ (1,213
|
)
|
NJR
Energy
|
Swaps
|
6.0
|
|
$3.22
- $ 4.39
|
$
45,710
|
|
Total
|
|
|
|
|
$(60,946
|
)
|
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2007 to June 30,
2008:
(Thousands)
|
Balance
September
30,
2007
|
Increase
(Decrease)
in Fair
Market Value
|
Less
Amounts
Settled
|
Balance
June
30,
2008
|
NJRES
|
—
|
|
$13,165
|
|
$12,952
|
|
$213
|
|
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.
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The VaR
at June 30, 2008, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $600,000. The VaR with a 99
percent confidence level and a 10-day holding period was $2.5 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.
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 June 30, 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 June 30, 2008 is as follows:
(Thousands)
|
Gross
Credit
Exposure
|
|
Net
Credit
Exposure
|
Investment
grade
|
$316,307
|
|
|
$248,149
|
|
Noninvestment
grade
|
7,560
|
|
|
—
|
|
Internally
rated investment grade
|
12,171
|
|
|
4,964
|
|
Internally
rated noninvestment grade
|
3,214
|
|
|
—
|
|
Total
|
$339,252
|
|
|
$253,113
|
|
NJNG’s
counterparty credit exposure as of June 30, 2008 is as follows:
(Thousands)
|
Gross
Credit
Exposure
|
|
Net
Credit
Exposure
|
Investment
grade
|
$77,364
|
|
|
$63,943
|
|
Noninvestment
grade
|
2,677
|
|
|
6
|
|
Internally
rated investment grade
|
267
|
|
|
39
|
|
Internally
rated noninvestment grade
|
—
|
|
|
—
|
|
Total
|
$80,308
|
|
|
$63,988
|
|
New
Jersey Resources Corporation
Part
I
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
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
June 30, 2008, the Company (excluding NJNG) had no variable-rate long-term
debt.
As of
June 30, 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 with the
NJNG variable-rate debt is based on the rates the EDA receives from its ARS. As
of June 30, 2008, most of 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 4.1 percent as of June 30, 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.
New
Jersey Resources Corporation
Part
I
ITEM
4. CONTROLS AND PROCEDURES (Continued)
|
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 Unaudited Condensed Consolidated
Statements of Income and of Cash flows for the nine months ended June 30, 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.
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.
|
New
Jersey Resources Corporation
Part
I
ITEM
4. CONTROLS AND PROCEDURES (Continued)
|
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 June 30, 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
PR
OCEEDINGS
|
Information
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
in the Unaudited Condensed Consolidated
Financial Statements. No legal proceedings became reportable during the quarter
ended June 30, 2008 and there have been no material developments during such
quarter regarding any previously reported legal proceedings, which have not been
previously disclosed.
While NJR
attempts to identify, manage and mitigate risks and uncertainties associated
with its 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 and Part II, Item 1A, “Risk Factors” of
NJR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (2nd
Quarter 10-Q) include a detailed discussion of NJR’s risk factors. These risks
and uncertainties have the potential to materially affect NJR’s financial
condition and results of operations. There have not been any material changes
from the risk factors as previously disclosed by NJR in the 2007 Annual Report
on Form 10-K and the 2nd Quarter 10-Q.
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 June 30, 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 June
30, 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
|
04/01/08
– 04/30/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
05/01/08
– 05/31/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
06/01/08
– 06/30/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
Total
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
*
Share data has been retroactively adjusted to reflect a 3 for 2 stock split
effective March 3, 2008.
New
Jersey Resources Corporation
Part
II
ITEM
5. OTHER INFORMATION
|
Ba
se Rate Case and Signed Stipulation
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.
On July
30, 2008, NJNG and the Department of the Public Advocate, Division of Rate
Counsel signed an agreement that stipulated the principal financial terms
of a settlement of its petitioned rate increase. Pending final review and
approval by the BPU, NJNG would receive a revenue increase to its base rates of
approximately $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the conservation incentive program baseline usage level,
receive an allowed return on equity component of 10.3 percent, reduce its
depreciation expense component from 3.0 percent to 2.34 percent, and reduce its
depreciation expense by $1.6 million annually as a result of the amortization of
previously recovered asset retirement obligations, all of which are expected to
commence on or about October 1, 2008. A copy of the Company’s press release
dated August 5, 2008 announcing this event is filed as Exhibit 99.1 to this
Quarterly Report on Form 10-Q and is incorporated by reference
herein.
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*
|
|
|
99.1
|
Press
Release dated August 5, 2008
|
*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
SIG
NATURES
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:
August 5,
2008
|
|
|
By
:
/s/ Glenn C.
Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
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