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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number 1-8359
June 30, 2002
NEW JERSEY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2376465
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1415 WYCKOFF ROAD, WALL, NEW JERSEY - 07719 732-938-1480
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
The number of shares outstanding of $2.50 par value Common Stock as of August 6,
2002 was 26,884,004.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- ---------- -----------
(Thousands, except per share data)
OPERATING REVENUES ............................................. $442,309 $260,644 $1,363,920 $ 1,818,166
-------- -------- ---------- -----------
OPERATING EXPENSES
Gas purchases ................................................ 395,929 215,741 1,134,292 1,585,517
Operation and maintenance .................................... 22,605 20,961 69,208 68,192
Depreciation and amortization ................................ 7,981 8,210 23,950 24,587
Energy and other taxes ....................................... 6,213 6,947 32,819 39,006
-------- -------- ---------- -----------
Total operating expenses ...................................... 432,728 251,859 1,260,269 1,717,302
-------- -------- ---------- -----------
OPERATING INCOME ............................................... 9,581 8,785 103,651 100,864
Other income ................................................... 2,293 2,280 4,543 4,975
Interest charges, net .......................................... 4,054 4,120 12,509 15,156
-------- -------- ---------- -----------
INCOME BEFORE INCOME TAXES ..................................... 7,820 6,945 95,685 90,683
Income tax provision ........................................... 3,056 2,633 36,310 34,285
-------- -------- ---------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
4,764 4,312 59,375 56,398
Cumulative effect of a change in accounting for derivatives, net
of tax of $930 ................................................. -- -- -- (1,347)
NET INCOME ..................................................... $ 4,764 $ 4,312 $ 59,375 $ 55,051
======== ======== ========== ===========
EARNINGS PER COMMON SHARE-BASIC
INCOME BEFORE ACCOUNTING CHANGE ........................... $ .18 $ .16 $ 2.21 $ 2.12
======== ======== ========== ===========
NET INCOME ................................................ $ .18 $ .16 $ 2.21 $ 2.07
======== ======== ========== ===========
EARNINGS PER COMMON SHARE-DILUTED
INCOME BEFORE ACCOUNTING CHANGE ........................... $ .17 $ .16 $ 2.19 $ 2.11
======== ======== ========== ===========
NET INCOME ................................................ $ .17 $ .16 $ 2.19 $ 2.06
======== ======== ========== ===========
DIVIDENDS PER COMMON SHARE ..................................... $ .30 $ .29 $ .90 $ .88
======== ======== ========== ===========
AVERAGE SHARES OUTSTANDING
BASIC ..................................................... 26,937 26,672 26,846 26,562
======== ======== ========== ===========
DILUTED ................................................... 27,255 26,945 27,156 26,750
======== ======== ========== ===========
See Notes to Consolidated Financial Statements
1
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
JUNE 30,
(Thousands) 2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................... $ 59,375 $ 55,051
Adjustments to reconcile net income to cash flows
Depreciation and amortization .................. 23,950 24,587
Amortization of deferred charges ............... 3,502 3,901
Deferred income taxes .......................... 3,538 15,211
Manufactured gas plant remediation costs ....... (18,990) (8,739)
Change in working capital ...................... (37,898) (96,516)
Other, net ..................................... (3,270) (2,619)
-------- --------
Net cash flows from operating activities ......... 30,207 (9,124)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock ...................... 9,224 8,642
Proceeds from long-term debt .................... 91,981 --
Payments of long-term debt ...................... (1,152) (16,343)
Purchases of treasury stock ..................... (4,275) (2,473)
Payments of common stock dividends .............. (23,936) (23,161)
Payments of preferred stock ..................... (3) (102)
Net change in short-term debt ................... (71,600) 81,000
-------- --------
Net cash flows from financing activities ......... 239 47,563
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for
Utility plant .................................. (31,320) (31,114)
Real estate properties and other ............... (300) (4,302)
Equity investments ............................. -- (2,634)
Cost of removal ................................ (3,245) (3,981)
Proceeds from asset sales ....................... 4,314 4,511
-------- --------
Net cash flows from investing activities ......... (30,551) (37,520)
-------- --------
Net change in cash and temporary investments ..... (105) 919
Cash and temporary investments at September 30 ... 4,044 1,904
-------- --------
Cash and temporary investments at June 30 ........ $ 3,939 $ 2,823
======== ========
CHANGES IN COMPONENTS OF WORKING CAPITAL
Receivables ..................................... $(92,932) $ (1,917)
Construction fund ............................... 3,600 4,000
Inventories ..................................... 2,840 18,211
Deferred gas costs .............................. 9,775 (28,781)
Purchased gas ................................... 59,734 (52,502)
Prepaid and accrued taxes, net .................. 10,130 4,177
Customers' credit balances and deposits ......... 237 (7,798)
Accounts payable & other ........................ (3,302) (8,764)
Broker margin accounts .......................... (16,111) (30,372)
Other, net ...................................... (11,869) 7,230
-------- --------
Total ............................................ $(37,898) $(96,516)
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for
Interest (net of amounts capitalized) ........... $ 12,343 $ 15,306
Income taxes .................................... $ 28,159 $ 4,604
See Notes to Consolidated Financial Statements
2
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
2002 2001 2001
(unaudited) (unaudited)
----------- ----------- -----------
(Thousands)
PROPERTY, PLANT AND EQUIPMENT
Utility plant, at cost .................. $ 1,043,730 $ 1,016,911 $ 1,004,642
Real estate properties and other, at cost 24,533 26,759 31,892
----------- ----------- -----------
1,068,263 1,043,670 1,036,534
Accumulated depreciation and amortization (317,257) (299,721) (294,151)
----------- ----------- -----------
Property, plant and equipment, net ..... 751,006 743,949 742,383
----------- ----------- -----------
CURRENT ASSETS
Cash and temporary investments .......... 3,939 4,044 2,823
Construction fund ....................... -- 3,600 3,600
Customer accounts receivable ............ 173,190 78,367 107,320
Unbilled revenues ....................... 6,770 7,724 3,664
Allowance for doubtful accounts ......... (3,884) (3,026) (4,813)
Gas in storage, at average cost ......... 67,215 70,019 46,165
Materials and supplies, at average cost . 2,967 3,003 2,972
Prepaid state taxes ..................... 6,174 8,268 20,120
Underrecovered gas costs ................ 22,996 15,335 41,485
Derivatives ............................. 5,214 24,698 30,614
Broker margin accounts .................. 45,009 28,898 16,567
Other ................................... 27,606 20,822 6,937
----------- ----------- -----------
Total current assets ................... 357,196 261,752 277,454
----------- ----------- -----------
DEFERRED CHARGES AND OTHER
Equity investments ...................... 14,751 15,468 20,588
Regulatory assets ....................... 111,539 98,753 119,455
Underrecovered gas costs ................ 15,570 33,006 --
Derivatives ............................. 10,796 14,428 10,270
Other ................................... 24,421 24,836 9,545
----------- ----------- -----------
Total deferred charges and other ....... 177,077 186,491 159,858
----------- ----------- -----------
Total assets ..................... $ 1,285,279 $ 1,192,192 $ 1,179,695
=========== =========== ===========
See Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
JUNE 30, SEPTEMBER 30, JUNE 30,
2002 2001 2001
(unaudited) (unaudited)
---------- ---------- ----------
(Thousands)
CAPITALIZATION
Common stock equity ....................... $ 372,023 $ 352,069 $ 371,622
Redeemable preferred stock ................ 295 298 298
Long-term debt ............................ 418,215 353,799 325,185
---------- ---------- ----------
Total capitalization ..................... 790,533 706,166 697,105
---------- ---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt ...... 26,942 529 495
Short-term debt ........................... 14,200 85,800 74,300
Purchased gas ............................. 145,060 85,326 100,957
Accounts payable and other ................ 34,864 38,166 31,647
Dividends payable ......................... 8,075 7,837 7,828
Accrued taxes ............................. 27,732 15,771 20,326
Derivatives ............................... 36,551 35,431 31,619
Customers' credit balances and deposits ... 14,660 14,423 8,488
---------- ---------- ----------
Total current liabilities ................ 308,084 283,283 275,660
---------- ---------- ----------
DEFERRED CREDITS
Deferred income taxes ..................... 79,605 95,182 108,042
Deferred investment tax credits ........... 9,236 9,497 9,584
Deferred revenue .......................... 15,420 19,046 19,538
Derivatives ............................... 12,510 9,209 7,411
Manufactured gas plant remediation ........ 53,840 53,840 45,219
Other ..................................... 16,051 15,969 17,136
---------- ---------- ----------
Total deferred credits ................... 186,662 202,743 206,930
---------- ---------- ----------
Total capitalization and liabilities $1,285,279 $1,192,192 $1,179,695
========== ========== ==========
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The financial statements have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). The
September 30, 2001 balance sheet data is derived from the audited financial
statements of New Jersey Resources Corporation (the Company). Although
management believes that the disclosures are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's 2001 Annual Report on Form 10-K and December 31, 2001, and
March 31, 2002, Quarterly Reports on Form 10-Q.
In the opinion of management, the information furnished reflects all
adjustments necessary for a fair statement of the results of the interim
periods. Because of the seasonal nature of the Company's utility operations and
other factors, the results of operations for the interim periods presented are
not indicative of the results to be expected for the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, New Jersey Natural Gas Company (NJNG), NJR Energy
Services Company (Energy Services), NJR Retail Holdings Corporation (Retail
Holdings), NJR Capital Services Corporation (Capital) and NJR Service
Corporation.
The Retail and Other segment includes Retail Holdings and its four
wholly-owned subsidiaries, NJR Home Services Company (Home Services), NJR
Natural Energy Company (Natural Energy), NJR Power Services Company and NJR
Plumbing Services Company. Retail and Other also includes Capital and its
wholly-owned subsidiaries, Commercial Realty & Resources Corp. (CR&R), NJR
Investment Company and NJR Energy Corporation (NJR Energy).
3. Capitalized and Deferred Interest
The Company's capitalized interest totaled $55,000 and $195,000 for the
three months ended June 30, 2002 and 2001, respectively, and $283,000 and
$728,000 for the nine months ended June 30, 2002 and 2001, respectively.
Pursuant to a New Jersey Board of Public Utilities (BPU) order, NJNG
recovers carrying costs on uncollected balances related to its manufactured gas
plant (MGP) remediation expenditures (see Note 4c.-Manufactured Gas Plant
Remediation) and underrecovered gas costs (see Note 4b.-LGA and Other Adjustment
Clauses). Accordingly, Other income included deferred interest of $685,000 and
$1.7 million for the three months ended June 30, 2002 and 2001, respectively,
and $2.2 million and $3.3 million for the nine months ended June 30, 2002 and
2001, respectively, related to remediation and underrecovered gas costs.
5
4. Legal and Regulatory Proceedings
a. Energy Deregulation Legislation
In February 1999, the Electric Discount and Energy Competition Act
(Act), which provides the framework for the restructuring of New Jersey's energy
markets, became law. In March 2001, the BPU issued a written order that approved
a stipulation agreement among various parties to fully open NJNG's residential
markets to competition, restructure its rates to segregate its Basic Gas Supply
Service (BGSS) and Delivery (i.e., transportation) service prices as required by
the Act, and expand an incentive for residential and small commercial customers
to switch to transportation service.
The Act allows continuation of each utility's role as the provider of
BGSS at least until December 31, 2002. The Act required the BPU to determine by
December 31, 2001, the role other parties should have in providing BGSS after
December 31, 2002. In June 2001, the BPU initiated a proceeding to review issues
related to the potential of making the BGSS competitive. In July 2001, NJNG
submitted a BGSS proposal that provides for additional customer choices and
includes a request to develop new incentive mechanisms. In January 2002, the BPU
issued an order which stated that BGSS could be provided by suppliers other than
state natural gas utilities, but at this time it should be provided by the
state's natural gas utilities. The parties are currently discussing NJNG's July
2001 proposal, and no assurance can be made as to the timing or terms of any
resolution to such proposal.
b. LGA and Other Adjustment Clauses
In fiscal 2001, the BPU approved price increases of approximately 2
percent per month for a period from December 2000 through July 2001 under a
Flexible Pricing Mechanism (FPM). The BPU also directed NJNG to establish a Gas
Cost Underrecovery Adjustment (GCUA) surcharge to collect the underrecovered gas
costs and accrue interest at a rate of 5.75 percent per year, commencing
December 1, 2001 until November 30, 2004.
On November 15, 2001, NJNG filed with the BPU for the establishment of
the GCUA to collect $29.9 million in underrecovered gas costs and sought to
reduce its gas cost recovery rate. The combined effect of the two changes
resulted in an approximate 10.8 percent price decrease effective December 1,
2001. The filing also contained a proposal to extend the existing margin-sharing
mechanisms related to NJNG's off-system sales and capacity management programs
for two years beyond their currently scheduled expiration of December 31, 2002.
NJNG is currently negotiating with the parties to the proceeding and has no
reason to believe that the incentives will not be extended on terms acceptable
to NJNG.
On January 21, 2002, NJNG filed with the BPU for an additional 3
percent price decrease as a result of lower projected gas costs. The BPU
approved this filing on February 6, 2002, and the decrease became effective
immediately.
NJNG is also involved in various proceedings associated with several
other adjustment clauses (e.g., Transportation Education and Implementation
(TEI) and Comprehensive Resource Analysis (CRA) factors) which, in management's
opinion, will not have a material adverse effect on its financial condition or
results of operations.
6
c. Manufactured Gas Plant (MGP) Remediation
NJNG has identified 11 former MGP sites, dating back to the late 1800s
and early 1900s, which contain contaminated residues from the former gas
manufacturing operations. Ten of the 11 sites in question were acquired by NJNG
in 1952. All of the gas manufacturing operations ceased at these sites at least
by the mid-1950s and in some cases had been discontinued many years earlier, and
all of the former gas manufacturing facilities were subsequently dismantled by
NJNG or the previous owners. NJNG is currently involved in administrative
proceedings with the New Jersey Department of Environmental Protection (NJDEP)
and local government authorities with respect to the plant sites in question,
and is participating in various studies and investigations by outside
consultants to determine the nature and extent of any such contaminated residues
and to develop appropriate programs of remedial action, where warranted. Since
October 1989, NJNG has entered into Administrative Consent Orders or Memoranda
of Agreement with the NJDEP covering all 11 sites. These documents establish the
procedures to be followed by NJNG in developing a final remedial clean-up plan
for each site.
With respect to 10 of the MGP sites, until September 2000 most of the
cost of such studies and investigations had been shared under an agreement with
the former owner and operator of such 10 MGP sites. In September 2000, a revised
agreement was executed pursuant to which NJNG is responsible for two of the
sites, while the former owner is responsible for the remaining eight sites. Also
in September 2000, NJNG purchased a 20-year cost-containment insurance policy
for these two sites. NJNG continues to participate in the investigation and
remedial action for one MGP site that was not subject to the original
cost-sharing agreement. Through a Remediation Rider approved by the BPU, NJNG is
recovering its expenditures incurred through June 30, 1998, over a 7-year
period. Costs incurred subsequent to June 30, 1998, including carrying costs on
the deferred expenditures (see Note 3 - Capitalized and Deferred Interest), will
be reviewed annually and recovered over rolling 7-year periods, subject to BPU
approval. In September 1999, NJNG filed for recovery of expenditures incurred
through June 30, 1999, and in January 2001, NJNG filed for recovery of
expenditures incurred through June 30, 2000. The BPU is currently reviewing
these filings.
In March 1995, NJNG instituted an action for declaratory relief against
24 separate insurance companies in the Superior Court of New Jersey. These
insurance carriers provided comprehensive general liability coverage to NJNG
from 1951 through 1985. Prior to the institution of the suit, NJNG requested the
insurance carriers to defend and indemnify it with respect to the environmental
liability created by the former manufactured gas plants. All insurance carriers
denied coverage claiming that various terms in the policies preclude coverage.
In 2001, settlements were reached with several of the excess carriers, while
other carriers were dismissed without prejudice when it was determined that the
state's allocation method would not have assessed any liability to the
particular carrier. In September 2001, NJNG reached a favorable settlement with
the insurance carrier that provided the majority of NJNG's coverage. This
settlement involves a significant cash payment to NJNG that will be tendered in
four annual installments. NJNG has reached a settlement with the last carrier.
NJNG is also pursuing a claim against Kaiser-Nelson Steel and Salvage Company
and its successors. Kaiser-Nelson Steel and Salvage was responsible for
demolishing the structures at several of the MGP sites and removing the contents
of the vessels. Discovery is expected to be completed within the next 60 days.
There can be no assurance as to the outcome of this proceeding.
7
d. Various
The Company is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In management's opinion,
the ultimate disposition of these matters will not have a material adverse
effect on its financial condition or results of operations.
5. Earnings Per Share (EPS)
On January 22, 2002, the Board of Directors approved a three-for-two
split of its outstanding shares of common stock and on March 4, 2002, the
Company began trading on a post-split basis. All share and per share amounts
have been adjusted to reflect this split.
The incremental shares required for inclusion in the denominator for
the diluted EPS calculation were 317,872 and 273,044 for the three months ended
June 30, 2002 and 2001, respectively, and 310,050 and 187,713 for the nine
months ended June 30, 2002 and 2001, respectively. These shares relate to stock
options and restricted stock and were calculated using the treasury stock
method. The numerator for each applicable basic and diluted calculation was
income before cumulative effect of a change in accounting and net income,
respectively.
Net income for the nine months ended June 30, 2001 included a charge of
$1.3 million, or $.05 per share, resulting from the cumulative effect of a
change in accounting for derivatives under SFAS 133. There was no comparable
charge in the current period.
6. Construction Fund and Long-Term Debt
The Company has $335 million in revolving credit agreements with
several banks. The New Jersey Resources Corporation portion of the facility
consists of $135 million with a 3-year term expiring January 2004, and the NJNG
portion of the facility consists of $100 million with a 364-day term and $100
million with a 3-year term expiring January 2004. The New Jersey Resources
Corporation facilities are used to finance its unregulated operations. New
Jersey Resources Corporation has also entered into a $10 million demand loan
agreement and a $15 million loan agreement with banks, both of which expire
December 31, 2002. The NJNG facility is used to support its commercial paper
borrowings. Consistent with management's intent to maintain a portion of its
commercial paper borrowings on a long-term basis, and as supported by its
long-term revolving credit facility, $50 million of commercial paper borrowings
is included in Long-term debt on the Consolidated Balance Sheet at June 30,
2002, September 30, 2001 and June 30, 2001.
In April 1998, NJNG entered into a loan agreement whereby the New
Jersey Economic Development Authority (EDA) loaned NJNG the proceeds from its
$18 million Natural Gas Facilities Revenue Bonds, Series 1998C, which were
deposited into a construction fund. NJNG may draw down these funds in
reimbursement for certain qualified expenditures. NJNG drew down the final $3.6
million of these funds in May 2002.
On June 24, 2002, NJNG filed an application with the EDA for approval
of $12 million of new funds to finance NJNG's northern division construction
over the next three years. On July 9, 2002, the application was approved.
8
On July 10, 2002, NJNG entered into $97.1 million of interest-rate caps
with several banks at a rate of 3.25 percent, expiring in July 2004. These caps
are designed to limit NJNG's variable rate debt exposure for all of its
outstanding EDA Bonds.
7. Segment Reporting
The Natural gas distribution segment consists of regulated energy and
off-system and capacity management operations. The Energy services segment
consists of unregulated fuel and capacity management and wholesale marketing
operations. The Retail and other segment consists of appliance service,
commercial real estate development, retail marketing, investment and other
corporate activities.
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
(Thousands)
Operating Revenues
Natural gas distribution $ 144,199 $ 140,216 $ 653,756 $ 885,820
Energy services 293,810 116,560 696,279 920,059
Retail and other 4,330 4,141 14,035 16,278
--------- --------- ----------- -----------
Subtotal 442,339 260,917 1,364,070 1,822,157
Intersegment revenues (30) (273) (150) (3,991)
--------- --------- ----------- -----------
Total $ 442,309 $ 260,644 $ 1,363,920 $ 1,818,166
========= ========= =========== ===========
Operating Income
Natural gas distribution $ 7,267 $ 7,522 $ 90,267 $ 91,796
Energy services 1,785 58 10,532 5,564
Retail and other 529 1,205 2,852 3,504
--------- --------- ----------- -----------
Total $ 9,581 $ 8,785 $ 103,651 $ 100,864
========= ========= =========== ===========
The Company's assets for the various business segments are detailed below:
As of As of As of
June 30, 2002 September 30, 2001 June 30, 2001
---------- ---------- ----------
(Thousands)
Assets
Natural gas distribution $1,032,101 $1,065,748 $1,060,937
Energy services 209,111 78,042 56,610
Retail and other 44,067 48,402 62,148
---------- ---------- ----------
Total $1,285,279 $1,192,192 $1,179,695
========== ========== ==========
9
8. Investments
Included in Equity investments on the Consolidated Balance Sheet is the
Company's less-than-1-percent ownership interest in the Capstone Turbine
Corporation (Capstone), a developer of microturbines, which completed its
initial public offering in June 2000. In July 2001, the Company entered into a
5-year zero-premium collar to hedge changes in the value of 100,000 shares of
its investment in Capstone. The collar consists of a purchased put option with a
strike price of $9.97 per share and a sold call option with a strike price of
$24.16 per share for 100,000 shares. The Company entered into this transaction
to hedge its anticipated sale of 100,000 shares of Capstone at the settlement
date in 2006 and, accordingly, accounts for the transaction as a cash flow
hedge. The change in Other comprehensive income for the nine months ended June
30, 2002, is a $252,000 unrealized gain related to this collar. Through June 30,
2002, Accumulated other comprehensive income includes a $704,000 unrealized gain
related to this collar. In July 2002, the Company sold all of its unhedged
Capstone shares and realized an after-tax loss of $449,000.
9. Comprehensive Income
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------ -------- -------- --------
(Thousands)
Net income $4,764 $ 4,312 $ 59,375 $ 55,051
------ -------- -------- --------
Other comprehensive income:
Change in fair value of equity investments, net $ 30 $ (1,175) $ (188) $ (9,774)
Change in fair value of derivatives, net 2,612 (15,318) (22,398) (5,660)
Cumulative effect of a change in accounting for
derivatives, net -- -- -- 20,530
------ -------- -------- --------
Total other comprehensive income $2,642 $(16,493) $(22,586) $ 5,096
------ -------- -------- --------
Comprehensive income $7,406 $(12,181) $ 36,789 $ 60,147
====== ======== ======== ========
Accumulated other comprehensive income, included in Stockholders equity
on the Consolidated Balance Sheets, was a negative $13 million at June 30, 2002,
$9.6 million at September 30, 2001 and $18.6 million at June 30, 2001.
10
10. Change in Accounting
Effective October 1, 2000, the Company adopted SFAS 133.
At October 1, 2000, the effect of adopting SFAS 133 was as follows:
(Thousands)
Increase/
(Decrease)
----------
Fair value of derivative assets $ 56,963
Fair value of derivative liabilities $ 17,657
Regulatory liability $ 6,834
Cumulative effect on net income from a change in
accounting, net $ (1,347)
Cumulative effect of a change in accounting for
derivatives in other comprehensive income, net $ 20,530
The cumulative effect on net income from a change in accounting
resulted from derivatives that do not qualify for hedge accounting.
The amounts included in Other comprehensive income, which relate to
natural gas instruments, will reduce or be charged to gas costs as the related
transaction occurs. Based on the amount recorded to Accumulated other
comprehensive income at June 30, 2002, $3.8 million is expected to be recorded
as an increase to gas costs in the fourth quarter of fiscal 2002. For the three
months ended June 30, 2002 and 2001, $1.5 million was credited and $7.8 million
was charged to gas costs, and for the nine months ended June 30, 2002 and 2001,
$32.8 million was credited and $7.5 million was charged to gas costs,
respectively.
The cash flow hedges described above cover various periods of time
ranging from July 2002 to October 2010.
11. Commitments and Contingent Liabilities
Energy Services has entered into a marketing and management agreement
for the Stagecoach storage project. Stagecoach is a 12 billion cubic feet (Bcf)
high-injection/high-withdrawal facility in New York State with interstate
pipeline connections to the Northeast markets, which received Federal Energy
Regulatory Commission (FERC) certification for full operations on June 27, 2002.
Energy Services is the exclusive agent for marketing Stagecoach
services for a 10-year period, subject to standard termination rights, ending
March 31, 2012. During this period, Energy Services has agreed to arrange
contracts for, or purchase at fixed prices, sufficient services to provide
Stagecoach with revenues of approximately $14 million for the period from July
1, 2002, to March 31, 2003, and $22 million annually from April 1, 2003, to
March 31, 2012. Stagecoach can require Energy Services to make the foregoing
purchases only if Stagecoach is capable of providing the underlying services. In
addition, Energy Services believes that the price at which it would be required
to purchase these services is
11
currently below market. Energy Services has reached 3-year agreements with third
parties for the purchase of over 50 percent of the required level of services
from Stagecoach. On August 8, 2002, NJNG, in connection with its system
requirements, was awarded 2-year agreements for Stagecoach storage and
transportation services. These agreements were awarded pursuant to an open bid
process. The NJNG agreements represent an additional 35 percent of the required
level of services for the 2-year period. Due to the price levels of the
potential purchase obligations to Energy Services, as compared with current
market prices, and the current and expected level of contracts, the Company does
not currently believe that the potential purchase obligation in the Stagecoach
agreement will result in any future losses.
Additionally, under the Stagecoach agreement, Energy Services is
required to provide to, and maintain at, the Stagecoach facility 2 Bcf of firm
base gas, and to manage up to 3 Bcf of interruptible base gas for the term of
the agreement.
As of June 30, 2002, NJNG has $97.1 million in stand-by letters of
credit (Letters of Credit) with several banks which provide liquidity support
for Natural Gas Facilities Refunding Revenue Bonds and Natural Gas Revenue Bonds
issued by the EDA for the benefit of NJNG's northern division construction
projects. The Letters of Credit have various expiration dates with the latest
expiring in January 2003. The Bond issues, which are recorded as Long-term debt
on the Consolidated Balance Sheet, are being remarketed on a weekly and daily
basis.
12. Other
At June 30, 2002, there were 26,892,771 shares of common stock
outstanding and the book value per share was $13.83.
Certain reclassifications have been made of previously reported amounts
to conform with current year classifications.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2002
A. RESULTS OF OPERATIONS
Consolidated net income for the quarter ended June 30, 2002 increased
11.6 percent to $4.8 million, compared with $4.3 million for the same period
last year. Basic EPS increased 12.5 percent to $.18, compared with $.16 last
year. Diluted EPS increased 6.3 percent to $.17, compared with $.16 last year.
Consolidated net income for the nine months ended June 30, 2002
increased 7.8 percent to $59.4 million, compared with $55.1 million for the same
period last year. Basic EPS increased 6.8 percent to $2.21, compared with $2.07
last year. Diluted EPS increased 6.3 percent to $2.19, compared with $2.06 last
year.
The increase in consolidated net income in both the three and nine
months ended June 30, 2002 was attributable primarily to continued profitable
customer growth at the Company's principal subsidiary, NJNG, higher results in
Energy Services and lower net interest charges, which more than offset the
impact of warm weather.
Consolidated net income for the nine months ended June 30, 2001
included a charge of $1.3 million, or $.05 per share, resulting from the
cumulative effect of a change in accounting for derivatives under SFAS 133.
There was no comparable charge in the current period.
NATURAL GAS DISTRIBUTION OPERATIONS
NJNG's financial results are summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Revenue $144,199 $140,216 $653,756 $885,820
======== ======== ======== ========
Gross margin
Residential and commercial sales $ 28,042 $ 29,401 $149,522 $148,458
Transportation 4,930 3,992 18,656 24,345
-------- -------- -------- --------
Total firm margin 32,972 33,393 168,178 172,803
Off-system and capacity management 886 1,100 3,762 4,583
Interruptible 237 226 659 586
-------- -------- -------- --------
Total gross margin $ 34,095 $ 34,719 $172,599 $177,972
======== ======== ======== ========
Operation and maintenance expense $ 18,400 $ 18,558 $ 57,136 $ 60,104
======== ======== ======== ========
Operating income $ 7,267 $ 7,522 $ 90,267 $ 91,796
======== ======== ======== ========
Other income $ 861 $ 1,957 $ 2,425 $ 3,294
======== ======== ======== ========
Cumulative effect of a change in
accounting -- -- -- $ 275
======== ======== ======== ========
Net income $ 3,062 $ 3,349 $ 51,415 $ 51,396
======== ======== ======== ========
13
Gross Margin
Gross margin is defined as gas revenues less gas costs, sales tax and a
Transitional Energy Facilities Assessment (TEFA). Gross margin provides a more
meaningful basis for evaluating utility operations since gas costs, sales tax
and TEFA are passed through to customers and, therefore, have no effect on
earnings. Gas costs are charged to operating expenses on the basis of therm
sales at the rates included in NJNG's tariff. The Levelized Gas Adjustment
Clause (LGA) allows NJNG to recover gas costs that exceed the level reflected in
its base rates. Sales tax is calculated at 6 percent of revenue and excludes
sales to other utilities, off-system sales and federal accounts. TEFA is
calculated on a per-therm basis and excludes sales to other utilities and
off-system sales.
Firm Margin
Residential and commercial gross margin is subject to a Weather
Normalization Clause (WNC), which provides for a revenue adjustment if the
weather varies by more than one-half of 1 percent from normal, or 20-year
average, weather. The WNC does not fully protect NJNG from factors such as
unusually warm weather and declines in customer usage patterns, which were set
at the conclusion of NJNG's last base rate case in January 1994. The accumulated
adjustment from one heating season (i.e., October through May) is billed or
credited to customers in subsequent periods. This mechanism reduces the
variability of both customer bills and NJNG's gross margin due to weather
fluctuations.
The components of gross margin from residential and commercial
customers are affected by customers switching between sales service and
transportation service. NJNG's total gross margin is not affected negatively by
customers who utilize its transportation service and purchase their gas from
another supplier because its tariff is designed such that no profit is earned on
the commodity portion of sales to firm customers. All customers who purchase gas
from another supplier continue to utilize NJNG for transportation service.
Total firm margin decreased $421,000, or 1.3 percent, and $4.6 million,
or 2.7 percent, for the three and nine months ended June 30, 2002, respectively,
compared with the same periods last year, due primarily to 21 percent warmer
weather as compared with the nine month period last year. This record warm
weather for the nine month period resulted in lower average customer usage,
which more than offset the impact of customer growth and the WNC.
The weather for the nine months ended June 30, 2002 was 17 percent
warmer than normal, which, in accordance with the WNC, resulted in the accrual
of $16.4 million of gross margin for recovery from NJNG's customers in the
future. At June 30, 2002, NJNG also had $857,000 in deferred WNC margin to be
credited to its customers through fiscal 2004 due to prior year's activity. NJNG
estimates that for the nine months ended June 30, 2002, the warm weather
resulted in $6.2 million of lost margin beyond the amount captured in the WNC.
Gross margin from sales to residential and commercial customers
decreased $1.4 million, or 4.6 percent, and increased $1.1 million, or less than
1 percent, for the three and nine months ended June 30, 2002, respectively,
compared with the same periods last year. The increase in gross margin for the
nine months ended June 30, 2002 was due primarily to the impact of 11,271
customer additions during the twelve months ended June 30, 2002, the impact of
the WNC, and firm transportation customers switching back to firm sales service,
which more than offset the decrease in sales due to the warm weather. Sales to
residential and commercial customers were 6.7 Bcf and 40.4 Bcf for the three and
nine months ended June 30, 2002, respectively, compared with 7.3 Bcf and 47.4
Bcf for the same periods last year.
14
Gross margin from transportation service increased $938,000, or 23 percent,
and decreased $5.7 million, or 23 percent, for the three and nine months ended
June 30, 2002, compared with the same periods last year. The decrease in margin
for the nine months ended June 30, 2002 was due primarily to customers switching
back to sales service. NJNG transported 1.2 Bcf and 6.3 Bcf for the three and
nine months ended June 30, 2002, respectively, compared with 0.7 Bcf and 8.6
Bcf, in the same periods last year.
NJNG had 10,879 and 17,252 residential customers and 5,127 and 3,127
commercial customers using transportation service at June 30, 2002 and 2001,
respectively. The decrease in the number of residential transportation customers
was due primarily to changes in market conditions, which resulted in customers
returning to sales service from transportation service. The increase in
commercial transportation customers was due primarily to an increase in marketer
activity during the third fiscal quarter.
Off-System and Capacity Management
To reduce the overall cost of its gas supply commitments, NJNG has entered
into contracts to sell gas to customers outside its franchise territory when the
gas is not needed for system requirements. These off-system sales enable NJNG to
spread its fixed demand costs, which are charged by pipelines to access their
supplies year round, over a larger and more diverse customer base. NJNG also
participates in the capacity release market on the interstate pipeline network
when the capacity is not needed for its firm system requirements. Effective
October 1, 1998, through December 31, 2002, NJNG retains 15 percent of the gross
margin from these sales, with 85 percent credited to firm customers through the
LGA.
An incentive mechanism designed to reduce the fixed cost of NJNG's gas
supply portfolio also became effective October 1, 1998. Any savings achieved
through the permanent reduction or replacement of capacity or other services is
shared between customers and shareowners. Under this program, NJNG retains 40
percent of the savings for the first 12 months following any transaction and
retains 15 percent for the remaining period through December 31, 2002, with 60
percent and 85 percent, respectively, credited to firm sales customers through
the LGA.
NJNG also has a Financial Risk Management (FRM) program, which is designed
to provide price stability to its system supply portfolio. The FRM program
includes an incentive mechanism designed to encourage the use of financial
instruments to hedge NJNG's gas costs, with an 80/20 percent sharing of the
costs and results between customers and shareowners, respectively, through
December 31, 2002.
NJNG has requested an extension of these incentives through December 31,
2004 (See Note 4b.-LGA and Other Adjustment Clauses). NJNG is currently
negotiating with the parties to the proceeding and has no reason to believe that
the incentives will not be extended on terms acceptable to NJNG.
NJNG's off-system sales, capacity management and FRM programs totaled 19.4
Bcf and generated $886,000 of gross margin, and 75.8 Bcf and $3.8 million of
gross margin, for the three and nine months ended June 30, 2002, respectively,
compared with 12.1 Bcf and $1.1 million of gross margin, and 66.7 Bcf and $4.6
million of gross margin for the respective periods last year. The decrease in
margin for the nine months was due primarily to lower results from the FRM
program.
15
Interruptible
NJNG serves 52 customers through interruptible sales and/or transportation
tariffs. Sales made under the interruptible sales tariff are priced on
market-sensitive oil and gas parity rates. Although therms sold and transported
to interruptible customers represented 5.7 percent and 5.9 percent of total
throughput for the nine months ended June 30, 2002 and 2001, respectively, they
accounted for less than 1 percent of the total gross margin in each period due
to the margin-sharing formulas that govern these sales. Under these formulas,
NJNG retains 10 percent of the gross margin from interruptible sales and 5
percent of the gross margin from transportation sales, with 90 percent and 95
percent, respectively, credited to firm sales customers through the LGA.
Interruptible sales were 0.6 Bcf and 0.8 Bcf for the nine months ended June 30,
2002 and 2001, respectively. In addition, NJNG transported 6.8 Bcf and 6.9 Bcf
for the nine months ended June 30, 2002 and 2001, respectively, for its
interruptible customers.
Operation & Maintenance (O&M) Expense
O&M expense decreased $158,000, or 1 percent, and $3 million, or 4.9
percent, for the three and nine months ended June 30, 2002, respectively,
compared with the same periods last year. The reduction in O&M expense was due
primarily to the benefits of an early retirement program initiated last year, a
reduction in bad debt expense associated with lower revenue, lower regulatory
rider expenses due to lower sales and general cost control efforts.
Operating Income
Operating income decreased $255,000, or 3.4 percent, and $1.5 million, or
1.7 percent, for the three and nine months ended June 30, 2002, respectively,
compared with the same periods last year. The decreases were due primarily to
the decrease in total gross margin described above, which was partially offset
by a reduction in O&M and depreciation expenses. The decrease in depreciation
expense was due primarily to components of NJNG's computer software becoming
fully depreciated. NJNG installed the software between 1995 and 1997 and
currently does not anticipate any significant capital expenditures to replace or
upgrade the software in the near future.
Net Income
Net income decreased $287,000, or 8.6 percent, and increased $19,000, or
less than 1 percent, for the three and nine months ended June 30, 2002,
respectively, compared with the same periods last year. The nine month increase
was due primarily to lower interest costs, resulting primarily from lower
interest rates, and increased recovery of carrying costs on deferred regulatory
assets, which is included in Other income (see Note 3. Capitalized and Deferred
Interest), more than offsetting the lower operating income.
Net income for the nine months ended June 30, 2001 included a charge of
$275,000 resulting from the cumulative effect of a change in accounting for
derivatives under SFAS 133. There was no comparable charge in the current
period.
16
ENERGY SERVICES OPERATIONS
Energy Services provides unregulated fuel and capacity management and
wholesale marketing services.
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(Thousands)
Revenues $ 293,810 $ 116,560 $ 696,279 $ 920,059
========= ========= ========= =========
Gross margin $ 2,840 $ 939 $ 13,585 $ 7,756
========= ========= ========= =========
Operating income $ 1,785 $ 58 $ 10,532 $ 5,564
========= ========= ========= =========
Other income $ 53 $ 129 $ 158 $ 605
========= ========= ========= =========
Cumulative effect of a change in
accounting -- -- -- $ (688)
========= ========= ========= =========
Net income $ 853 $ 661 $ 6,024 $ 3,766
========= ========= ========= =========
Energy Services' revenues increased for the three months ended and
decreased for the nine months ended June 30, 2002, compared to the same periods
last year. The increase in revenue for the three months ended June 30, 2002 was
due primarily to increased sales. The nine month decrease in revenue was due
primarily to significantly lower wholesale natural gas prices prevailing during
the first six months of the fiscal year. Energy Services' gross margin and
operating income increased for the three and nine months ended June 30, 2002,
compared with the same periods last year, as a result of higher margins from
pipeline and storage transactions and daily and term wholesale capacity and
commodity marketing. Net income for the nine months ended June 30, 2001 included
a charge of $688,000 resulting from the cumulative effect of a change in
accounting for derivatives under SFAS 133. There was no comparable charge in the
current period.
Energy deliveries totaled 82.2 Bcf and 230 Bcf for the three and nine
months ended June 30, 2002, respectively, compared with 24.6 Bcf and 139.3 Bcf
for the same periods last year. The increases were due primarily to additional
volumes from pipeline, storage and capacity transactions, and additional sales
to wholesale customers.
RETAIL AND OTHER OPERATIONS
Retail and other consists primarily of Home Services, which provides
appliance and installation services to approximately 131,000 customers, Natural
Energy, which has participated in the unregulated retail marketing of natural
gas, CR&R, which develops commercial real estate, and NJR Energy, which consists
primarily of equity investments in Capstone and the Iroquois Gas Transmission
System, L.P. (Iroquois). The consolidated financial results of Retail and other
are summarized as follows:
17
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Thousands)
Revenues $ 4,330 $ 4,141 $ 14,035 $ 16,278
======== ======== ======== ========
Other income $ 1,379 $ 199 $ 1,960 $ 1,092
======== ======== ======== ========
Cumulative effect of a change in accounting -- -- -- $ (384)
======== ======== ======== ========
Net income (loss) $ 849 $ 302 $ 1,936 $ (111)
======== ======== ======== ========
Retail and other revenues for the nine months ended June 30, 2002 decreased
compared with the same period last year due primarily to the expiration of
Natural Energy's residential contracts, which more than offset increased revenue
at Home Services. Revenue in Home Services increased due primarily to the
formation of the installation service business in July 2001 and price increases
on appliance service contracts. The increase in revenue for the three months
ended June 30, 2002, compared with the same period last year was due primarily
to improved results at Home Services. Other income for the three and nine months
ended June 30, 2002 increased compared with the same periods last year due
primarily to a $885,000 pre-tax gain associated with the sale of a
20,000-square-foot building by CR&R. This sale generated proceeds of $3.3
million.
Net income for the three and nine months ended June 30, 2002 increased
compared with the same periods last year due primarily to revenue growth and
cost containment efforts at Home Services and improved results from the
Company's equity investment in Iroquois. Last year's results included a charge
of $384,000 resulting from the cumulative effect of a change in accounting for
derivatives under SFAS 133. There was no comparable charge in the current
period.
In 1996, CR&R entered into a sale-leaseback transaction that generated a
pre-tax gain of $17.8 million, which is included in Deferred revenue and is
being amortized to Other income over the 25-year term of the lease. The primary
tenant of the facility, NJNG, is leasing the building under a long-term master
lease agreement and continues to occupy a majority of the space in the building.
B. LIQUIDITY AND CAPITAL RESOURCES
In order to meet the working capital and external debt financing
requirements of its unregulated subsidiaries, as well as its own working capital
needs, New Jersey Resources Corporation maintains committed credit facilities
with several banks totaling $160 million. At June 30, 2002, there was $137.3
million outstanding under these agreements. NJNG satisfies its debt needs by
issuing short- and long-term debt based upon its own financial profile. The
Company meets its common equity requirements, if any, through new issuances of
the Company's common stock, including the proceeds from its Automatic Dividend
Reinvestment Plan (DRP). The DRP also allows for the purchase of shares in the
open market to satisfy the plan's needs. The Company can switch funding options
every 90 days.
18
The following table is a summary of contractual cash obligations and their
applicable payment due dates.
Payments Due by Period
Less
than 1 1-3
Contractual Obligations Total Year Years 4-5 Years After 5 Years
---------- -------- -------- -------- --------
(Thousands)
Long-term debt $405,095 $ 35,000 $202,250 - $167,845
Capital lease obligations 50,062 1,825 6,401 $ 2,320 39,516
Operating leases 7,783 2,269 4,349 402 763
Commercial paper 4,200 4,200 - - -
Potential storage obligations 178,797 7,243 21,824 43,416 106,314
Gas supply purchase obligations 733,885 117,407 256,676 120,384 239,418
---------- -------- -------- -------- --------
Total contractual cash obligations $1,379,822 $167,944 $491,500 $166,522 $553,856
========== ======== ======== ======== ========
NJNG
The seasonal nature of NJNG's operations creates large short-term cash
requirements, primarily to finance gas purchases and customer accounts
receivable. NJNG obtains working capital for these requirements, as well as for
the temporary financing of construction expenditures, 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
maintains a committed credit facility totaling $200 million, consisting of $100
million with a 364-day term and $100 million with a 3-year term.
Remaining fiscal 2002 construction expenditures are estimated at $14
million. These expenditures will be incurred for services, mains and meters to
support NJNG's continued customer growth, and general system renewals and
improvements. In addition, NJNG incurred $18.9 million remediating its former
MGP sites during the nine months ended June 30, 2002, and estimates additional
expenditures of approximately $8.5 million, net of insurance recoveries, for the
remaining three months of fiscal 2002 (see Note 4c. - Manufactured Gas Plant
Remediation).
NJNG expects to finance these expenditures through internal generation and
the issuance of short-term debt. The timing and mix of these issuances will be
geared toward maintaining a common equity ratio of at least 50 percent, which is
consistent with maintaining its current short- and long-term credit ratings.
ENERGY SERVICES
Energy Services does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2002. Energy Services
meets its working capital requirements for storage inventories, margin
requirements and wholesale operations through loans from the Company. Such
requirements fluctuate based on inventory levels, positions held and natural gas
prices.
19
RETAIL AND OTHER
Retail and other does not currently expect any significant capital
expenditures or external financing requirements in fiscal 2002.
CRITICAL ACCOUNTING POLICIES
The following is a description of the most important accounting principles
generally accepted in the United States of America that are used by the Company.
Management exercises good judgment in selecting and applying accounting
principles. The consolidated financial statements of the Company include
estimates and actual results in the future may differ from such estimates. The
Company's Critical Accounting Policies are described below.
Regulatory Assets & Liabilities
The Company's largest subsidiary, NJNG, maintains its accounts in
accordance with the Uniform System of Accounts as prescribed by the BPU. As a
result of the ratemaking process, NJNG is required to follow Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS 71) and, as a result, the accounting
principles applied by NJNG differ in certain respects from those applied by
unregulated businesses. NJNG is required under SFAS 71 to record the impact of
regulatory decisions on its financial statements. NJNG's LGA requires it to
project its gas costs over the subsequent 12 months and recover the excess, if
any, of such projected costs over those included in its base rates through
levelized charges to customers. Any under- or over-recoveries are treated as a
Regulatory asset or liability and reflected in the LGA in subsequent years. NJNG
also enters into derivatives that are used to hedge gas purchases and the offset
to the resulting derivative assets or liabilities are recorded as a Regulatory
asset or liability.
In addition to the LGA, other regulatory assets include the remediation
costs associated with MGP sites, which are discussed below under Environmental
Items, and the WNC, which is discussed in the Natural gas distribution
operations segment of the MD&A. If there are changes in future regulatory
positions that indicate the recovery of such regulatory assets is not probable,
the related cost would be charged to income.
Energy Trading Activity
Derivative activities are recorded in accordance with SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS
133), under which the Company records the fair value of derivatives held as
assets and liabilities. The changes in the fair value of the effective portion
of derivatives qualifying as cash flow hedges are recorded, net of tax, in Other
comprehensive income, a component of Common stock equity. Under SFAS 133, the
Company also has certain derivative instruments that do not qualify as cash flow
hedges. The change in fair value of these derivatives is recorded in net income.
In addition, the changes in the fair value of the ineffective portion of
derivatives qualifying for hedge accounting are recorded as an increase or
decrease in gas costs or interest expense, as applicable, based on the nature of
the derivatives. The derivatives that NJNG utilizes to hedge its gas purchasing
activities are recoverable through its LGA. Accordingly, the offset to the
change in fair value of these derivatives is recorded as a Regulatory asset or
liability. The Company has not designated any derivatives as fair value hedges
as of June 30, 2002.
20
The fair value of derivative investments is determined by reference to
quoted market prices of listed contracts, published quotations or quotations
from independent parties. In the absence thereof, the Company utilizes
mathematical models based on current and historical data. The effect on earnings
of valuations from our mathematical models is immaterial.
In providing its unregulated fuel and capacity management and wholesale
marketing services, Energy Services enters into physical contracts to buy and
sell natural gas. These contracts qualify as normal purchases and sales under
SFAS 133 in that they provide for the purchase or sale of natural gas that will
be delivered in quantities expected to be used or sold by Energy Services over a
reasonable period in the normal course of business. Accordingly, Energy Services
accounts for these contracts under settlement accounting.
Environmental Items
NJNG periodically updates the environmental review of its MGP sites (see
Note 4c. - Manufactured Gas Plant Remediation), including a review of its
potential liability for investigation and remedial action, based on assistance
from an outside consulting firm. On the basis of such review, NJNG will estimate
expenditures to remediate and monitor these MGP sites, exclusive of any
insurance recoveries. NJNG's estimate of these liabilities are based upon
currently available facts, existing technology and presently enacted laws and
regulations. Where available information is sufficient to estimate the amount of
the liability, it is NJNG's policy to accrue the full amount of such estimate.
Where the information is sufficient only to establish a range of probable
liability and no point within the range is more likely than any other, it is
NJNG's policy to accrue the lower end of the range. Since NJNG expects to
recover these expenditures, as well as related litigation costs, through the
regulatory process, in accordance with SFAS 71, it has recorded a Regulatory
asset corresponding to the accrued liability, which is included in Other
deferred credits on the Consolidated Balance Sheet. The actual costs to be
incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries. If there are changes in future regulatory positions that
indicate the recovery of such regulatory asset is not probable, the related cost
would be charged to income. As of June 30, 2002, $91.2 million of previously
incurred and accrued remediation costs is included in Regulatory assets on the
Consolidated Balance Sheet.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL RISK MANAGEMENT
Commodity Market Risks
Natural gas is a nationally traded commodity, and its prices are determined
effectively by the New York Mercantile Exchange (NYMEX) and over-the-counter
markets. The prices on the NYMEX and over-the-counter markets generally reflect
the notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
The regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and
over-the-counter swap agreements. To manage these instruments, the Company has
well-defined risk management policies and procedures, which include daily
monitoring of volumetric limits and monetary guidelines. The Company's natural
gas businesses are conducted through three of its operating subsidiaries. First,
NJNG is a regulated utility whose recovery of gas costs is protected by the LGA,
which utilizes futures, options and swaps to hedge against price fluctuations.
Second, using futures and swaps, Energy Services hedges purchases and sales of
storage gas and transactions with wholesale customers. Finally, NJR Energy has
entered into several swap transactions to hedge an 18-year fixed-price contract
to sell approximately 20.9 Bcf of natural gas (Gas Sale Contract) to a gas
marketing company.
NJR Energy has hedged both its price and physical delivery risks associated
with the Gas Sale Contract. To hedge its price risk, NJR Energy entered into two
swap agreements effective November 1995. Under the terms of these swap
agreements, NJR Energy will pay to its swap counterparties the identical fixed
price it receives from the gas marketing company in exchange for the payment by
such swap counterparties of a floating price based on an index price plus a
spread per Mmbtu for the total volumes under the Gas Sale Contract. In order to
hedge its physical delivery risk, NJR Energy entered into a purchase contract
with a second gas marketing company for the identical volumes that it is
obligated to sell under the Gas Sale Contract, under which it pays the identical
floating price it receives under the swap agreements mentioned above.
The following table reflects the changes in the fair market value of
commodity derivatives from September 30, 2001 to June 30, 2002.
Balance Increase (Decrease) Less Balance
September 30, 2001 in Fair Market Value Amounts Settled June 30, 2002
--------- -------- -------- --------
(Thousands)
NJNG $(20,978) $ (20,028) $(29,592) $ (11,414)
Energy Services 15,355 (9,288) 33,490 (27,423)
NJR Energy (343) 5,175 (250) 5,082
--------- -------- -------- --------
Total $ (5,966) $(24,597) $ 3,648 $(33,755)
========= ======== ======== ========
22
There were no contracts originated and valued at fair market value and no
changes in methods of valuations during the nine months ended June 30, 2002.
The following is a summary of fair market value of commodity derivatives at
June 30, 2002, by method of valuation and by maturity.
Current Next Fiscal Next Three In Excess of Total
Fiscal Year Year Fiscal Years 5 years Fair Value
------- -------- ------- ----- --------
(Thousands)
Price based
on NYMEX $(8,070) $(27,570) $(9,537) $(852) $(46,029)
Price based on
over-the-counter
published quotations $222 $3,494 $8,135 $1,040 $12,891
Price based upon
models - $189 $187 $(993) $(617)
The following is a summary of commodity derivatives by type as of June 30,
2002:
Amounts included in
Volume Price per Derivatives
(Bcf) Mmbtu (Thousands)
- -------------------------------------------------------------------------------------------------------------
NJNG
Futures 0.5 $2.53 - 3.89 $(323)
Swaps 25.0 $(7,207)
Options 4.4 $3.00 - 10.00 $(3,884)
Energy Services
Futures 2.7 $2.40 - 4.63 $(28,663)
Swaps 25.0 $1,240
NJR Energy
Swaps 21.3 $5,082
The Company uses a value-at-risk (VAR) model to assess the market risk of
its net futures, swaps and options positions. The VAR at June 30, 2002, using
the variance-covariance method with a 95 percent confidence level and a one-day
holding period, was $209,000. The calculated VAR represents an estimate of the
potential change in the value of the net positions. These estimates may not be
indicative of actual results since actual market fluctuations may differ from
forecasted fluctuations.
23
Interest Rate Risk - Long-Term Debt
As of June 30, 2002, the Company (excluding NJNG) had variable rate debt of
$137.3 million. According to the Company's sensitivity analysis, if interest
rates were to change by 1 percent, annual interest expense, net of tax, would
change by $810,000.
At June 30, 2002, NJNG had total variable-rate debt outstanding of $147
million, of which $97.1 million has been hedged by the purchase of a
3.25-percent interest-rate cap through July 2004. According to the Company's
sensitivity analysis, at June 30, 2002, NJNG's annual interest rate exposure on
the $97.1 million, based on the difference between current average rates and the
3.25 percent interest-rate cap, is limited to $140,000, net of tax. If interest
rates were to change by 1 percent on the remaining $50 million of variable rate
debt at June 30, 2002, NJNG's annual interest expense, net of tax, would change
by $295,000.
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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report including, without
limitation, those with respect to expected disposition of legal and regulatory
proceedings, exposure under the Stagecoach agreement, a need to replace or
upgrade NJNG's computer software, expected capital expenditures, external
financing requirements, the impact of changes in market rates of interest and
the impact of changes in market prices of commodities are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements can also be identified by the use of
forward-looking terminology such as "may," "intend," "expect," "continue," or
comparable terminology and are made based upon management's expectations and
beliefs concerning future developments and their potential effect upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management.
The Company wishes to caution readers that the assumptions that form the
basis for forward-looking statements with respect to, or that may impact
earnings for, fiscal 2002 and thereafter include many factors that are beyond
the Company's ability to control or estimate precisely, such as estimates of
future market conditions, the behavior of other market participants and changes
in interest rates. Among the factors that could cause actual results to differ
materially from estimates reflected in such forward-looking statements are
weather conditions and economic conditions, demographic changes in NJNG's
service territory, fluctuations in energy commodity prices, energy conversion
activity and other marketing efforts, the conservation efforts of NJNG's
customers, the pace of deregulation of retail gas markets, competition for the
acquisition of gas, regulatory decisions made by the BPU, the regulatory and
pricing policies of federal and state regulatory agencies, changes due to
legislation at the federal and state levels, the availability of Canadian
reserves for export to the United States and other regulatory changes.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not, by including this statement, assume any
obligation to review or revise any particular forward-looking statement
referenced herein in light of future events.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Information required by this Item is incorporated herein by reference
to Part I, Item 1, Note 5 - Legal and Regulatory Proceedings.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4-1 Amended and Restated Syndicated credit agreement, dated
January 4, 2002, among NJNG, PNC Bank and other parties named
therein.
4-2 Demand Loan Agreement dated May 27, 2002, between New Jersey
Resources Corporation and Citizens Bank of Massachusetts.
4-3 Demand Loan Agreement dated August 1, 2002, between New Jersey
Resources Corporation and Wachovia Securities.
99-1 Statement, dated August 12, 2002, of the principal executive
officer, and principal financial officer of the Company
regarding facts and circumstances relating to the Company's
filings under the Securities Exchange Act of 1934.
(b) Reports on Form 8-K
On May 6, 2002, a report on Form 8-K was filed by the Company
furnishing under Item 9 information disclosed pursuant to Regulation FD.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW JERSEY RESOURCES CORPORATION
Date: August 12, 2002 /s/ Glenn C. Lockwood
---------------------------
Glenn C. Lockwood
Senior Vice President
and Chief Financial Officer
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