Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - NEW JERSEY RESOURCES CORP | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - NEW JERSEY RESOURCES CORP | ex31_1.htm |
EX-32.1 - EXHIBIT 32.1 - NEW JERSEY RESOURCES CORP | ex32_1.htm |
EX-32.2 - EXHIBIT 32.2 - NEW JERSEY RESOURCES CORP | ex32_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009
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 001-8359
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes:
o 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 4,
2009, was 42,014,773.
EXPLANATORY
NOTE
Overview
New Jersey Resources Corporation (the
“Company”) is filing this Amendment No. 1 on Form 10-Q/A to our
quarterly report on Form 10-Q for the quarter ended June 30, 2009, originally
filed on August 5, 2009, to amend and restate our unaudited condensed
consolidated financial statements for the three and nine month periods ended
June 30, 2009 and 2008 and for the
condensed consolidated balance sheets as of
June 30, 2009 and September 30, 2008 to correct an error related to the
accounting for park and loan transactions executed through the Company’s
unregulated subsidiary, NJR Energy Services (NJRES).
Restatement
NJRES
enters into park and loan transactions whereby it borrows natural gas from a
counterparty with an obligation to return the gas at a future date. In the
fourth quarter of fiscal 2009, management discovered an error in the accounting
for gas in storage, purchase obligations, embedded derivatives and gas demand
fees associated with these transactions. Specifically, NJR had been using a
forward price to value the inventory and gas purchases liability. Both the
natural gas that was received and the “park and loan” liability should have been
initially valued at the spot price on the date NJRES received the gas. In
addition, NJRES should have been accounting for the obligation to return the gas
as an embedded derivative, which should have been fair valued (“marked to
market”) at each subsequent balance sheet reporting date until the gas was
returned to the counterparty. As well, the initial spread between the spot price
of the borrowed gas liability on the date of the transaction and the forward
price, based on the date NJRES would return the natural gas, should have been
recognized into income on a ratable basis over the term of the park and loan
agreement. In addition, demand fees related to these transactions
were not but should have been recognized ratably over the term of the
contract.
These
errors, while impacting our reported results in accordance with generally
accepted accounting principles (“GAAP”), have no impact on our Non-GAAP measure
of Net Financial Earnings (“NFE”), which excludes the impact of unrealized
derivative gains and losses, effects of economic hedging related to inventory
and demand fees related to park and loan transactions. As discussed in the
MD&A, NFE is the key financial metric by which we measure the profitability
of the Company.
The
Company is also filing amended Quarterly Reports on Form 10-Q/A for the quarters
ended, December 31, 2008 and March 31, 2009 to correct the errors described
above.
The
Company originally filed its Form 10-Q with the Securities and Exchange
Commission on August 5, 2009, and therefore, had initially evaluated subsequent
events through that date. All of the information in this Form 10-Q/A
is as of November 24 2009 and management has determined that there are no other
subsequent events to be reported other than the restatement discussed in Note 2
to the Consolidated Financial Statements appearing in this Form 10-Q/A. For the
convenience of the reader, this Form 10-Q/A sets forth the originally filed Form
10-Q in its entirety. However, the following items have been amended solely as a
result of, and to reflect, the restatement, and no other information in the Form
10-Q/A is amended hereby as a result of the restatement:
|
·
|
Part I, Item 1 - Financial
Statements
|
|
·
|
Part I, Item 2 - Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
·
|
Part
I, Item 4 - Controls and Procedures
|
|
·
|
Part
II — Item 6. Exhibits.
|
In the
Quarterly Reports on Form 10-Q as previously filed, the Company reported under
Item 4 “Controls and Procedures,” that its disclosure controls and procedures
were not effective due to a material weakness in internal control over financial
reporting. Management, in consultation with the Audit Committee, has
concluded that the errors set forth herein constituted a material weakness in
the Company’s internal controls over financial reporting as of the date of the
original filing, which has since been remediated. The revised
assessment is included under Part II, Item 4 in this document.
The
Company is including currently dated Sarbanes-Oxley Act Section 302 and Section
906 certifications of the Chief Executive Officer and Chief Financial Officer
that are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and
32.2.
This Form
10-Q/A amends or updates any other information set forth in the Form 10-Q
including updated disclosures contained therein as applicable to reflect any
events that occurred at a date subsequent to the filing of the originally filed
Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our
filings made with the Securities and Exchange Commission subsequent to the
filing of the original Form 10-Q, including any amendments to those
filings.
New
Jersey Resources Corporation
Page
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1
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PART
I – FINANCIAL INFORMATION
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|||||
ITEM
1.
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2
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7
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7
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9
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12
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16
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28
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30
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30
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ITEM
2.
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30
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ITEM
3.
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53
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ITEM
4.
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56
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PART
II – OTHER INFORMATION
|
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ITEM
1.
|
58
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ITEM
1A.
|
58
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ITEM
2.
|
58
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ITEM
6.
|
59
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60
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INFORMATION
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 2009 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 Part II, 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, cash
flow, 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
|
continued
volatility or seizure of the credit markets that would result in the
decreased availability and access to credit at NJR to fund and support
physical gas inventory purchases and other working capital needs at NJRES,
and all other non-regulated subsidiaries, as well as negatively affect
access to the commercial paper market and other short-term financing
markets at NJNG to allow it to fund its commodity purchases and meet its
short-term obligations as they come
due;
|
Ÿ
|
the
impact to the asset values and resulting higher costs and funding
obligations of NJR’s pension and postemployment benefit plans as a result
of declines in the financial
markets;
|
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
|
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, including the possible
expiration of the Conservation Incentive Program
(CIP);
|
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.
ITEM
1. FINANCIAL
STATEMENTS
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands,
except per share data)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
|||||||||||||
OPERATING
REVENUES
|
$ | 441,052 | $ | 1,000,439 | $ | 2,179,872 | $ | 2,989,122 | ||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Gas
purchases
|
400,487 | 974,677 | 1,859,495 | 2,716,761 | ||||||||||||
Operation
and maintenance
|
38,436 | 34,187 | 112,209 | 100,971 | ||||||||||||
Regulatory
rider expenses
|
6,280 | 5,925 | 40,585 | 35,879 | ||||||||||||
Depreciation
and amortization
|
7,880 | 9,680 | 22,749 | 28,600 | ||||||||||||
Energy
and other taxes
|
11,739 | 10,711 | 67,353 | 58,245 | ||||||||||||
Total
operating expenses
|
464,822 | 1,035,180 | 2,102,391 | 2,940,456 | ||||||||||||
OPERATING
(LOSS) INCOME
|
(23,770 | ) | (34,741 | ) | 77,481 | 48,666 | ||||||||||
Other
income
|
1,179 | 237 | 3,095 | 3,305 | ||||||||||||
Interest
expense, net of capitalized interest
|
5,187 | 5,182 | 15,953 | 19,684 | ||||||||||||
(LOSS)
INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF
AFFILIATES
|
(27,778 | ) | (39,686 | ) | 64,623 | 32,287 | ||||||||||
Income
tax (benefit) provision
|
(12,146 | ) | (14,379 | ) | 21,296 | 11,015 | ||||||||||
Equity
in earnings of affiliates, net of tax
|
1,477 | 378 | 2,778 | 1,548 | ||||||||||||
NET
(LOSS) INCOME
|
$ | (14,155 | ) | $ | (24,929 | ) | $ | 46,105 | $ | 22,820 | ||||||
(LOSS)
EARNINGS PER COMMON SHARE
|
||||||||||||||||
BASIC
|
$ | (0.34 | ) | $ | (0.59 | ) | $ | 1.09 | $ | 0.55 | ||||||
DILUTED
|
$ | (0.34 | ) | $ | (0.59 | ) | $ | 1.08 | $ | 0.54 | ||||||
DIVIDENDS
PER COMMON SHARE
|
$ | 0.31 | $ | 0.28 | $ | 0.93 | $ | 0.83 | ||||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||||||
BASIC
|
42,049 | 41,949 | 42,175 | 41,822 | ||||||||||||
DILUTED
|
42,049 | 41,949 | 42,547 | 42,037 |
See Notes
to Unaudited Condensed Consolidated Financial Statements
ITEM
1. FINANCIAL STATEMENTS (Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine
Months Ended
June
30,
|
||||||||
(Thousands)
|
2009
|
2008
|
||||||
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 46,105 | $ | 22,820 | ||||
Adjustments
to reconcile net income to cash flows from operating
activities:
|
||||||||
Unrealized
loss on derivative instruments
|
65,160 | 84,498 | ||||||
Depreciation
and amortization
|
23,417 | 29,369 | ||||||
Allowance
for funds (equity) used during construction
|
(233 | ) | — | |||||
Allowance
for bad debt expense
|
5,015 | 3,104 | ||||||
Deferred
income taxes
|
12,732 | (10 | ) | |||||
Manufactured
gas plant remediation costs
|
(12,280 | ) | (13,263 | ) | ||||
Equity
in earnings from investments, net of distributions
|
3,858 | 388 | ||||||
Cost
of removal – asset retirement obligations
|
(508 | ) | (888 | ) | ||||
Contributions
to employee benefit plans
|
(1,768 | ) | (521 | ) | ||||
Changes
in:
|
||||||||
Components
of working capital
|
243,048 | (25,561 | ) | |||||
Other
noncurrent assets
|
(23,611 | ) | 17,596 | |||||
Other
noncurrent liabilities
|
(10,251 | ) | 26,763 | |||||
Cash
flows from operating activities
|
350,684 | 144,295 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Expenditures
for:
|
||||||||
Utility
plant
|
(51,169 | ) | (51,472 | ) | ||||
Real
estate properties and other
|
(356 | ) | (888 | ) | ||||
Cost
of removal
|
(4,014 | ) | (5,775 | ) | ||||
Investments
in equity investees
|
(41,343 | ) | (16,595 | ) | ||||
Release
from restricted cash construction fund
|
4,200 | — | ||||||
Cash
flows used in investing activities
|
(92,682 | ) | (74,730 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from issuance of common stock
|
13,327 | 13,072 | ||||||
Proceeds
from long-term debt
|
— | 125,000 | ||||||
Tax
benefit from stock options exercised
|
993 | 677 | ||||||
Proceeds
from sale-leaseback transaction
|
6,268 | 7,485 | ||||||
Payments
of long-term debt
|
(58,860 | ) | (3,977 | ) | ||||
Purchases
of treasury stock
|
(17,757 | ) | (11,040 | ) | ||||
Payments
of common stock dividends
|
(37,977 | ) | (33,451 | ) | ||||
Net
payments from short-term debt
|
(129,600 | ) | (146,579 | ) | ||||
Cash
flows used in financing activities
|
(223,606 | ) | (48,813 | ) | ||||
Change
in cash and temporary investments
|
34,396 | 20,752 | ||||||
Cash
and temporary investments at beginning of period
|
42,626 | 5,140 | ||||||
Cash
and temporary investments at end of period
|
$ | 77,022 | $ | 25,892 | ||||
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
||||||||
Receivables
|
$ | 97,642 | $ | (214,552 | ) | |||
Inventories
|
260,883 | 37,233, | ||||||
Recovery
of gas costs
|
58,836 | (18,037 | ) | |||||
Gas
purchases payable
|
(144,528 | ) | 246,495 | |||||
Prepaid
and accrued taxes
|
37,792 | 21,075 | ||||||
Accounts
payable and other
|
2,271 | (8,871 | ) | |||||
Restricted
broker margin accounts
|
(27,814 | ) | (73,016 | ) | ||||
Customers’
credit balances and deposits
|
(43,162 | ) | (11,632 | ) | ||||
Other
current assets
|
1,128 | (4,256 | ) | |||||
Total
|
$ | 243,048 | $ | (25,561 | ) | |||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
||||||||
Cash
paid for:
|
||||||||
Interest
(net of amounts capitalized)
|
$ | 13,498 | $ | 17,972 | ||||
Income
taxes
|
$ | 12,685 | $ | 25,477 |
See Notes
to Unaudited Condensed Consolidated Financial Statements
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
June
30,
|
September
30,
|
|||||||
(Thousands)
|
2009
|
2008
|
||||||
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
|||||||
PROPERTY,
PLANT AND EQUIPMENT
|
||||||||
Utility
plant, at cost
|
$ | 1,418,320 | $ | 1,366,237 | ||||
Real
estate properties and other, at cost
|
30,163 | 29,808 | ||||||
1,448,483 | 1,396,045 | |||||||
Accumulated
depreciation and amortization
|
(399,005 | ) | (378,759 | ) | ||||
Property,
plant and equipment, net
|
1,049,478 | 1,017,286 | ||||||
CURRENT
ASSETS
|
||||||||
Cash
and temporary investments
|
77,022 | 42,626 | ||||||
Customer
accounts receivable
|
||||||||
Billed
|
126,128 | 227,132 | ||||||
Unbilled
revenues
|
9,739 | 9,417 | ||||||
Allowance
for doubtful accounts
|
(6,555 | ) | (4,580 | ) | ||||
Regulatory
assets
|
6,318 | 51,376 | ||||||
Gas
in storage, at average cost
|
206,413 | 467,537 | ||||||
Materials
and supplies, at average cost
|
5,351 | 5,110 | ||||||
Prepaid
state taxes
|
35,660 | 37,271 | ||||||
Derivatives,
at fair value
|
164,560 | 227,224 | ||||||
Restricted
broker margin accounts
|
49,204 | 41,277 | ||||||
Deferred
taxes
|
17,882 | — | ||||||
Other
|
30,990 | 15,181 | ||||||
Total
current assets
|
722,712 | 1,119,571 | ||||||
NONCURRENT
ASSETS
|
||||||||
Investments
in equity investees
|
156,311 | 115,981 | ||||||
Regulatory
assets
|
359,876 | 340,670 | ||||||
Derivatives,
at fair value
|
13,345 | 24,497 | ||||||
Restricted
cash construction fund
|
— | 4,200 | ||||||
Other
|
11,577 | 13,092 | ||||||
Total
noncurrent assets
|
541,109 | 498,440 | ||||||
Total
assets
|
$ | 2,313,299 | $ | 2,635,297 |
See Notes
to Unaudited Condensed Consolidated Financial Statements
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
CAPITALIZATION
AND LIABILITIES
June
30,
|
September
30,
|
|||||||
(Thousands)
|
2009
|
2008
|
||||||
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
|||||||
CAPITALIZATION
|
||||||||
Common
stock equity
|
$ | 735,496 | $ | 728,068 | ||||
Long-term
debt
|
457,671 | 455,117 | ||||||
Total
capitalization
|
1,193,167 | 1,183,185 | ||||||
CURRENT
LIABILITIES
|
||||||||
Current
maturities of long-term debt
|
5,995 | 60,119 | ||||||
Short-term
debt
|
48,600 | 178,200 | ||||||
Gas
purchases payable
|
179,072 | 323,600 | ||||||
Accounts
payable and other
|
49,229 | 61,735 | ||||||
Dividends
payable
|
13,004 | 11,776 | ||||||
Deferred
and accrued taxes
|
47,088 | 24,720 | ||||||
Regulatory
liabilities
|
30,842 | — | ||||||
New
Jersey clean energy program
|
10,805 | 3,056 | ||||||
Derivatives,
at fair value
|
151,365 | 146,320 | ||||||
Restricted
broker margin accounts
|
9,185 | 29,072 | ||||||
Customers’
credit balances and deposits
|
20,294 | 63,455 | ||||||
Total
current liabilities
|
565,479 | 902,053 | ||||||
NONCURRENT
LIABILITIES
|
||||||||
Deferred
income taxes
|
233,598 | 240,414 | ||||||
Deferred
investment tax credits
|
6,951 | 7,192 | ||||||
Deferred
revenue
|
7,828 | 9,090 | ||||||
Derivatives,
at fair value
|
9,000 | 25,016 | ||||||
Manufactured
gas plant remediation
|
120,230 | 120,730 | ||||||
Postemployment
employee benefit liability
|
55,795 | 52,272 | ||||||
Regulatory
liabilities
|
58,634 | 63,419 | ||||||
New
Jersey clean energy program
|
29,155 | — | ||||||
Asset
retirement obligation
|
25,021 | 24,416 | ||||||
Other
|
8,441 | 7,510 | ||||||
Total
noncurrent liabilities
|
554,653 | 550,059 | ||||||
Commitments
and contingent liabilities (Note 14)
|
||||||||
Total
capitalization and liabilities
|
$ | 2,313,299 | $ | 2,635,297 |
See Notes
to Unaudited Condensed Consolidated Financial Statements
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
As
Restated
(See
Note 2)
|
|||||||||||||
Net
(loss) income
|
$ | (14,155 | ) | $ | (24,929 | ) | $ | 46,105 | $ | 22,820 | ||||||
Other
comprehensive (loss) income
|
||||||||||||||||
Unrealized
(loss) gain on available for sale securities, net of tax of $10, $(206),
$74 and $(235), respectively
(1)
|
(14 | ) | 296 | (106 | ) | 336 | ||||||||||
Net
unrealized (loss) on derivatives, net of tax of $16, $3, $50 and $64,
respectively
|
(23 | ) | (42 | ) | (71 | ) | (92 | ) | ||||||||
Other
comprehensive income
|
(37 | ) | 254 | (177 | ) | 244 | ||||||||||
Comprehensive
income
|
$ | (14,192 | ) | $ | (24,675 | ) | $ | 45,928 | $ | 23,064 |
|
(1)
|
Available
for sale securities are included in Investments in equity investees in the
Unaudited Condensed Consolidated Balance
Sheets.
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
GENERAL
|
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, 2008 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 2008 Annual Report on Form 10-K.
The
unaudited condensed consolidated financial statements include the accounts of
NJR and its subsidiaries, New Jersey Natural Gas Company (NJNG), NJR Energy
Services Company (NJRES), NJR Retail Holdings Corporation (Retail Holdings), NJR
Energy Investment Corporation (NJREI) and NJR Service Company (NJR Service).
Intercompany transactions and accounts have been eliminated. NJREI’s primary
subsidiaries are NJR Energy Corporation (NJR Energy) and NJR Steckman Ridge
Storage Company. NJR Energy invests primarily in energy-related ventures through
its subsidiary, NJNR Pipeline Company (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 Pennsylvania. Retail Holdings’ two
principal subsidiaries are NJR Home Services Company (NJRHS) and Commercial
Realty & Resources Corporation (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. These adjustments are of a
normal and recurring nature. 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 ended September 30,
2009.
Subsequent
Events
The
Company evaluates subsequent events through the date it issues its financial
statements. Accordingly, for the period ended June 30, 2009, events occurring
between June 30, 2009 and November 24, 2009, have been reviewed to determine
appropriate recognition and disclosures. See Note 3, Regulation, for
subsequent events disclosures.
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of:
June
30,
|
September
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
||||||||||||||
NJNG
|
$ | 11,211 | 9 | % | $ | 21,398 | 9 | % | ||||||||
NJRES
|
106,431 | 84 | 198,902 | 88 | ||||||||||||
NJRHS
and other
|
8,486 | 7 | 6,832 | 3 | ||||||||||||
Total
|
$ | 126,128 | 100 | % | $ | 227,132 | 100 | % |
Accounts
receivable decreased during the nine months ended June 30, 2009, due primarily
to the impact of lower commodity prices on NJRES’ receivables.
Gas
in Storage
The
following table summarizes Gas in storage by company as of:
June
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
|||||||||||||||
($
in thousands)
|
Assets
|
Bcf
|
Assets
|
Bcf
|
||||||||||||
NJNG
|
$ | 113,480 | 14.2 | $ | 189,828 | 22.1 | ||||||||||
NJRES
|
92,933 | 28.1 | 277,709 | 27.6 | ||||||||||||
Total
|
$ | 206,413 | 42.3 | $ | 467,537 | 49.7 |
Gas in
storage decreased during the nine months ended June 30, 2009, due primarily to
the seasonal reduction in volumes at NJNG and lower cost of inventory purchases
at NJRES stemming from a decline in commodity prices.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
New
Accounting Standards
Recently
Adopted
On April
10, 2007, the FASB issued FASB Staff Position (FSP) 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 values of 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 became
effective for fiscal years beginning after November 15, 2007. As NJR’s policy
has been to present its derivative positions and any receivables or payables
with the same counterparty on a gross basis, FSP FIN 39-1 had no impact on its
statement of financial position or results of operations.
Effective
October 1, 2008 NJR adopted Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value
Measurements (SFAS 157) for its financial assets and liabilities, with
the exception of its pension assets. On October, 1, 2009, in accordance with
SFAS 157-2, NJR will prospectively apply the provisions of SFAS 157 to its
non-financial assets and liabilities that are not measured at least annually. In
addition, the provisions of SFAS 157 will be applied to NJR’s annual pension
disclosures in accordance with FASB Staff Position (FSP) No. FAS 132(R)-1 (FSP
132(R)-1), Employers’
Disclosures about Pensions and Other Postretirement Benefits, beginning
in fiscal 2010.
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 market and unobservable data that is used
to develop pricing assumptions. The adoption of SFAS 157 did not have a material
impact on NJR’s financial position or results of operations. See Note 5, Fair Value, for more
information on the adoption of SFAS 157, as well as the required
disclosures.
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
impacts on the financial statements. NJR adopted SFAS 161 effective January 1,
2009. As SFAS 161 provisions only require additional disclosures, there was no
impact to NJR’s statement of financial position or results of operations upon
adoption. See Note 4
Derivative Instruments for a description of NJR’s derivative activities,
including the additional disclosures required by SFAS 161.
On April
9, 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Values of Financial Instruments, which amends SFAS 107, Disclosures about Fair Values of
Financial Instruments, and requires that companies also disclose the fair
value of financial instruments during interim reporting similar to those that
are currently provided annually. NJR adopted the provisions of FSP No. FAS 107-1
and APB 28-1 effective June 30, 2009. As it is a disclosure only standard, it
had no impact on the Company’s statement of financial position or results of
operations. See Note 5, Fair
Value, for more information on the required disclosures.
In April
2009, the FASB issued FSP FAS 157-4 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. The FSP
provides additional guidance for estimating fair value in accordance with SFAS
157 when the volume and level of activity for the asset or liability have
significantly decreased. In addition, it includes guidance on identifying
circumstances that indicate a transaction is not orderly. The FSP became
effective for interim and annual reporting periods ending after June 15, 2009.
There was no impact to NJR’s statement of financial position or results of
operations as a result of the adoption of the FSP.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of
Other-Than-Temporary Impairments. The FSP improves presentation and
disclosures in financial statements for other-than-temporary impairments of debt
and equity securities and expands on the factors companies should consider when
evaluating debt securities for other-than-temporary impairments. The FSP is
effective for interim and annual reporting periods ending after June 15, 2009.
There was no impact to NJR’s statement of financial position or results of
operations as a result of NJR’s adoption of the FSP.
In May
2009, the FASB issued SFAS 165, Subsequent Events. SFAS 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued, including the date through which financial
statements may be reissued. In addition, SFAS 165 includes a new required
disclosure of the date through which an entity has evaluated subsequent events.
As SFAS 165 is effective for interim or annual periods ending after June 15,
2009, NJR adopted its provisions effective June 30, 2009. There was no impact to
NJR’s statement of financial position or results of operations as a result of
the adoption.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Other
Recently Issued Standards
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to elect
to measure eligible items at fair value as an alternative to hedge accounting
and to mitigate volatility in earnings. A company can either elect the fair
value option according to a pre-existing policy, when the asset or liability is
first recognized or when it enters into an eligible firm commitment. Changes in
the fair value of assets and liabilities that the company chooses to apply the
fair value option to, are reported in earnings at each reporting date. SFAS 159
also provides guidance on disclosures that are intended to provide comparability
to other companies’ assets and liabilities that have different measurement
attributes and to other companies with similar financial assets and liabilities.
SFAS 159 became effective for NJR as of October 1, 2008; however, since the
Company did not elect the fair value option for any items, the provisions of
SFAS 159 do not impact its statement of financial position or results of
operations.
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 has concluded that this statement will have
no impact on its statement of financial position or results of
operations.
On
December 30, 2008, the FASB issued FSP 132(R)-1, which requires additional
disclosures surrounding postretirement benefit plan assets. Specifically, the
objective of FSP 132(R)-1 is to provide users of financial statements
information related to a company’s plan assets, investment policies and
strategies and significant concentrations of risk. In addition, certain
disclosure provisions from FAS 157 will be applied, including those related to
inputs and valuation techniques that are used to measure plan assets and the
effect of level three measurements on changes in plan assets. FSP 132(R)-1 is
effective for fiscal years ending after December 15, 2009. As it is a disclosure
only standard, it will have no impact on the Company’s statement of financial
position or results of operations.
In June
2009, the FASB issued SFAS No. 167 (SFAS 167), Amendments to FASB Interpretation
No. 46 (R) (FIN 46(R)), which will eliminate the quantitative assessments
currently in practice under FIN 46 (R), and instead will require qualitative
assessments to determine whether a company has a controlling financial interest
in a variable interest entity (VIE) and, therefore, would be deemed the primary
beneficiary, resulting in consolidation of the VIE’s operating results. In
addition, SFAS 167 requires ongoing reassessments, rather than limiting the
reassessments to when certain triggering events occur, and additional
disclosures that are intended to provide information on a company’s involvement
with VIE’s. SFAS 167 is effective at the beginning of a company’s annual
reporting period that begins after November 15, 2009, including interim
reporting periods within the first annual reporting period, and thereafter. The
Company will adopt the provisions of the statement prospectively during its
first quarter of fiscal 2011 and is evaluating the effect on its financial
position and results of operations.
In June
2009, the FASB issued SFAS No. 168 (SFAS 168), The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, as a replacement to SFAS 162. SFAS 168 establishes the FASB Accounting Standards
Codification (Codification) as the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities and clarifies that once the Codification takes effect,
the GAAP hierarchy will include only two levels of GAAP: authoritative and
nonauthoritative. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. There will be no
impact to NJR’s financial statements upon adoption, however, certain disclosures
surrounding GAAP guidance will be modified to reflect the appropriate references
to the Codification.
RESTATEMENT OF UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
NJRES
enters into park and loan transactions whereby it borrows natural gas from a
counterparty with an obligation to return the gas at a future date. In the
fourth quarter of fiscal 2009, management discovered an error in the accounting
for gas in storage, purchase obligations, embedded derivatives and gas demand
fees associated with these transactions. The impact of the errors was limited to
NJRES. Specifically, NJR had been using a forward price to value the inventory
and gas purchases liability. Both the natural gas that was received and the
“park and loan” liability should have been initially valued at the spot price on
the date NJRES received the gas. In addition, NJRES should have been accounting
for the obligation to return the gas as an embedded derivative,
which should have been fair valued (“marked to market”) at each subsequent
balance sheet reporting date until the gas was returned to the counterparty. As
well, the initial spread between the spot price of the borrowed gas liability on
the date of the transaction and the forward price, based on the date NJRES would
return the natural gas, should have been recognized into income on a ratable
basis over the term of the park and loan agreement. In addition,
demand fees related to these transactions were not but should have been
recognized ratably over the term of the contract.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
These
errors, while impacting our reported GAAP results, have no impact on our
Non-GAAP measure of Net Financial Earnings (“NFE”), which excludes the impact of
unrealized derivative gains and losses, effects of economic hedging related to
inventory and demand fees related to park and loan transactions. As discussed in
the MD&A, NFE is the key financial metric by which we measure the
profitability of the Company.
To
correct this accounting error, the Company is restating, herein, the unaudited
condensed consolidated financial statements for the three and nine months ended
June 30, 2009 and 2008 and condensed consolidated balance sheets as of June 30,
2009 and September 30, 2008.
EFFECTS
OF RESTATEMENT
The
following tables set forth the effects of the restatement on affected line items
within the Company’s previously reported financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three
Months Ended
June
30,
|
Three
Months Ended
June
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Gas
purchases
|
$ | 400,783 | $ | (296 | ) | $ | 400,487 | $ | 945,629 | $ | 29,048 | $ | 974,677 | |||||||||||
Total
operating expenses
|
$ | 465,118 | $ | (296 | ) | $ | 464,822 | $ | 1,006,132 | $ | 29,048 | $ | 1,035,180 | |||||||||||
Operating
(Loss) Income
|
$ | (24,066 | ) | $ | 296 | $ | (23,770 | ) | $ | (5,693 | ) | $ | (29,048 | ) | $ | (34,741 | ) | |||||||
(Loss)
Income before income taxes and equity in earnings of
affiliates
|
$ | (28,074 | ) | $ | 296 | $ | (27,778 | ) | $ | (10,638 | ) | $ | (29,048 | ) | $ | (39,686 | ) | |||||||
Income
tax (benefit) provision
|
$ | (12,262 | ) | $ | 116 | $ | (12,146 | ) | $ | (2,663 | ) | $ | (11,716 | ) | $ | (14,379 | ) | |||||||
Net
(Loss) Income
|
$ | (14,335 | ) | $ | 180 | $ | (14,155 | ) | $ | (7,597 | ) | $ | (17,332 | ) | $ | (24,929 | ) | |||||||
Basic
(loss) earnings per share
|
$ | (0.34 | ) | — | $ | (0.34 | ) | $ | (0.18 | ) | $ | (0.41 | ) | $ | (0.59 | ) | ||||||||
Diluted
(loss) earnings per share
|
$ | (0.34 | ) | — | $ | (0.34 | ) | $ | (0.18 | ) | $ | (0.41 | ) | $ | (0.59 | ) |
Note: Amounts
may not cross foot due to rounding
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Gas
purchases
|
$ | 1,881,058 | $ | (21,563 | ) | $ | 1,859,495 | $ | 2,696,248 | $ | 20,513 | $ | 2,716,761 | |||||||||||
Total
operating expenses
|
$ | 2,123,954 | $ | (21,563 | ) | $ | 2,102,391 | $ | 2,919,943 | $ | 20,513 | $ | 2,940,456 | |||||||||||
Operating
(Loss) Income
|
$ | 55,918 | $ | 21,563 | $ | 77,481 | $ | 69,179 | $ | (20,513 | ) | $ | 48,666 | |||||||||||
(Loss)
Income before income taxes and equity in earnings of
affiliates
|
$ | 43,060 | $ | 21,563 | $ | 64,623 | $ | 52,800 | $ | (20,513 | ) | $ | 32,287 | |||||||||||
Income
tax (benefit) provision
|
$ | 12,880 | $ | 8,416 | $ | 21,296 | $ | 19,225 | $ | (8,210 | ) | $ | 11,015 | |||||||||||
Net
(Loss) Income
|
$ | 32,958 | $ | 13,147 | $ | 46,105 | $ | 35,123 | $ | (12,303 | ) | $ | 22,820 | |||||||||||
Basic
(loss) earnings per share
|
$ | 0.78 | $ | 0.31 | $ | 1.09 | $ | 0.84 | $ | (0.29 | ) | $ | 0.55 | |||||||||||
Diluted
(loss) earnings per share
|
$ | 0.77 | $ | 0.31 | $ | 1.08 | $ | 0.84 | $ | (0.29 | ) | $ | 0.54 |
Note: Amounts
may not cross foot due to rounding
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Net
Income
|
$ | 32,958 | $ | 13,147 | $ | 46,105 | $ | 35,123 | $ | (12,303 | ) | $ | 22,820 | |||||||||||
Unrealized
(gain) loss on derivatives
|
$ | 46,798 | $ | 18,362 | $ | 65,160 | $ | 75,095 | $ | 9,403 | $ | 84,498 | ||||||||||||
Deferred
income taxes
|
$ | 4,316 | $ | 8,416 | $ | 12,732 | $ | 8,203 | $ | (8,213 | ) | $ | (10 | ) | ||||||||||
Components
of working capital
|
$ | 282,973 | $ | (39,925 | ) | $ | 243,048 | $ | (34,761 | ) | $ | 9,200 | $ | (25,561 | ) | |||||||||
Other
non-current liabilities
|
$ | (23,611 | ) | — | $ | (23,611 | ) | $ | 24,850 | $ | 1,913 | $ | 26,763 | |||||||||||
Inventories
|
$ | 279,693 | $ | (18,811 | ) | $ | 260,882 | $ | 73,666 | $ | (36,433 | ) | $ | 37,233 | ||||||||||
Gas
purchases payable
|
$ | (122,271 | ) | $ | (22,256 | ) | $ | (144,527 | ) | $ | 199,407 | $ | 47,088 | $ | 246,495 | |||||||||
Other
current assets
|
$ | (14 | ) | $ | 1,142 | $ | 1,128 | $ | (2,801 | ) | $ | (1,455 | ) | $ | (4,256 | ) | ||||||||
Total
working capital
|
$ | 282,973 | $ | (39,925 | ) | $ | 243,048 | $ | (34,761 | ) | $ | 9,200 | $ | (25,561 | ) |
Note: Amounts
may not cross foot due to rounding
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
|
(Audited)
|
|||||||||||||||||||||||
June
30,
|
September
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Gas
in storage, at average cost
|
$ | 198,615 | $ | 7,798 | $ | 206,413 | $ | 478,549 | $ | (11,012 | ) | $ | 467,537 | |||||||||||
Derivatives
(current), at fair value
|
$ | 164,401 | $ | 159 | $ | 164,560 | $ | 208,703 | $ | 18,521 | $ | 227,224 | ||||||||||||
Other
(current)
|
$ | 29,736 | $ | 1,254 | $ | 30,990 | $ | 12,785 | $ | 2,396 | $ | 15,181 | ||||||||||||
Total
current assets
|
$ | 713,501 | $ | 9,211 | $ | 722,712 | $ | 1,109,666 | $ | 9,905 | $ | 1,119,571 | ||||||||||||
Total
assets
|
$ | 2,304,088 | $ | 9,211 | $ | 2,313,299 | $ | 2,625,392 | $ | 9,905 | $ | 2,635,297 |
Note: Amounts
may not cross foot due to rounding
CAPITALIZATION
AND LIABILITIES
(Unaudited)
|
(Audited)
|
|||||||||||||||||||||||
June
30,
|
September
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Common
stock equity
|
$ | 721,239 | $ | 14,257 | $ | 735,496 | $ | 726,958 | $ | 1,110 | $ | 728,068 | ||||||||||||
Total
capitalization
|
$ | 1,178,910 | $ | 14,257 | $ | 1,193,167 | $ | 1,182,075 | $ | 1,110 | $ | 1,183,185 | ||||||||||||
Gas
purchases payable
|
$ | 193,245 | $ | (14,173 | ) | $ | 179,072 | $ | 315,516 | $ | 8,084 | $ | 323,600 | |||||||||||
Total
current liabilities
|
$ | 579,652 | $ | (14,173 | ) | $ | 565,479 | $ | 893,969 | $ | 8,084 | $ | 902,053 | |||||||||||
Deferred
income taxes
|
$ | 224,471 | $ | 9,127 | $ | 233,598 | $ | 239,703 | $ | 711 | $ | 240,414 | ||||||||||||
Total
noncurrent liabilities
|
$ | 545,526 | $ | 9,127 | $ | 554,653 | $ | 549,348 | $ | 711 | $ | 550,059 | ||||||||||||
Total
capitalization and liabilities
|
$ | 2,304,088 | $ | 9,211 | $ | 2,313,299 | $ | 2,625,392 | $ | 9,905 | $ | 2,635,297 |
Note: Amounts
may not cross foot due to rounding
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three
Months Ended
June
30,
|
Three
Months Ended
June
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Net
(Loss) Income
|
$ | (14,335 | ) | $ | 180 | $ | (14,155 | ) | $ | (7,597 | ) | $ | (17,332 | ) | $ | (24,929 | ) | |||||||
Comprehensive
income
|
$ | (14,372 | ) | $ | 180 | $ | (14,192 | ) | $ | (7,343 | ) | $ | (17,332 | ) | $ | (24,675 | ) |
Note: Amounts
may not cross foot due to rounding
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Nine
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
(Thousands)
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||||||||||
Net
Income
|
$ | 32,958 | $ | 13,147 | $ | 46,105 | $ | 35,123 | $ | (12,303 | ) | $ | 22,820 | |||||||||||
Comprehensive
income
|
$ | 32,781 | $ | 13,147 | $ | 45,928 | $ | 35,367 | $ | (12,303 | ) | $ | 23,064 |
Note: Amounts
may not cross foot due to rounding
REGULATION
|
October
Base Rate Order
As a
result of increases in NJNG’s operation, maintenance and capital costs, on
November 20, 2007, NJNG petitioned the New Jersey Board of Public Utilities
(BPU) to increase base rates for delivery service by approximately $58.4
million, which included a return on NJNG’s equity component of 11.5 percent.
This request was 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
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the Conservation Incentive Program (CIP) baseline usage
rate, received an allowed return on equity component of 10.3 percent, reduced
its depreciation expense component from 3 percent to 2.34 percent and reduced
its annual depreciation expense by $1.6 million as a result of the amortization
of previously recovered asset retirement obligations.
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 in the year following the end of the CIP usage year) is
subject to additional conditions, including an earnings test and an evaluation
of Basic Gas Supply Service (BGSS) related savings.
In May
2008, NJNG filed its Petition for the annual review of its CIP for recoverable
CIP amounts for fiscal 2008, requesting an additional $6.8 million and approval
to modify its CIP recovery rates effective October 1, 2008. The additional
amount brought the total recovery requested to $22.4 million. The total recovery
requested for fiscal 2008 includes amounts accrued and estimated through
September 30, 2008. On October 3, 2008, the BPU approved the CIP petition on a
provisional basis, effective the date of the order and on June 8, 2009, the BPU
issued their final order approving the rates on a permanent basis. On April 1,
2009, NJNG submitted a proposal to extend its CIP mechanism, as currently
structured, until October 1, 2010. The extension was requested due to the
continuing nature of energy efficiency programs at the state and federal levels
in concert with the issuance of the economic stimulus programs. If accepted by
the BPU, the CIP would remain in effect for an additional year or until a final
order is issued by the BPU.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
In June
2009, NJNG filed its annual BGSS and CIP filing for recoverable CIP amounts for
fiscal 2009, requesting approval to modify its CIP recovery rates effective
October 1, 2009, resulting in total annual recovery of $6.9 million. The total
recovery requested for fiscal 2009 includes amounts accrued and estimated
through September 30, 2009. As of June 30, 2009, NJNG has $6.3 million accrued
under the CIP to be recovered in Regulatory Assets in the Unaudited Condensed
Consolidated Balance Sheets.
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the three-year term
of the CIP pilot program. As of June 30, 2009, NJNG had a remaining liability of
$269,000 related to these programs.
Basic
Gas Supply Service (BGSS)
BGSS is a
BPU-approved rate mechanism designed to allow for the recovery of natural gas
commodity costs. NJNG occasionally adjusts its periodic BGSS rates for its
residential and small commercial customers to reflect increases or decreases in
the cost of natural gas sold to customers.
In May
2008, NJNG filed for an increase to the periodic BGSS factor to be effective
October 1, 2008, that would increase an average residential heating customer’s
bill by approximately 18 percent due to an increase in the price of wholesale
natural gas. Subsequent to the filing, wholesale natural gas prices moderated,
and on September 22, 2008, NJNG, the Staff of the BPU and the Department of the
Public Advocate, Division of Rate Counsel (Rate Counsel) signed an agreement for
an increase to the periodic BGSS factor that would increase an average
residential heating customer’s bill by approximately 8.9 percent. On October 3,
2008 and June 8, 2009, the BPU and Rate Counsel approved the BGSS increase on a
provisional and final basis, respectively, effective the date of the
orders.
In
December 2008, NJNG provided notice that it would implement a $30 million
BGSS-related rate credit that would lower residential and small commercial sales
customers’ bills in January and February 2009. This rate credit was due
primarily to a decline in wholesale commodity costs subsequent to the October
2008 BGSS price change. On February 20, 2009, NJNG provided notice to the BPU
that its BGSS-related rate credit would be extended through March 31, 2009, to
reduce BGSS charges by an additional $15 million.
In June
2009, NJNG filed its annual BGSS and CIP filing (2010 BGSS/CIP filing) proposing
a decrease of 17.6 percent for the average residential heating customer of which
15.7 percent stems from the reduction in commodity costs based on the continuing
decline in the wholesale natural gas market. The balance of the rate change is
related to changes to the CIP rate, as discussed above, and a minor reduction to
the rate related to collecting the remaining balance under the Weather
Normalization Clause.
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 reduced the sharing percentage of the margin
generated by the FRM program retained by NJNG from 20 percent to 15 percent
effective November 1, 2007. In October 2008, the BPU’s base rate order provided
for the extension of the incentive programs through October 31, 2011, along with
an 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 (RA), and the New Jersey
Clean Energy Program (NJCEP). In February 2008, NJNG filed an application
regarding its SBC proposing no change to the rates previously approved in
October 2007 (February 2008 SBC filing). The BPU approved the February 2008 SBC
filing on June 8, 2009. On January 27, 2009, NJNG filed an application regarding
its SBC to increase its RA factor and its NJCEP factor while maintaining its
effective rate on USF (January 2009 SBC filing). The January 2009 SBC filing is
subject to BPU Staff and Rate Counsel review and must be approved by the BPU
prior to implementing the new SBC rates.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
USF
Through
the USF, eligible customers receive a credit toward their utility bill. The
credits applied to eligible customers are recovered through the USF rider in the
SBC. NJNG recovers carrying costs on deferred USF balances.
In June
2008, the natural gas utilities in New Jersey collectively filed with the BPU to
increase the statewide USF recovery rate effective October 1, 2008. In the BPU’s
October 21, 2008 order, the USF increase was approved on a provisional basis,
effective October 24, 2008, and it also approved interest on USF deferred
balances at the Treasury Constant Maturity 2-year rate, plus 60 basis points,
net of deferred income tax, with the rate changing on a monthly basis. NJNG
believes the increase has a negligible impact on customers.
In June
2009, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to decrease the statewide USF recovery rate effective October 1,
2009.The USF, as filed, will decrease the average monthly bill of a residential
heating customer by 0.6 percent.
MGP
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. In
June 2009, the BPU approved the February 2008 SBC filing, which proposed
maintaining the current SBC rate and included recovery of MGP remediation
expenditures incurred through June 30, 2007, resulting in an expected annual
recovery of $17.7 million. The January 2009 SBC filing included MGP remediation
expenditures incurred through June 30, 2008, resulting in an expected annual
recovery of $20.7 million.
NJCEP
In
October 2008, the BPU released a final order, updating state utilities’ funding
obligations for NJCEP for the period from January 1, 2009 to December 31, 2012.
NJNG’s share of the total funding requirement of $1.2 billion is $50.8 million.
Accordingly, NJNG recorded the initial obligation and a corresponding regulatory
asset at a present value of $44.3 in the Unaudited Condensed Consolidated
Balance Sheets. NJNG’s annual obligation gradually increases from $10.3 million
in fiscal 2009 to $15.9 million in fiscal 2012. As of June 30, 2009, NJNG had a
$40 million obligation remaining.
The
January 2009 SBC filing included an increase to the NJCEP factor. The proposed
factor is expected to recover $12.9 million annually.
WNC
As of
June 30, 2009, NJNG has a $129,000 unrecovered balance related to gross margin
variations under the WNC incurred during the fiscal 2006 winter period. On
October 3, 2008, the BPU provisionally approved a decrease to NJNG’s WNC rate,
effective the date of the order, to fully recover its remaining WNC balance. As
a result of an estimated WNC balance remaining to be recovered at September 30,
2009, NJNG included a request in its 2010 BGSS/CIP filing to reduce the WNC rate
to recover the remaining balance in fiscal 2010.
Economic
Stimulus
On
January 20, 2009, NJNG filed two petitions with the BPU seeking approval to
implement programs designed to both stimulate the state and local economy
through infrastructure investments and encourage energy efficiency. The
Accelerated Infrastructure Program (AIP) was approved on April 16, 2009, and
allows NJNG to expedite $70.8 million of 14 previously planned infrastructure
projects, maintaining safe and reliable service to NJNG’s customers while
creating the opportunity for approximately 75 to 100 new jobs. Approved as a
2-year program, the AIP will be funded through an annual adjustment to
customers’ base rates with the first adjustment expected in October 2010. The
second filing, for an Energy Efficiency (EE) Program and associated cost
recovery mechanism, requested BPU approval to implement various programs to
encourage energy efficiency for residential and commercial customers. NJNG
proposed to recover the EE Program costs over a 4-year period through a clause
mechanism similar to the SBC. The EE Program stipulation was approved on July 1,
2009, for $21.1 million, if fully subscribed, including a return on investments
and the recovery of operation and maintenance expense and income taxes ratably
over four years. A true-up to actual EE program investments and costs is to be
filed with the BPU on an annual basis. The effective date of the EE Program is
August 1, 2009. Both the AIP and EE Programs include the recovery of NJNG’s
overall weighted average cost of capital on these investments.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Regulatory
Assets & Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
June
30,
2009
|
September
30,
2008
|
Recovery
Period
|
||||||||
Regulatory
assets–current
|
|||||||||||
Underrecovered
gas costs
|
$ | — | $ | 27,994 |
Less
than one year
(1)
|
||||||
WNC
|
129 | 919 |
Less
than one year (2)
|
||||||||
CIP
|
6,189 | 22,463 |
Less
than one year
(3)
|
||||||||
Total
current
|
$ | 6,318 | $ | 51,376 | |||||||
Regulatory
assets–noncurrent
|
|||||||||||
Remediation
costs (Note 14)
|
|||||||||||
Expended,
net of recoveries
|
$ | 84,595 | $ | 92,164 | (4) | ||||||
Liability
for future expenditures
|
120,230 | 120,730 | (5) | ||||||||
CIP
|
155 | 2,397 | (6) | ||||||||
Deferred
income and other taxes
|
12,523 | 12,726 |
Various
(7)
|
||||||||
Derivatives
(Note 4)
|
47,295 | 49,610 | (8) | ||||||||
Postemployment
benefit costs (Note 11)
|
52,322 | 52,519 | (9) | ||||||||
SBC/Clean
Energy
|
42,756 | 10,524 |
Various
(10)
|
||||||||
Total
noncurrent
|
$ | 359,876 | $ | 340,670 |
(1)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(2)
|
Recoverable
as a result of BPU approval in October 2008, without interest. This
balance reflects the net results from winter period of fiscal 2006. No new
WNC activity has been recorded since October 1, 2006 due to the existence
of the CIP.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance,
as of June 30, 2009, includes approximately $1.6 million relating to the
weather component of the calculation and approximately $4.6 million
relating to the customer usage component of the calculation. Recovery from
customers is designed to be one year from date of rate approval by the
BPU.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated
future expenditures. Recovery will be requested when actual expenditures
are incurred (see Note
14. Commitments and Contingent Liabilities – Legal
Proceedings).
|
(6)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance,
as of June 30, 2009, includes approximately $155,000 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 base rates charged to customers
(see Note
11. 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.
The
Company had the following regulatory liabilities, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
June
30, 2009
|
September
30, 2008
|
||||||
Regulatory
liabilities–current
|
||||||||
Overrecovered
gas costs
(1)
|
$ | 30,842 | — | |||||
Total
current
|
$ | 30,842 | — | |||||
Regulatory
liabilities–noncurrent
|
||||||||
Cost
of removal obligation (2)
|
$ | 58,634 | $ | 63,419 | ||||
Total
noncurrent
|
$ | 58,634 | $ | 63,419 |
|
(1)
|
Refundable,
subject to BPU approval, through BGSS with
interest.
|
|
(2)
|
NJNG
accrues and collects for cost of removal in rates. This liability
represents collections in excess of actual expenditures. Approximately $22
million, including accretion of $1.1 million for the nine months ended
June 30, 2009, of regulatory assets relating to asset retirement
obligations have been netted against the cost of removal obligation as of
June 30, 2009 (see Note
12. Asset Retirement
Obligations).
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
DERIVATIVE
INSTRUMENTS
|
The
Company and its subsidiaries are subject to commodity price risk due to
fluctuations in the market price of natural gas. To manage this risk, the
Company and its subsidiaries enter into a variety of derivative instruments
including, but not limited to, futures contracts, physical forward contracts,
financial options, and swaps to economically hedge the commodity price risk
associated with its existing and anticipated commitments to purchase and sell
natural gas. These contracts generally qualify as derivatives in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. As a result, in accordance
with the provisions of SFAS 133 all of the financial and certain of the
Company’s physical derivative instruments are recorded at fair value in the
Unaudited Condensed Consolidated Balance Sheets. The Company chooses not to
designate its derivatives as hedging instruments pursuant to SFAS 133, and
therefore changes in the fair value of the derivative instruments 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 as
unrealized gains or losses. Changes in fair value of NJNG’s 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.
Effective
October 1, 2007, the Company elected to discontinue the use of the “normal
purchase normal sales” (normal) scope exception of SFAS 133 for all new physical
commodity contracts entered into on or after October 1, 2007 by NJRES. For these
contracts, the changes in fair value are included currently in earnings. Also,
effective October 1, 2008, due to changes in the Company’s ability to assert
physical delivery, the Company is no longer applying normal treatment to
physical commodity contracts executed prior to October 1, 2007. Therefore, all
NJRES physical commodity contracts are derivatives and are accounted for at fair
value in the Unaudited Condensed Consolidated Balance Sheets, with changes in
fair value included as a component of Operating revenue or Gas purchases, as
appropriate, in the Unaudited Condensed Consolidated Statements of Income. The
Company continues to apply the normal scope exception for all physical commodity
contracts at NJNG and NJR Energy, and as a result the profit or loss on these
contracts is not recorded until physical delivery occurs.
As a result of entering into
transactions to borrow gas, commonly referred to as “park and loans,” an
embedded derivative is created related to potential differences between
the fair value of the amount borrowed and the fair value of the amount that may
ultimately be repaid, based on changes in value in forward natural gas prices
during the contract term. This embedded derivative is accounted for as a forward
sale in the month in which the repayment of the borrowed gas is expected to
occur, and is considered a physical derivative transaction which is recorded at
fair value on the balance sheet, with changes in value recognized in current
period earnings.
As
described in Note 1, General,
NJR adopted the provisions of SFAS 161, which requires enhanced
disclosures surrounding derivative activities. The additional quantitative and
qualitative disclosures are included throughout this note. For a more detailed
discussion of the Company’s fair value policies and level disclosures please see
Note 5, Fair
Value.
The
following table reflects the fair value of NJR's derivative assets and
liabilities recognized in its Unaudited Condensed Consolidated Balance Sheets as
of June 30, 2009:
Fair
Value
|
|||||||||
(Thousands)
|
Balance
Sheet Location
|
Asset
Derivatives
|
Liability
Derivatives
|
||||||
Derivatives
not designated as hedging instruments under SFAS 133:
|
|||||||||
NJNG:
|
|||||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
$ | 15,761 | $ | 60,689 | ||||
Derivatives
- Noncurrent
|
— | 2,368 | |||||||
NJRES:
|
|||||||||
Physical
forward commodity contracts
|
Derivatives
- Current
|
24,418 | 17,505 | ||||||
Derivatives
- Noncurrent
|
5,968 | 386 | |||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
122,368 | 72,738 | ||||||
Derivatives
- Noncurrent
|
6,000 | 6,095 | |||||||
NJR
Energy:
|
|||||||||
Financial
derivative commodity contracts
|
Derivatives
- Current
|
2,013 | 433 | ||||||
Derivatives
- Noncurrent
|
1,377 | 151 | |||||||
Total
fair value of derivatives
|
$ | 177,905 | $ | 160,365 |
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
As
previously discussed, the Company no longer applies the normal scope exception
at NJRES and chooses not to apply the hedge accounting provisions of SFAS 133 to
any of NJR and subsidiaries’ derivatives. As a result, any unrealized gains
(losses) related to NJRES’ open financial and physical commodity contracts and
NJR Energy’s financial derivatives are recognized in the Unaudited Condensed
Consolidated Statements of Income as a component of Operating revenue or Gas
purchases, as appropriate. NJRES’ utilizes financial derivatives to economically
hedge the margin associated with the purchase of physical gas for injection into
storage and the subsequent sale of physical gas at a later date. The gains
(losses) on these financial transactions are recognized upon settlement in Gas
purchases. The gains (losses) on the financial transactions that are economic
hedges of the cost of the purchased gas are recognized prior to the gains
(losses) on the physical transaction that is recognized when the natural gas is
sold. Therefore, mismatches between the timing of recognizing realized gains or
losses on the financial derivative instruments and the timing of the actual sale
of the natural gas that is being economically hedged creates volatility in the
results of NJRES, although the Company’s intended economic results relating to
the entire transaction are unaffected.
Gains
(losses) recognized at NJRES and NJR Energy since NJR’s adoption of SFAS 161 and
included as a component of Operating revenues and Gas purchases, as noted below,
for the three and six months ended June 30, 2009, are as follows:
(Thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative
|
Amount
of Gain or (Loss) Recognized in Income on Derivative
|
|||||||
Derivatives
not designated as hedging instruments under SFAS 133:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||
June
30, 2009
|
|||||||||
NJRES:
|
|||||||||
Physical
commodity contracts
|
Operating
revenues
|
$ | 8,301 | $ | 16,340 | ||||
Physical
commodity contracts
|
Gas
purchases
|
(882 | ) | 8,044 | |||||
Financial
derivatives
|
Gas
purchases
|
1,757 | 33,914 | ||||||
Subtotal
NJRES
|
$ | 9,176 | 58,298 | ||||||
NJR
Energy:
|
|||||||||
Financial
derivatives
|
Operating
revenues
|
62 | (9,948 | ) | |||||
Total
NJRES and NJR Energy unrealized and realized gains
|
$ | 9,238 | $ | 48,350 |
Not
included in the table above are (losses) associated with NJNG’s financial
derivatives, that totaled $(1.7) million and $(35.1) million for the three and
six months ended June 30, 2009, respectively. These derivatives are part of its
regulated risk management activities that serve to mitigate BGSS costs passed on
to its customers. As these transactions are entered into pursuant to and
recoverable through regulatory riders, any changes in the value of NJNG’s
financial derivatives are deferred in Regulatory Assets or Liabilities and there
is no impact to earnings.
As of
June 30, 2009, NJNG, NJRES and NJR Energy had the following outstanding long
(short) derivatives:
Volume
(Bcf)
|
|||||
NJNG
|
Futures
|
8.4 | |||
Swaps
|
(0.3 | ) | |||
Options
|
11.5 | ||||
NJRES
|
Futures
|
(16.3 | ) | ||
Swaps
|
(18.0 | ) | |||
Options
|
2.5 | ||||
Physical
|
54.9 | ||||
NJR
Energy
|
Swaps
|
3.2 |
Generally,
exchange-traded contracts require posted collateral, referred to as margin,
usually in the form of cash. The amount of margin required is comprised of a
fixed initial amount based on the contract and a variable amount based on market
price movements from the initial trade price. The Company maintains broker
margin accounts for NJNG and NJRES. The balances are as follows:
(Thousands)
|
Balance
Sheet Location
|
June
30, 2009
|
September
30, 2008
|
||||||
NJNG
broker margin deposit
|
Broker
margin - Current Assets
|
$ | 49,204 | $ | 41,277 | ||||
NJRES
broker margin (liability)
|
Broker
margin - Current Liabilities
|
$ | (9,185 | ) | $ | (29,072 | ) |
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy are exposed to credit risk as a result of their 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 current and prospective counterparties’ financial statements
and/or credit ratings, daily monitoring of counterparties’ credit limits and
exposure, daily communication with traders regarding credit status and the use
of credit mitigation measures, such as collateral requirements and netting
agreements. Examples of collateral include letters of credit and cash received
for either prepayment or margin deposit. Collateral may be requested due to
NJR’s election not to extend credit or because exposure exceeds defined
thresholds. Most of NJR’s wholesale marketing contracts contain standard netting
provisions. These contracts include those governed by the International Swaps
and Derivatives Association (ISDA) and the North American Energy Standards Board
(NAESB). The netting provisions refer to payment netting, whereby receivables
and payables with the same counterparty are offset and the resulting net amount
is paid to the party to which it is due.
As a
result of 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.
The
following is a summary of gross credit exposures grouped by investment and
noninvestment grade counterparties, as of June 30, 2009. Internally-rated
exposure applies to counterparties that are not rated by Standard & Poor’s
(S&P) or Moody’s Investors Service, Inc. (Moody’s). In these cases, the
company’s or guarantor’s financial statements are reviewed by the Company, and
similar methodologies and ratios used by S&P and/or Moody’s are applied to
arrive at a substitute rating. Gross credit exposure is defined as the
unrealized fair value of physical and financial derivative commodity contracts
plus any outstanding receivable for the value of natural gas delivered for which
payment has not yet been received. The amounts presented below have not been
reduced by any collateral received or netting and exclude accounts receivable
for retail natural gas sales and services.
(Thousands)
|
Gross
Credit
Exposure
|
|||
Investment
grade
|
$ | 119,929 | ||
Noninvestment
grade
|
13,793 | |||
Internally
rated investment grade
|
19,854 | |||
Internally
rated noninvestment grade
|
4,118 | |||
Total
|
$ | 157,694 |
Conversely,
certain of NJRES’, NJNG’s and NJR Energy’s derivative instruments are tied to
agreements containing provisions that would require cash collateral payments
from the Company if certain events occur. These provisions vary based upon the
terms in individual counterparty agreements and can result in cash payments if
NJNG’s credit rating were to fall below its current level. NJNG’s credit rating,
with respect to Standard and Poor’s, reflects the overall corporate credit
profile. Specifically, most, but not all, of these additional payments will be
triggered if NJNG’s debt is downgraded by the major credit agencies, regardless
of investment grade status. As well, some of these agreements include threshold
amounts that would result in additional collateral payments if the values of
derivative liabilities were to exceed the maximum values provided for in
relevant counterparty agreements. Other provisions include payment features that
are not specifically tied to ratings, but are based on certain financial
metrics.
Collateral
amounts associated with any of these conditions, are determined based on a
sliding scale and are contingent upon the degree to which the Company’s credit
rating and/or financial metrics deteriorate, and the extent to which liability
amounts exceed applicable threshold limits. The aggregate fair value of all
derivative instruments with credit-risk-related contingent features that are in
a net liability position on June 30, 2009, is $33.1 million for which the
Company has not posted any collateral. If all the thresholds related to the
credit-risk-related contingent features underlying these agreements were invoked
on June 30, 2009, the Company would not be required to post any additional
collateral to its counterparties. This amount differs from the Company’s net
derivative liability because the credit agreements also include clauses,
commonly known as “Rights of Offset,” that would permit the Company to offset
its derivative assets against its derivative liabilities for determining
additional collateral to be posted.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
FAIR
VALUE
|
The fair
value of cash and temporary investments, accounts receivable, accounts payable,
commercial paper and borrowings under revolving credit facilities are estimated
to equal their carrying amounts due to the short maturity of those instruments.
The estimated fair value of long-term debt, excluding current maturities and
capital lease obligations, is based on quoted market prices for similar issues
and is as follows:
June
30,
|
September
30,
|
|||||||
(Thousands)
|
2009
|
2008
|
||||||
Carrying
value
|
$ | 399,800 | $ | 399,800 | ||||
Fair
market value
|
$ | 402,600 | $ | 351,400 |
Adoption
of SFAS 157
As noted
in Note 1, General, NJR
adopted SFAS 157 effective October 1, 2008 and has applied the provisions to its
financial assets and liabilities, as appropriate, which include financial
derivatives and physical commodity contracts qualifying as derivatives,
available for sale securities and other financial assets and liabilities. SFAS
157 defines and establishes a framework for measuring fair value. SFAS 157
requires that companies consider assumptions market participants would make when
pricing assets and liabilities that are required to be recognized at fair value
in accordance with previously issued accounting pronouncements.
SFAS 157
also requires additional disclosures that are intended to convey the reliability
of price inputs used to determine fair value. To facilitate this, SFAS 157
established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value based on the source of the data used to
develop the price inputs. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities and the
lowest priority to inputs that are based on unobservable market data and include
the following:
Level
1
|
Unadjusted
quoted prices for identical assets or liabilities in active markets; NJR’s
Level 1 assets and liabilities include primarily exchange traded financial
derivative contracts and listed
equities;
|
Level
2
|
Significant
price data, other than Level 1 quotes, that is observed either directly or
indirectly; NJR’s level 2 assets and liabilities include over-the-counter
physical forward commodity contracts and swap contracts or derivatives
that are initially valued using observable quotes and are subsequently
adjusted to include time value, credit risk or estimated transport pricing
components. These additional adjustments are not considered to be
significant to the ultimate recognized
values.
|
Level
3
|
Inputs
derived from a significant amount of unobservable market data; these
include NJR’s best estimate of fair value and are derived primarily
through the use of internal valuation methodologies. Certain of NJR’s
physical commodity contracts that are to be delivered to inactively traded
points on a pipeline are included in this
category.
|
NJNG’s,
NJRES’ and NJR Energy’s financial derivatives portfolios consist mainly of
futures, options and swaps. NJR primarily uses the market approach and its
policy is to use actively quoted market prices when available. The principal
market for its derivative transactions is the natural gas wholesale market,
therefore, the primary source for its price inputs is the New York Mercantile
(NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian
delivery points and Platts and NYMEX ClearPort for certain over-the-counter
physical forward commodity contracts. However, NJRES also engages in
transactions that result in transporting natural gas to delivery points for
which there is no actively quoted market price. In these cases, NJRES’ policy is
to use the best information available to determine fair value based on internal
pricing models, which include estimates extrapolated from broker quotes or
pricing services. As of June 30, 2009, less than one percent of the total fair
value of NJRES’ derivative assets and liabilities was derived using such
inputs.
NJR
Energy uses NYMEX settlement prices to value its long-dated swap contracts. NJR
also has available for sale securities and other financial assets that include
listed equities, mutual funds and money market funds for which there are active
exchange quotes available.
When NJR
determines fair values, measurements are adjusted, as needed, for credit risk
associated with counterparties, as well as its own credit risk. NJR determines
these adjustments by using historical default probabilities that correspond to
the applicable Standard and Poor’s issuer ratings, while also taking into
consideration collateral and netting arrangements that serve to mitigate
risk.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
The
adoption of SFAS 157 did not have any impact on NJR’s financial condition or
results of operations. Assets and liabilities measured at fair value on a
recurring basis as of June 30, 2009, are summarized as follows:
Quoted
Prices in Active
Markets
for Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
(Thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
||||||||||||
Assets:
|
||||||||||||||||
Physical
forward commodity contracts
|
$ | — | $ | 30,385 | $ | — | $ | 30,385 | ||||||||
Financial
derivative contracts
|
102,568 | 44,952 | — | 147,520 | ||||||||||||
Available
for sale securities
(1)
|
7,780 | — | — | 7,780 | ||||||||||||
Other
assets
|
1,365 | — | — | 1,365 | ||||||||||||
Total
assets at fair value
|
$ | 111,713 | 75,337 | $ | — | $ | 187,050 | |||||||||
Liabilities:
|
||||||||||||||||
Physical
forward commodity contracts
|
$ | — | $ | 17,892 | $ | — | $ | 17,892 | ||||||||
Financial
derivative contracts
|
107,723 | 34,750 | — | 142,473 | ||||||||||||
Other
liabilities
|
1,365 | — | — | 1,365 | ||||||||||||
Total
liabilities at fair value
|
$ | 109,088 | $ | 52,642 | $ | — | $ | 161,730 |
|
(1)
|
Included
in Investments in equity investees in the Condensed Consolidated Balance
Sheets.
|
A
reconciliation of the beginning and ending balances of NJRES’ derivatives
measured at fair value based on significant unobservable inputs as of June 30,
2009, is as follows:
Fair
Value Measurements Using
|
||||||||
Significant
Unobservable Inputs
|
||||||||
(Level
3)
|
||||||||
(Thousands)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||
Beginning
balance
|
$ | 2 | $ | 937 | ||||
Total
gains realized and unrealized
(1)
|
— | 320 | ||||||
Purchases,
sales, issuances and settlements, net
|
(2 | ) | (774 | ) | ||||
Net
transfers in and/or out of level 3
|
— | (483 | ) | |||||
Ending
balance
|
$ | — | $ | — | ||||
Net
unrealized gains included in net income relating to derivatives still held
at June 30, 2009
|
$ | — | $ | — |
|
(1)
|
Gains
recognized in Operating revenues and Gas purchases for the nine months
ended June 30, 2009 are $77,000 and $243,000,
respectively.
|
NJR will
prospectively apply the provisions of SFAS 157 to its pension assets and
non-financial assets and liabilities during fiscal 2010.
6.
|
INVESTMENTS
IN EQUITY INVESTEES
|
NJR’s
Investments in equity investees include the following investments:
(Thousands)
|
June
30,
2009
|
September 30,
2008
|
||||||
Steckman
Ridge
|
$ | 127,994 | $ | 84,285 | ||||
Iroquois
|
20,537 | 23,604 | ||||||
Other
|
7,780 | 8,092 | ||||||
Total
|
$ | 156,311 | $ | 115,981 |
NJR’s
investment in Steckman Ridge increased $43.7 million during the nine months
ended June 30, 2009, including cash investments of $40.2 million and capitalized
costs and interest of $3.5 million. Steckman Ridge became partially operational
and had minimal activity during the third quarter of fiscal 2009.
NJR uses
the equity method of accounting for its investments in Steckman Ridge and
Iroquois.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Other
consists of an investment in equity securities of a publicly traded energy
company and is accounted for as available for sale securities, with any change
in the fair value of such investment recorded in Accumulated other
comprehensive income, a component of Common stock equity. Unrealized (losses)
gains associated with these equity securities were approximately $(106,000), net
of tax of $74,000, and $336,000, net of tax of $(235,000), for the nine months
ended June 30, 2009 and 2008, respectively.
The
following tables are summarized financial information for Iroquois:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
revenues
|
$ | 52.2 | $ | 40.9 | $ | 145.0 | $ | 124.3 | ||||||||
Operating
income
|
$ | 31.0 | $ | 20.6 | $ | 83.1 | $ | 66.0 | ||||||||
Net
income
|
$ | 14.1 | $ | 8.5 | $ | 38.1 | $ | 27.5 |
(Millions)
|
June
30,
2009
|
September 30,
2008
|
||||||
Current
assets
|
$ | 196.3 | $ | 64.2 | ||||
Noncurrent
assets
|
$ | 770.0 | $ | 729.2 | ||||
Current
liabilities
|
$ | 235.3 | $ | 39.3 | ||||
Noncurrent
liabilities
|
$ | 264.5 | $ | 348.9 |
7.
|
EARNINGS
PER SHARE
|
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)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
income, as reported
|
$ | (14,155 | ) | $ | (24,929 | ) | $ | 46,105 | $ | 22,820 | ||||||
Basic
earnings per share
|
||||||||||||||||
Weighted
average shares of common stock outstanding–basic
|
42,049 | 41,949 | 42,175 | 41,822 | ||||||||||||
Basic
earnings per common share
|
$ | (0.34 | ) | $ | (0.59 | ) | $ | 1.09 | $ | 0.55 | ||||||
Diluted
earnings per share
|
||||||||||||||||
Weighted
average shares of common stock outstanding–basic
|
42,049 | 41,949 | 42,175 | 41,822 | ||||||||||||
Incremental
shares
(1)
|
— | — | 372 | 215 | ||||||||||||
Weighted
average shares of common stock outstanding–diluted
|
42,049 | 41,949 | 42,547 | 42,037 | ||||||||||||
Diluted
earnings per common share (2)
|
$ | (0.34 | ) | $ | (0.59 | ) | $ | 1.08 | $ | 0.54 |
|
(1)
|
Incremental shares consist of
stock options, stock awards and performance
units.
|
|
(2)
|
Incremental
shares were not included in the computation of diluted loss per common
share for the three months ended June 30, 2009 and 2008, as their effect
would have been anti-dilutive.
|
DEBT
|
NJR
On March
15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at
maturity.
On
December 13, 2007, NJR entered into a $325 million unsecured committed credit
facility expiring in December 2012. As of June 30, 2009, NJR had $48.6 million
in borrowings outstanding under the facility.
As of
June 30, 2009, NJR has a $23 million letter of credit outstanding on behalf of
NJRES, which is used for margin requirements for natural gas transactions and
will expire on December 31, 2009.
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R, which will
expire on December 3, 2009. The letter of credit is in place to support
development activities.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
NJNG
On
November 1, 2008, NJNG repaid its $30 million, 6.27 percent, Series X First
Mortgage bonds at maturity.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
may be drawn upon through December 15, 2009, for up to $50 million. As of June
30, 2009, no letters of credit have been issued under this agreement. These
letters of credit would not reduce the amount available to be borrowed under
NJNG’s credit facility.
As of
June 30, 2009, NJNG has a $250 million committed credit facility with several
banks, expiring in December 2009. This facility is used to support NJNG’s
commercial paper program. NJNG had no borrowings outstanding under this facility
as of June 30, 2009.
NJNG
received $6.3 million and $7.5 million in December 2008 and 2007, 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.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97 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. On
those dates, 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. For the nine months ended June 30,
2009, all of the auctions surrounding the EDA ARS have failed, resulting in
those bonds bearing interest at their maximum rates, defined 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, 2009, the 30-day LIBOR rate was
0.3 percent. While the failure of the ARS auctions does not signify or
constitute a default by 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 0.6 percent as of June 30, 2009, compared with a weighted average
interest rate of 4.6 percent as of September 30, 2008. There can be no assurance
that the EDA ARS will have enough market liquidity to avoid failed auctions in
the future.
In
October 2005, NJNG entered into a loan agreement under which the EDA loaned NJNG
the proceeds from $35.8 million of tax-exempt EDA Bonds. NJNG deposited $15
million of the proceeds into a construction fund to finance subsequent
construction in the northern division of NJNG’s territory. NJNG drew down $10.8
million from the construction fund prior to fiscal year 2009 and drew down the
remaining $4.2 million in December 2008 .
Neither
NJNG’s assets nor the results of its operations are obligated or pledged to
support the NJR or NJRES credit facilities.
NJRES
As of
June 30, 2009, 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, 2009.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
A summary
of NJR’s and NJNG’s long-term debt, committed credit facilities, which require
annual commitment fees, and NJRES’ committed facility that does not require a
commitment fee, are as follows:
June
30,
|
September 30,
|
|||||||
(Thousands)
|
2009
|
2008
|
||||||
NJR
|
||||||||
Long
- term debt
|
$ | 50,000 | $ | 75,000 | ||||
Bank
credit facilities
|
$ | 325,000 | $ | 325,000 | ||||
Amount
outstanding under
bank credit facilities at end of period
|
||||||||
Notes
payable to banks
|
$ | 48,600 | $ | 32,700 | ||||
Weighted
average interest rate at end of period
|
||||||||
Notes
payable to banks
|
0.72 | % | 2.46 | % | ||||
NJNG
|
||||||||
Long
- term debt (1)
|
$ | 349,800 | $ | 379,800 | ||||
Bank
credit facilities
|
$ | 250,000 | $ | 250,000 | ||||
Amount
outstanding under
bank credit facilities at end of period
|
||||||||
Commercial
paper
|
— | $ | 145,500 | |||||
Weighted
average interest rate at end of period
|
||||||||
Commercial
paper
|
— | 2.31 | % | |||||
NJRES
|
||||||||
Bank
credit facilities
|
$ | 30,000 | $ | 30,000 | ||||
Amount
outstanding under bank credit facilities at end of period
|
||||||||
Notes
payable to banks
|
— | — | ||||||
Weighted
average interest rate at end of period
|
||||||||
Notes
payable to banks
|
— | — |
(1)
|
Long
- term debt excludes lease obligations of $63.8 million and $60.4 million
at June 30, 2009 and September 30, 2008,
respectively.
|
CAPITALIZED
FINANCING COSTS AND DEFERRED
INTEREST
|
Included
in the Condensed Consolidated Balance Sheets are capitalized amounts associated
with NJR’s Allowance for funds used during construction, (AFUDC), which are
recorded in Utility plant, as well as capitalized interest recorded in Real
estate properties and other and Investments in equity investees. Corresponding
amounts recognized in Interest expense and Other income, as appropriate, in the
Unaudited Consolidated Statements of Income are as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
AFUDC
– Utility plant
|
$ | 402 | $ | 244 | $ | 832 | $ | 871 | ||||||||
Weighted
average rate
|
5.38 | % | 4.8 | % | 3.57 | % | 4.8 | % | ||||||||
Capitalized
interest – Real estate properties and other
|
$ | — | $ | 14 | $ | — | $ | 79 | ||||||||
Weighted
average interest rates
|
— | % | 3.01 | % | — | % | 3.99 | % | ||||||||
Capitalized
interest – Investments in equity investees
|
$ | 214 | $ | 827 | $ | 1,884 | $ | 2,513 | ||||||||
Weighted
average interest rates
|
4.95 | % | 5.58 | % | 5.15 | % | 5.73 | % |
As a
result of the BPU’s Base Rate order issued in October 2008, NJNG implemented
certain rate design changes, including a change to its AFUDC calculation and a
return on equity rate of 10.3 percent (see Note 3. Regulation).
Effective October 3, 2008, NJNG is allowed to recover an incremental cost of
equity component during periods when its short-term debt balances are lower than
its construction work in progress.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
As of
April 2009, due to a reduction in NJNG’s commercial paper borrowings relative to
its Construction Work in Progress (CWIP), NJNG’s capitalized costs included
incremental equity as allowed, of $233,000 for the three and nine months ended
June 30, 2009.
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 6. Investments in
Equity Investees).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures. Accordingly, Other income included $482,000 and $515,000 of
interest related to these SBC program costs for the three months ended June 30,
2009 and 2008, respectively, and $1.5 million and $1.9 million for the nine
months ended June 30, 2009 and 2008, respectively.
10.
|
STOCK-BASED
COMPENSATION
|
On
November 11, 2008, the Company granted 106,730 restricted shares that vested
immediately. On the same date, the Company also granted 8,481 shares that vested
immediately and were issued on November 17, 2008. On January 21, 2009, the
members of the Board of Directors were issued 12,000 shares for their annual
retainer. On March 11, 2009, the Company granted 46,500 restricted shares
two-thirds of which vested on October 1, 2009, and one-third of which may vest
on October 1, 2010, subsequent to meeting certain performance milestones. On
April 7, 2009, the Company granted 1,500 restricted shares of which fifty
percent will vest on April 7, 2010, and the remaining fifty percent will vest on
April 7, 2011.
As of
June 30, 2009, 2,396,715 and 95,203 shares remain available for future awards to
employees and directors, respectively.
Included
in Operation and maintenance expense is $929,000 and $750,000 for the three
months and $2.1 million and $2 million for the nine months ended June 30, 2009
and 2008, respectively, related to stock-based compensation. As of June 30,
2009, there remains $2.4 million of deferred compensation related to unvested
shares and options, which is expected to be recognized over the next 2
years.
EMPLOYEE
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)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||||||
Service
cost
|
$ | 678 | $ | 728 | $ | 2,034 | $ | 2,185 | $ | 432 | $ | 436 | $ | 1,296 | $ | 1,360 | ||||||||||||||||
Interest
cost
|
1,937 | 1,648 | 5,811 | 4,945 | 1,014 | 810 | 3,043 | 2,441 | ||||||||||||||||||||||||
Expected
return on plan assets
|
(2,188 | ) | (2,183 | ) | (6,564 | ) | (6,548 | ) | (499 | ) | (627 | ) | (1,497 | ) | (1,837 | ) | ||||||||||||||||
Recognized
actuarial loss
|
138 | 275 | 416 | 826 | 267 | 181 | 801 | 624 | ||||||||||||||||||||||||
Prior
service cost amortization
|
14 | 14 | 42 | 42 | 20 | 19 | 59 | 58 | ||||||||||||||||||||||||
Transition
obligation amortization
|
— | — | — | — | 89 | 89 | 268 | 267 | ||||||||||||||||||||||||
Net
periodic cost
|
$ | 579 | $ | 482 | $ | 1,739 | $ | 1,450 | $ | 1,323 | $ | 908 | $ | 3,970 | $ | 2,913 |
For
fiscal 2009, the Company has no minimum pension funding requirements. However,
funding requirements are uncertain and can depend significantly on changes in
actuarial assumptions, returns on plan assets and changes in demographic
factors. On June 12, 2009, NJR made a discretionary contribution of $1 million
to the Pension plan. It is anticipated that the annual funding level to the OPEB
plans will range from $1.2 million to $1.4 million over the next five years.
Additional contributions may be made based on market conditions and various
assumptions.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
ASSET
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 nine month
period ended June 30, 2009:
(Thousands)
|
||||
Balance
at October 1, 2008
|
$ | 24,416 | ||
Accretion
|
1,113 | |||
Additions
|
— | |||
Retirements
|
(508 | ) | ||
Balance
at June 30, 2009
|
$ | 25,021 |
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.
13.
|
INCOME
TAXES
|
As of
September 30, 2008, the Company had a FIN 48 (Reserve for Uncertain Tax
Positions) balance of $6.5 million. During the first quarter of fiscal year
2009, the Company settled a tax court case with the State of New Jersey, which
resulted in a $2.7 million decrease to the reserve balance.
During
the second quarter of fiscal 2009, the Company settled the September 30, 2005
Internal Revenue Service (IRS) tax audit. The settlement resulted in an
additional reduction to the remaining FIN 48 balance of $3.8 million bringing it
to its current balance of zero. The prior balance of $3.8 million related to one
issue which has been settled and resulted in no changes to the Company’s tax
liability related to the issue.
NJR
accrues penalties and interest related to its FIN 48 and other tax issues as a
component of the income tax provision, therefore, the ultimate settlement of the
various tax issues will impact the effective tax rate to the extent that the
amount of penalties and interest assessed is different than the amounts
originally accrued. The tax effect of the currently accrued and
settled issues will have no impact on the effective tax rate.
Currently
the Company has no reason to believe that there will be any new additions to the
FIN 48 reserve.
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Cash
Commitments
NJNG has
entered into long-term contracts, expiring at various dates through 2023, for
the supply, storage and delivery of natural gas. These contracts include current
annual fixed charges of approximately $95 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, 2009, NJRES had contractual obligations for current annual demand
charges related to storage contracts and pipeline capacity contracts of $38.8
million and $43.5 million, respectively.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
Commitments
as of June 30, 2009, for natural gas purchases and future demand fees, for the
next five fiscal year periods, are as follows:
(Thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||
NJRES:
|
||||||||||||||||||||||||
Natural
gas purchases
|
$ | 154,206 | $ | 298,133 | $ | 125,513 | $ | 127,306 | $ | 10,734 | $ | — | ||||||||||||
Pipeline
demand fees
|
15,727 | 35,427 | 20,924 | 10,106 | 10,459 | 31,525 | ||||||||||||||||||
Storage
demand fees
|
10,393 | 33,728 | 16,136 | 10,616 | 6,405 | 4,410 | ||||||||||||||||||
Sub-total
NJRES
|
$ | 180,326 | $ | 367,288 | $ | 162,573 | $ | 148,028 | $ | 27,598 | $ | 35,935 | ||||||||||||
NJNG:
|
||||||||||||||||||||||||
Natural
gas purchases
|
$ | 17,463 | $ | 22,987 | $ | 1,644 | $ | — | $ | — | $ | — | ||||||||||||
Pipeline
demand fees
|
14,910 | 77,435 | 81,927 | 75,854 | 74,874 | 321,797 | ||||||||||||||||||
Storage
demand fees
|
5,477 | 21,910 | 18,398 | 13,310 | 10,415 | 6,713 | ||||||||||||||||||
Sub-total
NJNG
|
$ | 37,850 | $ | 122,332 | $ | 101,969 | $ | 89,164 | $ | 85,289 | $ | 328,510 | ||||||||||||
Total
|
$ | 218,176 | $ | 489,620 | $ | 264,542 | $ | 237,192 | $ | 112,887 | $ | 364,445 |
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)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
NJRES
|
$ | 30.1 | $ | 29.1 | $ | 87.9 | $ | 86.9 | ||||||||
NJNG
|
20.1 | 17.9 | 62.9 | 56.0 | ||||||||||||
Total
|
$ | 48.6 | $ | 47.3 | $ | 149.7 | $ | 144.4 |
NJNG’s
capital expenditures are estimated at $87.1 million for fiscal 2009, including
$6 million related to AIP construction costs, of which approximately $56.9
million has been committed. Capital expenditures consist primarily of NJNG’s
construction program to support customer growth, maintenance of its distribution
and transmission systems, replacements of infrastructure under pipeline safety
regulations, an automated meter reading installation project and
AIP.
The
Company’s future minimum lease payments under various operating leases are less
than $3.0 million annually for the next five years and $1.4 million in the
aggregate for all years thereafter.
Guarantees
As of
June 30, 2009, there were NJR guarantees covering approximately $356 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.
In fiscal
2009, the Company entered into agreements to lease vehicles over a five-year
term, which qualify as operating leases. These agreements contain provisions
that could require the Company to make additional cash payments at the end of
the term for a portion of the residual value of the vehicles. As of June 30,
2009, the present value of the liability recognized on the Condensed
Consolidated Balance Sheets is $292,000. In the event performance under the
guarantee is required, the Company’s maximum future payment would be
$475,000.
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.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a Remediation Adjustment
(RA) 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. In February 2008, NJNG filed an application
regarding its SBC which included MGP remediation expenditures incurred through
June 30, 2007, resulting in an expected annual recovery of $17.7 million. The
February 2008 filing was approved by the BPU on a permanent basis on June 10,
2009. On January 27, 2009, NJNG filed an application regarding its SBC including
MGP remediation expenditures incurred through June 30, 2008 resulting in an
expected annual recovery of $20.7 million. As of June 30, 2009, $84.6 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.
In
September 2008, 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 $120.2 million to $177.2 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
$120.2 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 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, the ultimate
disposition of these matters will not have a material adverse effect on its
financial condition, results of operations or cash flows.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
BUSINESS
SEGMENT AND OTHER OPERATIONS DATA
|
NJR
organizes its business based on its products and services as well as regulatory
environment. As a result, the Company chooses to manage the businesses
through the following reportable segments and other operations: 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 operations
consist of appliance and installation services, commercial real estate
development, investments and other corporate activities.
Information
related to the Company’s various business segments and other operations,
excluding capital expenditures at NJNG of $55.2 million and at Retail and Other
of $356,000 is detailed below.
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Three
Months Ended
June 30,
|
Nine
Months Ended
June 30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
Revenues
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 148,826 | $ | 179,511 | $ | 958,995 | $ | 940,689 | ||||||||
Energy
Services
|
283,439 | 801,628 | 1,219,296 | 2,009,751 | ||||||||||||
Segment
subtotal
|
432,265 | 981,139 | 2,178,291 | 2,950,440 | ||||||||||||
Retail
and Other
|
8,832 | 19,344 | 3,828 | 38,834 | ||||||||||||
Intersegment
revenues (1)
|
(45 | ) | (44 | ) | (2,247 | ) | (152 | ) | ||||||||
Total
|
$ | 441,052 | $ | 1,000,439 | $ | 2,179,872 | $ | 2,989,122 | ||||||||
Depreciation
and Amortization
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 7,668 | $ | 9,488 | $ | 22,120 | $ | 28,053 | ||||||||
Energy
Services
|
51 | 50 | 153 | 156 | ||||||||||||
Segment
subtotal
|
7,719 | 9,538 | 22,273 | 28,209 | ||||||||||||
Retail
and Other
|
161 | 142 | 476 | 391 | ||||||||||||
Total
|
$ | 7,880 | $ | 9,680 | $ | 22,749 | $ | 28,600 | ||||||||
Interest
Income (2)
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 772 | $ | (91 | ) | $ | 1,934 | $ | 2,519 | |||||||
Energy
Services
(3)
|
172 | 68 | 509 | 239 | ||||||||||||
Segment
subtotal
|
944 | (23 | ) | 2,443 | 2,758 | |||||||||||
Retail
and Other
|
289 | 124 | 308 | 250 | ||||||||||||
Intersegment
interest income (1)
|
(168 | ) | — | (487 | ) | — | ||||||||||
Total
|
$ | 1,065 | $ | 101 | $ | 2,264 | $ | 3,008 | ||||||||
Interest
Expense, net of capitalized interest
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 4,028 | $ | 4,146 | $ | 14,692 | $ | 15,641 | ||||||||
Energy
Services (3)
|
73 | 738 | 244 | 2,502 | ||||||||||||
Segment
subtotal
|
4,101 | 4,884 | 14,936 | 18,143 | ||||||||||||
Retail
and Other
|
1,254 | 298 | 1,504 | 1,541 | ||||||||||||
Intersegment
interest expense (1)
|
(168 | ) | — | (487 | ) | — | ||||||||||
Total
|
$ | 5,187 | $ | 5,182 | $ | 15,953 | $ | 19,684 | ||||||||
Income
Tax Provision (Benefit)
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 2,369 | $ | 3,218 | $ | 40,472 | $ | 34,378 | ||||||||
Energy
Services
|
(14,764 | ) | (22,768 | ) | (11,004 | ) | (30,817 | ) | ||||||||
Segment
subtotal
|
(12,395 | ) | (19,550 | ) | 29,468 | 3,561 | ||||||||||
Retail
and Other
|
249 | 5,171 | (8,172 | ) | 7,454 | |||||||||||
Total
|
$ | (12,146 | ) | $ | (14,379 | ) | $ | 21,296 | $ | 11,015 | ||||||
Net
Financial Earnings
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 4,134 | $ | 147 | $ | 68,796 | $ | 50,987 | ||||||||
Energy
Services
|
(4,484 | ) | (5,630 | ) | 35,977 | 56,979 | ||||||||||
Segment
subtotal
|
(350 | ) | (5,483 | ) | 104,773 | 107,966 | ||||||||||
Retail
and Other
|
1,596 | 1,397 | 1,379 | 2,253 | ||||||||||||
Total
|
$ | 1,246 | $ | (4,086 | ) | $ | 106,152 | $ | 110,219 |
(1)
|
Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation
|
(2)
|
Included
in Other income in the Unaudited Condensed Consolidated Statement of
Income
|
(3)
|
Amounts have been
restated to reflect a reclassification between interest income and
interest expense, which were previously
netted.
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
The chief
operating decision maker of the Company is the Chief Executive Officer (CEO).
The CEO uses net financial earnings as a measure of profit or loss in measuring
the results of the Company’s segments and operations. A reconciliation of
consolidated net financial earnings to consolidated net income, for the three
and nine months ended June 30, 2009 and 2008, respectively, is as
follows:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Consolidated
Net Financial Earnings (Loss)
|
$ | 1,246 | $ | (4,086 | ) | $ | 106,152 | $ | 110,219 | |||||||
Less:
|
||||||||||||||||
Unrealized
loss from derivative instruments, net of taxes
|
6,981 | 21,428 | 39,557 | 97,782 | ||||||||||||
Realized
loss (gain) from derivative instruments related to natural gas inventory,
net of taxes
|
8,420 | (585 | ) | 20,490 | (10,383 | ) | ||||||||||
Consolidated
Net (Loss) Income
|
$ | (14,155 | ) | $ | (24,929 | ) | $ | 46,105 | $ | 22,820 |
The
company uses derivative instruments as economic hedges of purchases and sales of
physical gas inventory. For GAAP purposes, these derivatives are recorded at
fair value and related changes in fair value are included in reported earnings.
Revenues and cost of gas related to physical gas flow is recognized as the gas
is delivered to customers. Consequently, there is a mismatch in the timing of
earnings recognition between the economic hedges and physical gas flows. Timing
differences occur in two ways:
|
Ÿ
|
Unrealized
gains and losses on derivatives are recognized in reported earnings in
periods prior to physical gas inventory flows;
and
|
|
Ÿ
|
Unrealized
gains and losses of prior periods are reclassified as realized gains and
losses when derivatives are settled in the same period as physical gas
inventory movements occur.
|
Net
financial earnings is a measure of the earnings based on eliminating these
timing differences, to effectively match the earnings effects of the economic
hedges with the physical sale of gas. Consequently, to reconcile between GAAP
and net financial earnings, current period unrealized gains and losses on the
derivatives are excluded from net financial earnings as a reconciling item.
Additionally, realized derivative gains and losses are also included in current
period net income, however net financial earnings include only realized gains
and losses related to natural gas sold out of inventory, effectively matching
the full earnings effects of the derivatives with realized margins on physical
gas flows.
The
Company’s assets for the various business segments and business operations are
detailed below:
June
30,
|
September
30,
|
|||||||
(Thousands)
|
2009
|
2008
|
||||||
Assets
at end of period:
|
||||||||
Natural
Gas Distribution
|
$ | 1,745,411 | $ | 1,761,964 | ||||
Energy
Services
|
374,500 | 699,897 | ||||||
Segment
Subtotal
|
2,119,911 | 2,461,861 | ||||||
Retail
and Other
|
215,343 | 231,551 | ||||||
Intercompany
Assets
(1)
|
(21,955 | ) | (58,115 | ) | ||||
Total
|
$ | 2,313,299 | $ | 2,635,297 |
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified in
consolidation
NJRES’
assets decreased 46 percent from September 30, 2008 to June 30, 2009, due
primarily to lower inventory values resulting from a decline in commodity
prices.
For the
nine months ended June 30, 2009, NJRES had one customer who represented more
than 10 percent of its total revenue. Management believes that the loss of this
customer would not have a material effect on its financial position, results of
operations or cash flows as an adequate number of alternative counterparties
exist.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
RELATED
PARTY TRANSACTIONS
|
During
the three months ended June 30, 2009, NJRES entered into park and loan
agreements and firm storage contracts with Steckman Ridge, an affiliated
regulated natural gas storage facility, for up to 2 Bcf of natural gas storage
with various terms ranging from April 2009 to March 2010. NJRES will incur
demand fees payable to Steckman Ridge aggregating approximately $5.5 million
annually. As of June 30, 2009, NJRES’ fees and related payable balances were
immaterial.
OTHER
|
At June
30, 2009, there were 41,950,253 shares of common stock outstanding and the book
value per share was $17.36.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations gives effect to the restatement of the Company's unaudited
condensed consolidated statements for the three and nine months ended June 30,
2009 and 2008 and for the condensed consolidated balance sheets as of June 30,
2009 and September 30, 2008, as discussed in Note 2 to the Company's condensed
consolidated financial statements in Part I, Item
1.
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company consisting of the Natural Gas Distribution segment, Energy Services
segment, and Retail and Other operations.
Comprising
the Natural Gas Distribution segment, New Jersey Natural Gas (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).
NJR
Energy Services (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 operations (Retail and Other) includes NJR Energy, an investor
in energy-related ventures, most significantly through NJNR Pipeline Company,
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 17.7 billion cubic
foot (Bcf) natural gas storage facility, with up to 12 Bcf working capacity,
which is being jointly developed, constructed and operated with a partner in
Pennsylvania; NJR Investment Company, which makes energy-related equity
investments; NJR Home Services Company (NJRHS), which provides service, sales
and installation of appliances; Commercial Realty and Resources Corporation
(CR&R), which holds and develops commercial real estate; and NJR Service
Corporation (NJR Service), which provides support services to the various NJR
businesses.
Assets by
business segment and business operations are as follows:
(Thousands)
|
June
30,
2009
|
September
30,
2008
|
||||||||||||||
Assets
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 1,745,411 | 76 | % | $ | 1,761,964 | 67 | % | ||||||||
Energy
Services
|
374,500 | 16 | 699,897 | 26 | ||||||||||||
Retail
and Other
|
215,343 | 9 | 231,551 | 9 | ||||||||||||
Intercompany
Assets
(1)
|
(21,955 | ) | (1 | ) | (58,115 | ) | (2 | ) | ||||||||
Total
|
$ | 2,313,299 | 100 | % | $ | 2,635,297 | 100 | % |
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified in
consolidation
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJRES and
NJR Energy account for certain of their derivative instruments 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). Effective October 1, 2007, the Company changed the
treatment of its physical commodity contracts at NJRES, such that the changes in
fair value of new contracts are included in earnings, and are not accounted for
using the “normal purchase normal sales” (normal) scope exception of SFAS 133.
In addition, effective October 1, 2008, due to changes in the Company’s ability
to assert physical delivery, the Company is no longer treating physical
commodity contracts executed prior to October 1, 2007 as normal. Therefore, all
NJRES physical commodity contracts are accounted for at fair value on the
Unaudited Condensed Consolidated Balance Sheets, with changes in fair value
included as a component of operating revenue and gas purchases, as appropriate,
on the Unaudited Condensed Consolidated Statements of Income. All physical
commodity contracts at NJNG and NJR Energy continue to be designated as normal
and accounted for under accrual accounting.
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 derivative instruments, used to economically hedge future natural gas
purchases, sales and transportation. Realized gains and losses at NJRES include
the settlement of natural gas futures instruments used to economically hedge
natural gas purchases in inventory that have not been sold.
Included in Net income for the
nine-month period ended June 30, 2009 and 2008, are unrealized (losses) in the
Energy Services segment of $(29.3) million and $(108) million, after taxes,
respectively and realized (losses) gains of $(20.5) million and $10.4 million,
after taxes, respectively, which are related to derivative instruments that have
settled and are designed to economically hedge natural gas that is in storage
inventory.
Also,
included in Net income are unrealized (losses) gains in the Retail and Other
operations of $(10.2) million and $10.2 million, after taxes, for the nine-month
period ended June 30, 2009 and 2008, respectively.
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably through several key initiatives including:
|
Ÿ
|
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;
|
|
Ÿ
|
Working
with the BPU and the Department of the Public Advocate, Division of Rate
Counsel (Rate Counsel), on the implementation and continuing review 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 against potential losses associated with reduced
customer usage. CIP usage differences are calculated annually and are
recovered one year following the end of the CIP usage
year;
|
|
Ÿ
|
Managing
the new customer growth rate which is expected to be approximately 1.3
percent over the next two years. In fiscal 2009 and 2010, NJNG currently
expects to add, in total, approximately 12,000 to 14,000 new customers.
The Company believes that this stable growth would increase utility gross
margin under its base rates as provided by approximately $3.6 million
annually, as calculated under NJNG’s CIP
tariff;
|
|
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.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
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. This base rate case filing was consistent with NJNG’s
objectives of providing safe and reliable service to its customers and earning a
market-based return.
On
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the CIP baseline usage rate, received an allowed return on
equity component of 10.3 percent, reduced its depreciation expense component
from 3 percent to 2.34 percent and reduced its annual depreciation expense by
$1.6 million as a result of the amortization of previously recovered asset
retirement obligations.
The CIP
allows 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 10.3 percent, and an evaluation of Basic Gas Supply Service
(BGSS)-related savings achieved. An annual review of the CIP must be filed in
June of each year, coincident with NJNG’s annual BGSS filing. In October 2007,
the BPU provisionally approved NJNG’s initial CIP recovery rates, which are
designed to recover approximately $15.6 million of accrued margin and on August
1, 2008, the provisional rates were approved by the BPU on a permanent basis. In
October 2008, the BPU provisionally approved recovery of an additional $6.8
million of accrued margin for the CIP, resulting in a total recovery requested
of $22.4 million includes amounts accrued and estimated through September 30,
2008. On June 10, 2009, these provisional rates were approved by the BPU on a
permanent basis. On June 1, 2009, NJNG filed its annual BGSS and CIP filing for
recoverable CIP amounts for fiscal 2009, requesting approval to modify its CIP
recovery rates effective October 1, 2009, resulting in total annual recovery of
$6.9 million. The total recovery requested for fiscal 2009 includes amounts
accrued and estimated through September 30, 2009. As of June 30, 2009, NJNG has
$6.3 million accrued to be recovered in Regulatory Assets in the Unaudited
Condensed Consolidated Balance Sheets. On April 1, 2009, NJNG filed a letter
with the BPU requesting a 1-year extension to its CIP through October 1,
2010.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of June 30, 2009 and September 30, 2008, the
obligation to fund these conservation programs was reflected at its present
value of $269,000 and $864,000, respectively in the Unaudited Condensed
Consolidated Balance Sheets.
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.
As a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding their
ultimate recovery from customers. The most significant costs incurred that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs. Actual remediation costs may
vary from management’s estimates due to the developing nature of remediation
requirements, regulatory decisions by the New Jersey Department of Environmental
Protection (NJDEP) and related litigation. If there are changes in the
regulatory position on the recovery of these costs, such costs would be charged
to income in the period of such determination.
On April
16, 2009, the BPU approved NJNG’s AIP allowing NJNG to commence construction on
14 infrastructure projects. NJNG will make a filing for the recovery of
infrastructure program investment costs in June 2010 to be effective October 1,
2010. The filing will allow the recovery of costs of the AIP construction
activities for the period ending August 31, 2010, including the recovery of
NJNG’s overall weighted cost of capital on these investments.
On July
1, 2009, the BPU approved NJNG’s Energy Efficiency (EE) Program allowing
approximately $21.1 million, if fully subscribed, to support three EE Programs.
A Tariff Rider Mechanism was approved by the BPU related to the recovery of the
EE Program costs, effective August 1, 2009, and includes the recovery of NJNG’s
overall weighted cost of capital on these investments.
Due to
the capital-intensive nature of NJNG’s operations and the seasonal nature of its
working capital requirements, significant changes in interest rates can also
impact NJNG’s results.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Energy
Services Segment
NJRES
provides unregulated wholesale energy services and engages in the business of
optimizing natural gas storage and transportation assets. The rights to these
assets are contractually acquired in anticipation of delivering natural gas or
performing asset management activities for our customers or in conjunction with
identifying arbitrage opportunities that exist in the marketplace. These
arbitrage opportunities occur as a result of price differences between market
locations and/or time horizons. These activities are conducted in the market
areas in which we have expertise and include states from the Gulf Coast and
Mid-continent regions to the Appalachian and Northeast regions and
Canada.
More
specifically, NJRES activities consist of the following elements which provide
for growth, while focusing on maintaining a low-risk operating and counterparty
credit profile:
|
Ÿ
|
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate gross margin;
|
|
Ÿ
|
Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
|
|
Ÿ
|
Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers by identifying the lowest cost alternative with the
natural gas supply, transportation availability and markets to which NJRES
is able to access through its business footprint and contractual asset
portfolio; and
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
NJRES
views “financial margin” as a financial measurement metric. NJRES’ financial
margin, which is a non-GAAP financial measure, 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 as part of a planned
transaction. NJRES uses financial margin to gauge operating results against
established benchmarks and earnings targets as it eliminates the impact of
volatility in GAAP earnings that can occur prior to settlement of the physical
commodity portion of the transactions and therefore is more representative of
the overall expected economic result.
NJRES
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 of the United States and eastern Canada. These assets
become more valuable when prices change between these areas and across time
periods. NJRES is able to capture financial margin by locking in the
differential between purchasing natural gas at a low future price and, in a
related transaction, selling that natural gas at a higher future price, all
within the constraints of its credit and contracts policies. In addition, NJRES
seeks to optimize 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.
NJRES
transacts with a variety of counterparties including local distribution
companies, industrial companies, electric generators and retail aggregators. The
physical sales commitments to these counterparties allows NJRES to leverage its
transportation and storage capacity. These physical sale commitments are managed
in an aggregate fashion, and as a result, gives NJRES the ability to extract
more value from its portfolio of natural gas storage and pipeline transportation
capacity. 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.
In
conducting its business, NJRES utilizes risk management practices which include
a formal risk management policy that includes trading limits, approval
processes, segregation of duties, and formal contract and credit review and
approval procedures. NJRES continuously monitors and seeks to reduce the risk
associated with various counterparties credit exposure. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Retail
and Other Operations
As part
of the Retail and Other operations 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 has either a regulated or market-based
rate, can provide a significant growth opportunity for the Company. To that end,
NJR has ownership interests in Iroquois (regulated rate) and Steckman Ridge
(market-based rate), and is actively pursuing other potential opportunities that
meet its investment and development criteria. Other businesses included as part
of Retail and Other 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. Also included within
Retail and Other operations are interest income and organizational expenses
incurred at NJR.
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. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have
begun to inject natural gas inventory in preparation for the initial withdrawal
season. Construction will continue through the summer of 2009 as more facilities
are made ready to support the initial winter season. As of June 30, 2009, NJR
had invested $120 million in Steckman Ridge, excluding capitalized interest and
other direct costs. Total project costs related to the development of the
storage facility are currently estimated at approximately $265 million, of which
NJR is obligated to fund 50 percent or approximately $132.5 million. NJR
anticipates that Steckman Ridge could seek non-recourse financing upon full
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, 2008. NJR’s critical
accounting policies have not changed materially from those reported in the 2008
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 and interpreted, (SFAS
133) under which NJR records the fair value of derivatives held as assets and
liabilities. In addition, NJRES also treats contracts for the purchase or sale
of natural gas as derivatives and, therefore, records 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.
NJRES
previously applied the “normal purchase normal sale” (normal) scope exception
for certain physical commodity contracts that were executed prior to October 1,
2007 which otherwise qualified as derivatives. Based on current conditions in
the credit markets and developments within the natural gas industry, NJRES has
determined that the probability of physical delivery with these counterparties
could potentially diminish and, therefore, these contracts do not meet the
requirements, outlined in SFAS 133, to continue applying the normal scope
exception. As a result, effective October 1, 2008, NJRES began treating 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 Operating revenues and Gas purchases, as appropriate, in the
Unaudited Condensed Consolidated Statements of Income.
Effective
October 1, 2008, NJR began applying the provisions of SFAS 157 Fair Value Measurement (see
Note 5, Fair Value). As
a result of the adoption of SFAS 157, NJR implemented procedures to evaluate its
own credit profile to determine an appropriate valuation adjustment to the
recorded amount of its derivative liabilities. NJR uses historical default
probabilities corresponding to Standard and Poor’s issuer
ratings.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
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. Under regulatory rate practices and in accordance with SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation, NJNG fully recovers AFUDC through base
rates. As a result of the BPU’s Base Rate order issued in October 2008, NJNG
implemented certain rate design changes, including a change to its AFUDC
calculation. Effective October 3, 2008, NJNG is allowed to recover an
incremental cost of equity component during periods when its short-term debt
balances are lower than its construction work in progress balance. This results
in a non-cash income statement recognition that will also be capitalized as a
component of Utility plant.
Foreign
Currency Transactions
NJRES’
market area includes Canadian delivery points and as a result it incurs certain
natural gas commodity costs and demand fees that are denominated in Canadian
dollars. Gains or losses that occur as a result of these foreign currency
transactions are reported as a component of Gas purchases in the Consolidated
Statements of Income and were not material during the three and nine months
ended June 30, 2009 and June 30, 2008, respectively.
Recently
Issued Accounting Standards
Refer to
Note 1. General, for
discussion of recently issued accounting standards.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Results
of Operations
Our
business segments and operations contributed the following to consolidated net
income for the three and nine months ended June 30, 2009 and 2008:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||||||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||||||||||
Net
income (loss)
|
||||||||||||||||||||||||||||||||
Natural
Gas Distribution
|
$ | 4,134 | (29 | )% | $ | 147 | (1 | )% | $ | 68,796 | 149 | % | $ | 50,987 | 223 | % | ||||||||||||||||
Energy
Services
|
(20,170 | ) | 142 | (32,878 | ) | 132 | (13,828 | ) | (30 | ) | (40,646 | ) | (178 | ) | ||||||||||||||||||
Retail
and Other
|
1,881 | (13 | ) | 7,802 | (31 | ) | (8,863 | ) | (19 | ) | 12,479 | 55 | ||||||||||||||||||||
Total
|
$ | (14,155 | ) | 100 | % | $ | (24,929 | ) | 100 | % | $ | 46,105 | 100 | % | $ | 22,820 | 100 | % |
Net
(loss) for the three-month period ended June 30, 2009, decreased by 43 percent
to $(14.2) million, compared with $(24.9) million for the same period last
fiscal year. Basic and diluted loss per share decreased 43 percent to $(0.34)
compared with $(0.59) for the same period last fiscal year. The decrease in net
loss during the three months ended June 30, 2009, was due primarily to a change
in the value of storage inventory and derivative contracts at NJRES and lower
unrealized losses at Retail and Other as a result of a continuing decline in
natural gas commodity prices. Partially offsetting these losses was an increase
in margins at NJNG, as a result of the BPU approved increase in its base rates
that took effect at the beginning of fiscal 2009.
Net
income for the nine-month period ended June 30, 2009, increased 102 percent to
$46.1 million, compared with $22.8 million for the same period last fiscal year.
Basic and diluted EPS increased 98.2 percent to $1.09, compared with $0.55 and
100 percent to $1.08, compared with $0.54, respectively, for the same period
last fiscal year. The decrease in net income was primarily due to unrealized
losses at Retail and Other as a result of the impact of lower commodity prices
on long financial derivative contracts, which was partially offset by improved
margins at NJNG as a result of the changes to its base rates and higher gross
margin from incentive programs and an overall reduction in interest expense
driven by lower average debt balances and short-term borrowing rates.
The
Company’s Operating revenues and Gas purchases are as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||||||||||
(Thousands)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Operating
revenues
|
$ | 441,052 | $ | 1,000,439 | (55.9 | )% | $ | 2,179,872 | $ | 2,989,122 | (27.1 | )% | ||||||||||||
Gas
purchases
|
$ | 400,487 | $ | 974,677 | (58.9 | )% | 1,859,495 | 2,716,761 | (31.6 | )% |
Operating
revenues decreased $559.4 million and Gas purchases decreased $574.2 million in
the three months ended June 30, 2009, compared with the same period of the prior
fiscal year due primarily to:
|
Ÿ
|
a
decrease in Operating revenues of $518.2 million and Gas purchases of
$537.9 million at NJRES due primarily to lower average natural gas prices,
which correlate to the decrease in NYMEX prices of 70 percent from an
average of $11.49 to $3.81;
|
|
Ÿ
|
a
decrease in Operating revenues of $30.7 million and Gas purchases of $37.9
million at NJNG due primarily to a 67 percent decrease in off-system sales
prices from an average of $11.85/dth to $3.87/dth;
and
|
|
Ÿ
|
a
decrease in Operating revenues of $10.5 million at Retail and Other due to
an increase of $10.4 million in unrealized losses at NJR Energy, which
were the result of declining natural gas market prices within a portfolio
of net long financial derivative
positions.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
For the
nine months ended June 30, 2009, Operating revenues decreased $809.3 million and
Gas purchases decreased $857.3 compared with the same period of the prior fiscal
year due primarily to:
|
Ÿ
|
a
decrease in Operating revenues of $790.5 million and Gas purchases of $837
million at NJRES due primarily to the same factors noted
above;
|
|
Ÿ
|
a
decrease in Operating revenues of $35 million at Retail and Other due to
an increase of $34.7 million of unrealized losses at NJR Energy due
primarily to the same factors noted above; partially offset
by
|
|
Ÿ
|
an
increase in Operating revenues of $18.3 million and a decrease in Gas
purchases of $21.5 million at NJNG. The increase in Operating revenue was
due primarily to an increase in firm sales as a result of colder weather
during the current fiscal period, partially offset by higher credits
extended to customers during fiscal 2009, in comparison to the BGSS
refunds given to customers during fiscal 2008. In addition, operating
revenues were favorably impacted by the base rate increase, while
increased credits from incentive programs contributed to the decrease in
Gas purchases.
|
Natural
Gas Distribution Operations
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 487,000 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.
NJNG’s
unaudited financial results are as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Utility
Gross Margin
|
||||||||||||||||
Operating
revenues
|
$ | 148,826 | $ | 179,511 | $ | 958,995 | $ | 940,689 | ||||||||
Less:
|
||||||||||||||||
Gas
purchases
|
87,169 | 125,060 | 631,712 | 653,196 | ||||||||||||
Energy
and other taxes
|
9,830 | 9,031 | 61,208 | 53,137 | ||||||||||||
Regulatory
rider expense
|
6,280 | 5,925 | 40,585 | 35,879 | ||||||||||||
Total
Utility Gross Margin
|
45,547 | 39,495 | 225,490 | 198,477 | ||||||||||||
Operation
and maintenance expense
|
27,351 | 21,637 | 79,137 | 69,417 | ||||||||||||
Depreciation
and amortization
|
7,668 | 9,488 | 22,120 | 28,053 | ||||||||||||
Other
taxes not reflected in utility gross margin
|
819 | 818 | 2,807 | 2,642 | ||||||||||||
Operating
Income
|
9,709 | 7,552 | 121,426 | 98,365 | ||||||||||||
Other
income
|
822 | (41 | ) | 2,534 | 2,641 | |||||||||||
Interest
charges, net of
capitalized interest
|
4,028 | 4,146 | 14,692 | 15,641 | ||||||||||||
Income
tax provision
|
2,369 | 3,218 | 40,472 | 34,378 | ||||||||||||
Net
Income
|
$ | 4,134 | $ | 147 | $ | 68,796 | $ | 50,987 |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
The
following table summarizes Utility Gross Margin and throughput in billion cubic
feet (Bcf) of natural gas by type:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
($
in thousands)
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
||||||||||||||||||||||||
Residential
|
$ | 28,488 | 5.8 | $ | 26,080 | 5.6 | $ | 150,235 | 40.5 | $ | 137,667 | 37.8 | ||||||||||||||||||||
Commercial,
Industrial & Other
|
9,051 | 1.2 | 7,455 | 1.3 | 40,398 | 9.1 | 40,478 | 8.3 | ||||||||||||||||||||||||
Transportation
|
5,987 | 1.5 | 4,639 | 1.4 | 24,838 | 8.4 | 15,438 | 8.0 | ||||||||||||||||||||||||
Total
Utility Firm Gross Margin
|
43,526 | 8.5 | 38,174 | 8.3 | 215,471 | 58.0 | 193,583 | 54.1 | ||||||||||||||||||||||||
Incentive
programs
|
1,940 | 13.6 | 1,225 | 5.6 | 9,783 | 45.9 | 4,836 | 26.8 | ||||||||||||||||||||||||
Interruptible
|
81 | 1.0 | 96 | 1.6 | 236 | 2.6 | 358 | 4.2 | ||||||||||||||||||||||||
BPU
settlement
|
— | — | — | — | — | — | (300 | ) | — | |||||||||||||||||||||||
Total
Utility Gross Margin/throughput
|
$ | 45,547 | 23.1 | $ | 39,495 | 15.5 | $ | 225,490 | 106.5 | $ | 198,477 | 85.1 |
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.
NJNG’s
Operating revenues decreased by $30.7 million, or 17.1 percent, and Gas
purchases decreased by $37.9 million, or 30.3 percent, for the three months
ended June 30, 2009, respectively, compared with same period in the prior fiscal
year as a result of:
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $34.7 million and $34.6 million, respectively, as a
result of 67 percent lower average sale prices from $11.85/dth compared
with $3.87/dth due to the change in the wholesale price of natural gas;
and
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to interruptible
sales in the amount of $1.9 million and $1.6 million, respectively, due to
a decrease in sales to electric co-generation customers; partially offset
by
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to total firm
sales in the amount of $9.6 million and $1.4 million, respectively, as a
result of an increase in BGSS, base rates and rates associated with
riders.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
NJNG’s
Operating revenues increased by $18.3 million, or 1.9 percent, and Gas purchases
decreased by $21.5 million, or 3.3 percent, for the nine months ended June 30,
2009, respectively, compared with the same period in the prior fiscal year as a
result of:
|
Ÿ
|
an
increase in Operating revenue related to firm sales in the amount of $76.1
million, as a result of increases in BGSS, base rates, rates associated
with riders and sales tax and TEFA as described below and an increase in
Gas purchases in the amount of $40.1 million, as a result of the BGSS
increases;
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to firm sales in
the amount of $51.2 million and $34.1 million, respectively, due primarily
to weather being 8.6 percent colder than the same period of the prior
fiscal year, partially offset by a decrease in Operating revenue of $18.8
million, as a result of lower accruals relating to the CIP during the
current fiscal period;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $66.8 million and $67.4 million, respectively, as a
result of a 41.9 percent lower average sales prices that decreased from
$10.05/dth to $5.84/dth due to the change in the wholesale price of
natural gas;
|
|
Ÿ
|
a
net decrease in Operating revenue and Gas purchases of $15 million related
to fiscal 2009 temporary rate credits of approximately $45 million
extended to customers, compared with a BGSS refund of $30 million given to
customers during fiscal 2008. NJNG extends these credits and refunds to
its customers to manage the recovery of its gas costs during periods when
wholesale natural gas costs are declining in comparison with the
established rate included in NJNG’s BGSS
tariff;
|
|
Ÿ
|
a
decrease of $5.2 million in Gas purchases related to increased amounts
received through the storage incentive program due primarily to the timing
of the incentive margins during the program's injection period as compared
with the same period in the prior fiscal
year;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to interruptible
sales in the amount of $4.6 million and $4 million, respectively, due to a
decrease in sales to electric co-generation customers;
and
|
|
Ÿ
|
a
decrease of $2.6 million in Gas purchases related to increased amounts
earned through the financial risk management (FRM) and capacity release
incentive programs of $3.2 million in fiscal 2009 as compared with
$559,000 in fiscal 2008 due primarily to lower NYMEX market prices in
comparison to published benchmark prices, resulting in additional
opportunities to purchase call options that were below the established
quarterly Financial Risk Management (FRM) benchmark pricing
levels.
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Unaudited Condensed Consolidated Statements of Income, totaled
$9.8 million and $9 million for the three months ended June 30, 2009 and 2008,
respectively. For the nine months ended June 30, 2009 and 2008, Sales tax and
TEFA totaled $61.2 million and $53.1 million, respectively. The increase for
both periods was due primarily to an increase of operating revenue from firm
sales of $17.7 million and $113.4 million for the three and nine months ended
June 30, 2009, respectively.
Regulatory
rider expenses are calculated on a per-therm basis and totaled $6.3 million and
$5.9 million for the three month periods ended June 30, 2009 and 2008,
respectively, and $40.6 million and $35.9 million for the nine month periods
ended June 30, 2009 and 2008, respectively. The increase was due primarily to an
increase in firm throughput of 0.2 Bcf for the three months and 3.9 Bcf for the
nine months ended June 30, 2009, as compared with the three and nine months
ended June 30, 2008, respectively, as a result of the previously mentioned
colder weather coupled with an increase in the SBC rate.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Utility
gross margin is comprised of three major categories:
|
Ÿ
|
Utility
firm gross margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
Ÿ
|
Incentive
programs, where margins generated or savings achieved from BPU-approved
off-system sales, capacity release, Financial Risk Management (defined in
Incentive Programs, below) or storage incentive programs are shared
between customers and NJNG; and
|
|
Ÿ
|
Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels.
|
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.
As a
result of NJNG’s implementation of the CIP, utility gross margin is no longer
linked to customer usage. The CIP eliminates the disincentive to promote
conservation and energy efficiency and facilitate normalizing NJNG’s utility
gross margin recoveries for variances not only in weather but also in 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 10.3 percent.
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 $5.4 million, or 14 percent, and $21.9
million, or 11.3 percent, for the three and nine months ended June 30, 2009,
respectively, as compared with the same periods in the prior fiscal year, due
primarily to an increase in residential and commercial transport customer margin
as a result of an increase in base rates effective October 3, 2008, partially
offset by a decrease in the amounts accrued through the CIP program. Firm margin
was also favorably impacted by the increase in firm and transport customers of
1,300 and 3,000, respectively, over the same periods in the prior fiscal
year.
Utility
firm gross margin from residential service sales increased to $28.5 million and
$150.2 million for the three and nine months ended June 30, 2009, respectively,
as compared with $26.1 million and $137.7 million for the three and nine months
ended June 30, 2008, respectively. NJNG delivered 5.8 Bcf compared with 5.6 Bcf,
to its firm residential customers, in the three months ended June 30, 2009 and
2008, respectively. In the nine months ended June 30, 2009, NJNG delivered 40.5
Bcf compared with 37.8 Bcf during the same period in fiscal 2008 due primarily
to weather being 8.6 percent colder.
Utility
firm gross margin from transportation service increased to $6 million and $24.8
million for the three and nine months ended June 30, 2009, respectively, as
compared with $4.6 million and $15.4 million for the three and nine months ended
June 30, 2008, respectively. NJNG delivered 1.5 Bcf and 8.4 Bcf for the three
and nine months ended June 30, 2008, respectively, to its customers that utilize
its transportation service, compared with 1.4 Bcf and 8 Bcf, respectively, for
the same periods ended June 30, 2008. The increase for both periods was due
primarily to the change in base rates, effective in October 2008.
The
weather for both the three months ended June 30, 2009 and 2008, was 15.6 percent
warmer-than-normal, based on a 20-year average, which resulted in a positive
adjustment of utility gross margin under the weather component of the CIP of
$1.9 million and $1.7 million, respectively. The weather for the nine months
ended June 30, 2009, was 1 percent colder-than-normal, which resulted in a
negative adjustment of $(177,000), compared with 8.3 percent warmer-than-normal
weather for the same period last fiscal year, which resulted in an accrual of
utility gross margin of $9.1 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 number of degree
days.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Customer
usage was higher than the established benchmark during the three months ended
June 30, 2009, which resulted in an adjustment of utility gross margin under the
CIP of $(189,000), compared with an accrual of $2.7 million, during the three
months ended June 30, 2008. Customer usage was lower than the established
benchmark during the nine months ended June 30, 2009, which resulted in an
accrual of utility gross margin under the CIP of $2.2 million, compared with
$11.5 million, during the three months ended June 30, 2008. The change in the
weather and non-weather components of the CIP include the effect of adjustments,
normal degree days, consumption factors and benchmarks related to the baseline
use per customer, which was amended with NJNG’s new base rates approved by the
BPU effective October 3, 2008.
NJNG had
13,213 and 10,697 residential customers and 5,679 and 5,179 commercial customers
using its transportation service at June 30, 2009 and 2008, respectively. The
increase in transportation customers for the nine month period ended June 30,
2009, was due primarily to an increase in marketing activity by third party
natural gas providers in NJNG’s distribution territory.
NJNG
added 4,193 and 4,896 new customers during the nine months ended June 30, 2009
and 2008, respectively. In addition, NJNG converted 460 and 505 existing
customers to natural gas heat and other services during the same periods for
fiscal 2009 and 2008, respectively. The decline in customer growth is driven by
a slower new construction market. This customer growth represents an estimated
annual increase of approximately 0.78 Bcf in sales to firm customers, assuming
normal weather and usage which would contribute approximately $2.5 million to
utility gross margin.
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 reduce its overall costs applicable to BGSS
customers. 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. Gross margin is generated by entering into
financial option positions that have a strike price below a published quarterly
benchmark, minus premiums and associated fees. NJNG retains 15 percent of the
utility gross margin, with 85 percent credited to firm customers through the
BGSS.
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 natural gas injection
season.
On
October 3, 2008, the BPU issued the Base Rate order, which extends the incentive
programs through October 31, 2011, and provides changes to certain volume and
cost limitations surrounding these incentive programs.
Sales
under NJNG’s incentive programs totaled 13.6 Bcf and generated $1.9 million of
utility gross margin for the three months ended June 30, 2009, compared with 5.6
Bcf and $1.2 million of utility gross margin during the same period last fiscal
year. Sales under the incentive programs totaled 45.9 Bcf and generated $9.8
million of utility gross margin for the nine months ended June 30, 2009,
compared with 26.8 Bcf and $4.8 million of utility gross margin during the same
period last fiscal year. Utility gross margin from incentive programs comprised
4.3 percent of total utility gross margin for both the three and nine months
ended June 30, 2009, and 3.1 percent and 2.4 percent of total utility gross
margin for the three and nine months ended June 30, 2008, respectively. The
increase in utility gross margin was due primarily to increased amounts earned
through the FRM program of $1.6 million for the nine months ended June 30, 2009,
and $312,000 and $1.7 million for both the three and nine months ended June 30,
2009, respectively, from increased amounts received through the storage
incentive program as discussed above. The increase in FRM is due primarily to
NYMEX market prices in the current fiscal year period being consistently lower
than the published FRM benchmark prices, resulting in additional opportunities
to transact long call options that are below the established quarterly FRM
benchmark pricing levels.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Interruptible
Revenues
As of
June 30, 2009, NJNG serves 61 customers through interruptible transportation and
sales services. Interruptible customers are those customers whose service can be
temporarily halted as they have the ability to utilize an alternate fuel source.
Although therms transported and sold to interruptible customers represented 1
Bcf, or 4.3 percent, and 2.6 Bcf, or 2.4 percent, of total throughput for the
three and nine months ended June 30, 2009, respectively, and 1.6 Bcf, or 10.3
percent, and 4.2 Bcf, or 4.9 percent, of the total throughput during the same
period in the prior fiscal year, respectively, they accounted for less than 1
percent of the total utility gross margin in each year.
Operation
and Maintenance Expense
Operation
and maintenance expense increased $5.7 million, or 26.4 percent, during the
three months ended June 30, 2009, as compared with the same period in the last
fiscal year, due primarily to:
|
Ÿ
|
increased
benefit costs in the amount of $1.9 million primarily as a result of the
decline in equity markets and the related impact on plan asset
values;
|
|
Ÿ
|
increased
labor costs of $1.3 million due primarily to annual wage increases,
partially offset by lower overtime;
|
|
Ÿ
|
higher
pipeline integrity costs of
$846,000;
|
|
Ÿ
|
an
increase in bad debt expense of $650,000 due primarily to additional
write-offs as a result of the economic
recession; and
|
|
Ÿ
|
an
increase in computer software leasing and maintenance of
$429,000.
|
Operation
and maintenance expense increased $9.7 million, or 14 percent, during the nine
months ended June 30, 2009, as compared with the same period in the last fiscal
year, due primarily to:
|
Ÿ
|
increased
benefit costs of $2.7 million including higher costs associated with
postemployment benefits as described
above;
|
|
Ÿ
|
increased
labor costs of $2 million due to the same factors as
above;
|
|
Ÿ
|
an
increase in the bad debt expense of $1.9 million associated with higher
operating revenues and write-off
activity;
|
|
Ÿ
|
higher
pipeline integrity costs of $1.1
million;
|
|
Ÿ
|
an
increase of $412,000 in contractors expenses due to third party damage
repair and increased maintenance;
and
|
|
Ÿ
|
increased
legal fees of $305,000.
|
Operating
Income
Operating
income increased $2.2 million, or 28.6 percent, for the three months ended June
30, 2009, as compared with the same period in the last fiscal year, due
primarily to:
|
Ÿ
|
an
increase in total Utility gross margin of $6.1 million, as discussed
above;
|
|
Ÿ
|
a
decrease in depreciation expense of $1.8 million, due to a rate reduction
from 3 percent to 2.34 percent and amortization of previously recovered
asset retirement obligations, both of which were part of the settlement of
the base rate case; partially offset
by
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $5.7
million, as discussed above.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Operating
income increased $23.1 million, or 23.4 percent, for the nine months ended June
30, 2009, as compared with the same period in the last fiscal year, due
primarily to:
|
Ÿ
|
an
increase in total Utility gross margin of $27 million, as discussed
above;
|
|
Ÿ
|
a
decrease in depreciation expense of $5.9 million, as discussed
above;
|
|
Ÿ
|
an
increase in interest income of $585,000, due primarily to a settlement of
a counterparty receivable that included interest income on escrowed
amounts; and
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $9.7
million, as discussed above.
|
Interest
Expense
Interest
expense decreased $118,000 and $949,000 for the three and nine months ended June
30, 2009, respectively compared with the same periods in the last fiscal year,
due primarily to:
|
Ÿ
|
lower
average interest rates and balances related to NJNG’s commercial paper
program, as well as lower rates associated with its variable rate EDA
bonds; partially offset by
|
|
Ÿ
|
the
issuance of long-term fixed rate debt of $125 million in May 2008,
partially offset by the redemption of a $30 million bond on November 1,
2008.
|
Net
Income
Net
income increased $4 million, to $4.1 million in the three months ended June 30,
2009, due primarily to an increase in Operating income of approximately $2.2
million, as discussed above, lower income tax expense of $849,000 and higher
Other income of $863,000 due to an aggregate change in the computation of AFUDC
Equity interest income in June of fiscal 2008. Net income increased $17.8
million, or 34.9 percent, to $68.8 million in the nine months ended June 30,
2009, due primarily to an increase in Operating income of approximately $23.1
million and lower Interest expense of $949,000, as discussed above, partially
offset by higher income tax expense of $6.1 million, as a result of the higher
pre-tax income.
Energy
Services Operations
NJRES is
a non-regulated natural gas marketer principally engaged in the optimization of
natural gas storage and transportation assets ultimately resulting in physical
delivery of natural gas to its customers, while managing its exposure to the
price risk associated with its natural gas commodity supply through the use of
financial derivative contracts. NJRES has physical storage and transportation
capacity contracts with natural gas storage facilities and pipelines which allow
it to take advantage of the continuous changes in supply and demand that it
faces in the market areas in which it participates and also assist natural gas
marketers, local distribution companies, industrial companies, electric
generators and retail aggregators in managing their supply needs. NJRES
purchases natural gas predominately in the eastern United States and Canada, and
transports that natural gas, through the use of its 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 eastern Canada or
directly to customers in various market areas including the Northeastern region
of the United States and eastern Canada.
When
NJRES enters into contracts for the future delivery and sales of physical
natural gas, it simultaneously enters into financial derivative contracts at
market prices to establish an initial financial margin for each of its
forecasted physical commodity transactions. The financial derivative contracts
also serve to protect the cash flows of the transaction from volatility in
commodity prices as NJRES locks in pricing and can include futures, options, and
swap contracts, which are all predominantly actively quoted on the
NYMEX.
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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Accordingly,
NJRES utilizes these contractual assets to optimize its opportunities to
increase its financial margin by capitalizing on changes or events in the
marketplace that impact natural gas demand levels. NJRES generates financial
margin through three primary channels:
|
Ÿ
|
Storage: NJRES
attempts to take advantage of differences in market prices occurring over
different time periods (time spreads) as
follows:
|
|
*
|
NJRES
can purchase gas to inject into storage and concurrently lock in gross
margin with a contract to sell the natural gas at a higher price at a
future date; and
|
|
*
|
NJRES
can purchase a future contract with an early delivery date at a lower
price and simultaneously sell another future contract with a later
delivery date having a higher
price.
|
|
Ÿ
|
Transportation
(Basis): Similarly, NJRES benefits from pricing
differences between various receipt and delivery points along a natural
gas pipeline as follows:
|
|
*
|
NJRES
can utilize its pipeline capacity by purchasing natural gas at a lower
price location and transporting to a higher value location. NJRES can
enter into a basis swap contract, a financial commodity derivative based
on the price of natural gas at two different locations, when it will lead
to positive cash flows and financial margin for
NJRES.
|
|
Ÿ
|
Daily Sales Optimization
(Cash): Consists of buying and selling flowing gas on a
daily basis while optimizing existing transport positions during
short-term market price movements to benefit from locational
spreads:
|
|
*
|
Involves
increasing the financial margin on established transportation hedges by
capitalizing on price movements between specific
locations.
|
Typically,
periods of greater price volatility provide NJRES with additional opportunities
to generate financial margin by optimizing its storage and transport capacity
assets, and capturing their respective time or locational spreads. The
combination of strategically positioned natural gas storage and transportation
capacities provides NJRES with a significant amount of arbitrage opportunities
that are typically more prevalent during periods of high price
volatility.
Predominantly
all of NJRES’ purchases and sales of natural gas result in the physical delivery
of natural gas. NJRES has elected not to use the normal purchase normal sale
scope exception of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, under which
related liabilities incurred and assets acquired under these contracts are
recorded when title to the underlying commodity passes. Therefore, all NJRES
physical commodity contracts are recorded at fair value on the Unaudited
Condensed Consolidated Balance Sheets with any changes in fair value related to
its forward physical sale and purchase contracts recognized as a component of
Operating revenues and Gas purchases, respectively, in the Unaudited Condensed
Consolidated Statements of Income.
The
changes in fair value of NJRES’ financial derivative instruments, which are
financial futures, swaps and option contracts, are also 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 Operating
revenue and Gas purchases, as appropriate, 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 placed into storage, to be sold at a later date, settle and result in
realized gains, which are also recorded at the time of settlement 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 gross margin established at inception of the transaction over the duration
of the forecasted transaction and may be able to capitalize on events in the
marketplace that enable it to increase the initial margin; however, gross margin
or earnings during periods prior to the delivery of the natural gas 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, over the term of the
related natural gas pipeline or storage contract. The term of these contracts
vary from less than one year to ten years.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Operating
Results
NJRES’
unaudited financial results are summarized as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
revenues
|
$ | 283,439 | $ | 801,628 | $ | 1,219,296 | $ | 2,009,751 | ||||||||
Gas
purchases
|
313,395 | 849,616 | 1,230,061 | 2,063,564 | ||||||||||||
Gross
(Loss)
|
(29,956 | ) | (47,988 | ) | (10,765 | ) | (53,813 | ) | ||||||||
Operation
and maintenance expense
|
4,703 | 6,811 | 12,931 | 14,677 | ||||||||||||
Depreciation
and amortization
|
51 | 50 | 153 | 156 | ||||||||||||
Other
taxes
|
323 | 151 | 1,248 | 559 | ||||||||||||
Operating
(Loss)
|
(35,033 | ) | (55,000 | ) | (25,097 | ) | (69,205 | ) | ||||||||
Other
income
|
172 | 92 | 509 | 244 | ||||||||||||
Interest
expense
|
73 | 738 | 244 | 2,502 | ||||||||||||
Income
tax (benefit)
|
(14,764 | ) | (22,768 | ) | (11,004 | ) | (30,817 | ) | ||||||||
Net
(Loss)
|
$ | (20,170 | ) | $ | (32,878 | ) | $ | (13,828 | ) | $ | (40,646 | ) |
Gross
(Loss)
Gross
(loss) for the three months ended June 30, 2009, decreased by $18 million, as
compared with the same period in the last fiscal year, due primarily to higher
realized losses partially offset by lower unrealized losses during the current
fiscal period. The combination of these changes in values generated a net
unfavorable variance of $(20.7) million in overall values on its financial and
physical commodity contracts compared with the same period during fiscal
2008.
NJRES’
results during the quarter ended June 30, 2009, were impacted by the continuing
decline in the price of natural gas resulting in realized (losses) associated
with natural gas in inventory of $(13.1) million compared to gains of $238
thousand during the same fiscal period in the prior year. The realized (losses)
gains pertain to the settlement of certain purchased futures and fixed swap
contracts, which economically hedge planned natural gas purchases. The losses
incurred during the current fiscal period resulted from a lower settlement price
as compared to the original hedge price (or trade price) consistent with a
general decline in the market price of natural gas. Conversely, fiscal 2008 was
a period of rising commodity prices, therefore NJRES recorded realized gains as
a result of settlement prices that were generally higher in comparison to
initial trade prices.
As these
financial contracts settle, the physical gas is purchased and injected into
storage. These physical gas injections and the associated financial hedges are
part of the NJRES’ business strategy to subsequently sell the natural gas from
storage in the future. The realized amounts are a component of the anticipated
financial margin associated with the overall strategy, and as a result of
certain accounting requirements, are recognized in current earnings and result
in a timing difference until the related gas is sold at which time, NJRES will
realize the entire margin on the transaction.
In
addition to the realized amounts discussed above, NJRES had unrealized (losses)
of $(11.6) million and $(45.6) million during the three months ended June 30,
2009 and 2008, respectively. The unrealized losses relate to certain derivative
contracts that have not yet settled. These unrealized amounts represent the
change in price of natural gas from the original hedge price as compared to the
market price of natural gas at each reporting date, respectively. These
unrealized amounts relate to physical and financial contracts that lock in a
sale price on the physical gas that will be sold. When NJRES sells the purchased
gas, the associated financial hedges will be settled and any previously
recognized unrealized amounts related to these transactions will be
realized.
Also
contributing to the lower margin that resulted from the higher net losses
discussed above, was a decrease in storage spreads during the current fiscal
period, as described further in the discussion of financial margin in the Non-GAAP measures
section.
NJRES had
a gross (loss) for the nine months ended June 30, 2009, which decreased by $43
million, as compared with the same period in the last fiscal year, due primarily
to an increase of $79.6 million in overall values on its financial and physical
commodity contracts, offset by lower margin of $36.6 million primarily related
to a decrease in storage spreads and the expiration of a favorable
transportation contract as described further in the discussion of financial
margin in the Non-GAAP
measures section.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
The
decline in commodity prices previously discussed also impacted NJRES’ realized
and unrealized gains (losses) for the nine months ended June 30, 2009 and 2008.
As a result, included in NJRES’ gross (loss) for the nine-month period ended
June 30, 2009, were realized (losses) of $(32.9) million compared to gains of
$16.9 million during the same period in fiscal 2008. The realized losses
recognized during the nine months ended June 30, 2009, relate to a lower market
price of natural gas as compared to the original hedged transactions. For the
nine months ended June 30, 2008, the inverse was true. In addition, NJRES
recognized net unrealized (losses) of $(47.8) million and $(177.1) million
during the nine months ended June 30, 2009 and 2008, respectively, due primarily
to the change in values related to its short financial derivative contracts and
differences in market price movements of the injection hedges relative to the
trade price.
Non-GAAP
measures
Additionally,
management of the Company uses non-GAAP measures, noted as “financial margin”
and “net financial earnings”, when evaluating the operating results of NJRES.
Since NJRES economically hedges its natural gas purchases and sales with
derivative instruments, management uses these measures to compare NJRES’ results
against established benchmarks and earnings targets as it eliminates the impact
of volatility to GAAP earnings associated with the derivative instruments.
Volatility can occur as a result of timing differences surrounding the
recognition of certain gains and losses. These timing differences can impact
GAAP earnings in two ways:
|
Ÿ
|
Unrealized
gains and losses on derivatives are recognized in reported earnings in
periods prior to physical gas inventory flows;
and
|
|
Ÿ
|
Unrealized
gains and losses of prior periods are reclassified as realized gains and
losses when derivatives are settled in the same period as physical gas
inventory movements occur.
|
Net
financial earnings is a measure of the earnings based on eliminating these
timing differences, to effectively match the earnings effects of the economic
hedges with the physical sale of gas. Consequently, to reconcile from GAAP to
both financial margin and net financial earnings, current period unrealized
gains and losses on the derivatives are excluded as a reconciling item.
Additionally, realized derivative gains and losses are also included in current
period net income, however financial margin and net financial earnings include
only realized gains and losses related to natural gas sold out of inventory,
effectively matching the full earnings effects of the derivatives with realized
margins on physical gas flows.
Management
views financial margin and net financial earnings as more representative of the
overall expected economic result. To the extent that there are unanticipated
changes in the markets or to the effectiveness of the economic hedges, NJRES’
non-GAAP results can be different than was originally planned at the beginning
of the transaction.
The
following table is a computation of financial margin of NJRES:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
revenues
|
$ | 283,439 | $ | 801,628 | $ | 1,219,296 | $ | 2,009,751 | ||||||||
Less:
Gas purchases
|
313,395 | 849,616 | 1,230,061 | 2,063,564 | ||||||||||||
Add:
|
||||||||||||||||
Unrealized
loss on derivative instruments
|
11,612 | 45,572 | 47,777 | 177,071 | ||||||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees
|
13,057 | (238 | ) | 32,854 | (16,858 | ) | ||||||||||
Financial
(Loss) Margin
|
$ | (5,287 | ) | $ | (2,654 | ) | $ | 69,866 | $ | 106,400 |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
A
reconciliation of Operating loss, the closest GAAP financial measurement, to the
Financial margin of NJRES is as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
(Loss)
|
(35,033 | ) | (55,000 | ) | (25,097 | ) | (69,205 | ) | ||||||||
Add:
|
||||||||||||||||
Operation
and maintenance expense
|
4,703 | 6,811 | 12,931 | 14,677 | ||||||||||||
Depreciation
and amortization
|
51 | 50 | 153 | 156 | ||||||||||||
Other
taxes
|
323 | 151 | 1,248 | 559 | ||||||||||||
Subtotal
– Gross (Loss)
|
(29,956 | ) | (47,988 | ) | (10,765 | ) | (53,813 | ) | ||||||||
Add:
|
||||||||||||||||
Unrealized
loss on derivative instruments
|
11,612 | 45,572 | 47,777 | 177,071 | ||||||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees
|
13,057 | (238 | ) | 32,854 | (16,858 | ) | ||||||||||
Financial
(Loss) Margin
|
$ | (5,287 | ) | $ | (2,654 | ) | $ | 69,866 | $ | 106,400 |
A
reconciliation of NJRES Net loss to NJRES Net financial earnings is as
follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
(Loss)
|
$ | (20,170 | ) | $ | (32,878 | ) | $ | (13,828 | ) | $ | (40,646 | ) | ||||
Add:
|
||||||||||||||||
Unrealized
loss on derivative instruments, net of taxes
|
7,266 | 27,833 | 29,315 | 108,008 | ||||||||||||
Effects
of economic hedging related to natural gas inventory and certain demand
fees, net of taxes
|
8,420 | (585 | ) | 20,490 | (10,383 | ) | ||||||||||
Net
Financial (Losses) Earnings
|
$ | (4,484 | ) | $ | (5,630 | ) | $ | 35,977 | $ | 56,979 |
Financial
margin for the three months ended June 30, 2009 and 2008, was $(5.3) million and
$(2.7) million, respectively. The decrease of $2.6 million is due primarily to
fewer storage arbitrage opportunities, which resulted in lower average price
spreads (difference between market sales price and cost) on storage positions
for the three-month period ended June 30, 2009, as compared with the same period
in the prior fiscal year.
Financial
margin for the nine months ended June 30, 2009 and 2008, was $69.9 million and
$106.4 million, respectively. The decrease of $36.5 million is due primarily to
the expiration of a favorable physical transport capacity contract servicing the
Northeast market region that was no longer available for asset optimization in
the current fiscal period, along with the transportation portfolio experiencing
lower hedged values coupled with higher capacity fees. Transport capacity
contracts normally have greater market value during the winter season, when
demand levels are usually higher. As a result, the combined operating results of
the basis and cash portfolios in the quarter ended June 30, 2009, decreased by
$16.8 million, as compared with the same period last fiscal year.
Financial
margin from the storage portfolio in the nine months ended June 30, 2009, also
decreased by $19.8 million, as compared with the same period in the prior fiscal
year, due primarily to lower average spreads on storage positions in the current
fiscal period, and less storage capacity, which decreased from 27 Bcf in the
prior fiscal period to 26.3 Bcf in the current fiscal period.
Operation
and Maintenance Expense (O&M)
Operation
and maintenance expense decreased $2.1 million, or 30.9 percent, during the
three months ended June 30, 2009, as compared with the same period in the last
fiscal year, due primarily to a decrease of $2 million in incentive-based
compensation expense during the three months ended June 30, 2009.
O&M
expense decreased $1.7 million, or 11.9 percent, during the nine months ended
June 30, 2009, as compared with the same period in the last fiscal year, due
primarily a decrease of $2.2 million related to incentive compensation as noted
above partially offset by a $374,000 increase to legal fees.
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, availability of storage arbitrage opportunities, sufficient liquidity in
the energy trading market and continued access to the capital
markets.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Retail
and Other Operations
The
unaudited consolidated financial results of Retail and Other are summarized as
follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
Revenues
|
$ | 8,832 | $ | 19,344 | $ | 3,828 | $ | 38,834 | ||||||||
Operation
and maintenance expense
|
$ | 6,431 | $ | 5,892 | $ | 20,293 | $ | 17,030 | ||||||||
Equity
in earnings, net of tax
|
$ | 1,477 | $ | 378 | $ | 2,778 | $ | 1,548 | ||||||||
Net
Income (Loss)
|
$ | 1,881 | $ | 7,802 | $ | (8,863 | ) | $ | 12,479 |
Operating
revenue decreased $10.5 million, or 54.3 percent, and $35 million, or 90.1
percent, respectively for the three months and nine months ended June 30, 2009,
to $8.8 million and $3.8 million, respectively as compared with $19.3 million
and $38.8 million for the three months and nine months ended June 30, 2008,
respectively, due primarily to greater unrealized losses at NJR Energy, which
were the result of declining market prices within a portfolio of net long
financial derivative positions along with a decrease in installation revenue at
NJRHS.
Operation
and maintenance expenses for the three months and the nine months ended June 30,
2009, increased $539,000 and $3.3 million, respectively as compared to last
fiscal year due primarily to higher labor cost and increased building and
utilities expenses and higher health care costs at NJRHS.
Taxes
netted in Equity in earnings in the Condensed Consolidated Unaudited Statements
of Income from Iroquois were $507,000 and $264,000 for the three months ended
June 30, 2009 and 2008, respectively. For the nine months ended June 2009 and
2008, taxes netted in Equity in earnings from Iroquois were $1.4 million and $1
million, respectively. Equity in earnings from Iroquois is driven by the
underlying performance of natural gas transportation through its existing
pipeline, which is based on FERC regulated tariffs. Similarly, Equity in
earnings from Steckman Ridge is driven by storage revenues based on FERC
regulated rates. Taxes netted in Equity in earnings from Steckman Ridge were
$501,000 for both the three months and nine months ended June 30,
2009.
Net
income for the three months and nine months ended June 30, 2009, decreased $5.9
million and $21.3 million, respectively compared with the same periods in the
prior fiscal year, due primarily to the decreased operating revenue at NJR
Energy and NJRHS and the increased O&M expenses, partially offset by an
increase in equity in earnings primarily as a result of the contribution from
Steckman Ridge, which became operational during the third quarter of fiscal 2009
and lower income tax expense as a result of the lower Operating
income.
NJR
Energy has economically hedged 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 financial derivative instruments designed to
economically hedge the long-term fixed-price contracts.
The
Income statement includes unrealized (gains) losses associated with these
derivative instruments of $(484,000) and $(10.9) million for the three months
and $17.4 million and $(17.4) million nine months ended June 30, 2009 and 2008,
respectively, which are recorded, pre-tax, as a component of Operating
revenues.
Additionally,
management of the Company uses the non-GAAP measure “net financial earnings”,
when viewing the results of NJR Energy to monitor the operational results
without the impact of unsettled derivative instruments.
A
reconciliation of Net (loss) income to Net financial earnings, a non-GAAP
measure, is as follows:
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||||||
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
income (loss)
|
$ | 1,881 | $ | 7,802 | $ | (8,863 | ) | $ | 12,479 | |||||||
Add:
|
||||||||||||||||
Unrealized
(gain) loss on derivative instruments, net of taxes
|
(285 | ) | (6,405 | ) | 10,242 | (10,226 | ) | |||||||||
Net
financial earnings
|
$ | 1,596 | $ | 1,397 | $ | 1,379 | $ | 2,253 |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Net
financial earnings for the three months ended June 30, 2009, increased $199,000
compared with the same period in the prior fiscal period due primarily to an
increase in equity in earnings, which is related to Steckman Ridge, which became
operational in April 2009, offset by higher Operations and maintenance expense
as discussed above. Net financial earnings decreased $874,000 for the nine
months ended June 30, 2009, due primarily to an increase in Operation and
maintenance expense, partially offset by an increase in equity in earnings and a
decrease in tax expense corresponding to the lower net Operating
income.
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,
|
|||||||
2009
|
2008
|
|||||||
Common
stock equity
|
59 | % | 51 | % | ||||
Long-term
debt
|
37 | 32 | ||||||
Short-term
debt
|
4 | 17 | ||||||
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 that were granted
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.
NJR issued approximately 385,000 shares related to the DRP and exercised
options during the nine months ended June 30, 2008.
The
Company has a share repurchase program that provides for the repurchase of up to
6.8 million shares. As of June 30, 2009, the Company repurchased approximately
5.9 million of those shares and has the ability to repurchase approximately
854,000 additional 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, 2009, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $533 million available under these facilities (see
Note 8.
Debt).
NJR
believes that existing borrowing availability, its current cash balances and its
cash flow from operations will be sufficient to satisfy it and its subsidiaries’
working capital, capital expenditure and dividend requirements for the
foreseeable future. NJR, NJNG and NJRES currently anticipate that its financing
requirements for the next twelve months will be met through the issuance of
short-term debt, meter sale lease-backs and proceeds from the Company’s
DRP.
NJR
On March
15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured Senior notes at
maturity.
On
December 13, 2007, NJR entered into a $325 million, five-year, revolving,
unsecured credit facility, which permits the borrowing of revolving loans and
swing loans, as well as the issuance of letters of credit. Swing loans are loans
made available on a same-day basis for an aggregate principal amount of up to
$50 million and repayable in full within a maximum of seven days of borrowing.
It also permits an increase to the facility, from time to time, with the
existing or new lenders, in a minimum of $5 million increments up to a maximum
$100 million at the lending banks discretion. Borrowings under the new facility
are conditional 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. 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
As of
June 30, 2009, NJR has a $23 million letter of credit outstanding on behalf of
NJRES, which is used for margin requirements for natural gas transactions and
will expire on December 31, 2009.
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R, which will
expire on December 3, 2009. The letter of credit is in place to support
development activities.
NJR uses
its short term borrowings primarily to finance its share repurchases, to satisfy
NJRES’ short term liquidity needs and to finance, on an initial basis,
unregulated investments. NJRES’ use of high-injection, high-withdrawal storage
facilities and anticipated pipeline park-and-loan arrangements, combined with
related economic hedging activities in the volatile wholesale natural gas
market, create significant short-term cash requirements.
NJNG
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its own
financial profile. The seasonal nature of NJNG’s operations creates large
short-term cash requirements, primarily to finance natural gas purchases and
customer accounts receivable. NJNG obtains working capital for these
requirements, and for the temporary financing of construction and MGP
remediation expenditures and energy tax payments, through the issuance of
commercial paper and short-term bank loans.
On
November 1, 2008, upon maturity, NJNG redeemed its $30 million, 6.27 percent,
Series X First Mortgage bonds.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
may be drawn upon through December 15, 2009, for up to $50 million. As of June
30, 2009, no letters of credit have been issued under this agreement. These
letters of credit would not reduce the amount available to be borrowed under
NJNG’s credit facility.
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 currently plans to renew or replace this facility prior to or upon
its expiration. NJNG had no borrowings supported by the credit facility as of
June 30, 2009. In addition, borrowings under NJNG’s credit facility are
conditioned upon compliance with a maximum leverage ratio, as defined in the
credit facility, of not more than 0.65 to 1.00 at any time and a minimum
interest coverage ratio, as defined in the credit facility, of less than 2.50 to
1.00.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97 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. On
those dates, 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. For the nine months ended June 30,
2009, all of the auctions surrounding the EDA ARS have failed, resulting in
those bonds bearing interest at their maximum rates, defined 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, 2009, the 30-day LIBOR rate was
0.3 percent. While the failure of the ARS auctions does not signify or
constitute a default by 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 0.6 percent as of June 30, 2009, compared with a weighted average
interest rate of 4.6 percent as of September 30, 2008. There can be no assurance
that the EDA ARS will have enough market liquidity to avoid failed auctions in
the future.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
NJRES has
a 3-year, $30 million committed credit facility with a multinational financial
institution. Borrowings under this facility are guaranteed by NJR. There were no
borrowings under this facility as of June 30, 2009.
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,
2009:
(Thousands)
|
Total
|
Up
to
1
Year
|
2-3
Years
|
4-5
Years
|
After
5
Years
|
|||||||||||||||
Long-term
debt (1)
|
$ | 523,075 | $ | 17,086 | $ | 51,766 | $ | 90,707 | $ | 363,516 | ||||||||||
Capital
lease obligations (1)
|
86,616 | 9,748 | 22,093 | 15,709 | 39,066 | |||||||||||||||
Operating
leases (1)
|
10,985 | 3,047 | 4,100 | 2,439 | 1,399 | |||||||||||||||
Short-term
debt
|
48,600 | 48,600 | — | — | — | |||||||||||||||
New
Jersey Clean Energy Program (1)
|
39,960 | 10,805 | 23,293 | 5,862 | — | |||||||||||||||
Construction
obligations
|
2,019 | 2,019 | — | — | — | |||||||||||||||
Remediation
expenditures (2)
|
120,230 | 11,051 | 31,349 | 8,300 | 69,530 | |||||||||||||||
Natural
gas supply purchase obligations–NJNG
|
42,094 | 35,570 | 6,524 | — | — | |||||||||||||||
Demand
fee commitments–NJNG
|
723,020 | 94,953 | 192,849 | 165,146 | 270,072 | |||||||||||||||
Natural
gas supply purchase obligations–NJRES
|
715,891 | 411,402 | 262,485 | 42,004 | — | |||||||||||||||
Demand
fee commitments–NJRES
|
205,857 | 82,303 | 65,663 | 30,438 | 27,453 | |||||||||||||||
Total
contractual cash obligations
|
$ | 2,518,347 | $ | 726,584 | $ | 660,122 | $ | 360,605 | $ | 771,036 |
|
(1)
|
These
obligations include an interest component, as defined under the related
governing agreements or in accordance with the applicable tax
statute.
|
|
(2)
|
Expenditures
are estimated
|
|
(3)
|
As
of June 30, 2009, we had a liability for unrecognized tax benefits of $6.5
million. We cannot make a reasonable estimate of the period of cash
settlement for the liability for unrecognized tax benefits. See Note 13 to
the consolidated financial statements, Income Taxes, for a further
discussion on our income tax
positions.
|
For
fiscal 2009, the Company has no minimum pension funding requirements, however,
funding requirements are uncertain and can depend significantly on changes in
actuarial assumptions, returns on plan assets and changes in demographic
factors. On June 12, 2009, NJR made a discretionary contribution of $1 million
to the Pension plan. It is anticipated that the annual funding level to the OPEB
plans will range from $1.2 million to $1.4 million over the next five years.
Additional contributions may be made based on market conditions and various
assumptions.
As of
June 30, 2009, there were NJR guarantees covering approximately $356 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.
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 could seek 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 2009 are estimated at $87.1 million, including
an estimate of $6 million related to the AIP construction costs.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Unaudited Condensed Consolidated Statements of Cash Flows, cash
flow from operating activities totaled $350.7 million for the nine months ended
June 30, 2009, compared with cash flow from operations of $144.3 million for the
same period in fiscal 2008. NJR employs the indirect method when preparing its
Unaudited Condensed Consolidated Statement of Cash Flows. Net income is adjusted
for any non-cash items, such as accruals and certain amortization amounts that
impact earnings during the period. In addition, operating cash flows are
primarily affected by variations in working capital and the related changes in
the beginning and period end balances, which can be impacted by the
following:
|
Ÿ
|
seasonality
of NJR’s business;
|
|
Ÿ
|
fluctuations
in wholesale natural gas prices;
|
|
Ÿ
|
timing
of storage injections and
withdrawals;
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
|
Ÿ
|
management
of the deferral and recovery of gas
costs;
|
|
Ÿ
|
changes
in contractual assets utilized to optimize margins related to natural gas
transactions; and
|
|
Ÿ
|
timing
of the collections of receivables and payments of current
liabilities.
|
A summary
of the primary factors that contributed to the increase in operating cash flows
during the nine months ended June 30, 2009, as compared with the prior fiscal
period is as follows:
|
Ÿ
|
lower
costs associated with natural gas inventory at NJRES due primarily to the
decline in commodity prices during fiscal 2009 compared to rising prices
during fiscal 2008. As a general indicator, NYMEX prices declined
approximately 58 percent during fiscal 2009 compared with an increase of
approximately 119 percent during the prior fiscal
period;
|
|
Ÿ
|
a
reduction in receivable balances at NJRES stemming from a 55 percent
decrease in average sales price in fiscal 2009 compared with an increase
in receivable balances during the nine months ended June 30, 2008, which
resulted from a 25 percent increase in volumes coupled with a 113 percent
increase in average sales prices;
|
|
Ÿ
|
an
increase in NJNG’s gas costs recovered during fiscal 2009 as a result of
gas costs falling below the commodity component of NJNG’s BGSS rate billed
to its customers compared with the nine months ended June 30, 2008. The
amount of gas costs overrecovered was moderated by a BGSS refund of $30
million issued to NJNG’s customers during fiscal 2008 and temporary rate
credits of $45 million during fiscal
2009;
|
|
Ÿ
|
reduced
margin requirements at NJRES during the current fiscal year compared with
higher deposits during the same period in fiscal 2008 as a result of the
adverse impact of rising NYMEX prices to NJRES’ short futures
positions.
|
These
increases in operating cash flows were offset by a decrease in NJRES payable
balances primarily related to a decrease in the cost of purchases during the
current fiscal period.
NJNG’s
MGP expenditures are currently expected to total $11.1 million in fiscal 2009
(see Note 14. Commitments and
Contingent Liabilities).
Investing
Activities
Cash flow
used in investing activities totaled $92.7 million for the nine months ended
June 30, 2009, compared with $74.7 million in the same period in fiscal 2008.
The increase in cash used was due primarily to an increase in the cash invested
in Steckman Ridge and higher NJNG utility plant expenditures offset by the
drawdown from the restricted cash construction fund.
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. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have
begun to inject natural gas inventory in preparation for the initial withdrawal
season. Construction will continue through the summer of 2009 as more facilities
are made ready to support the initial winter season. As of June 30, 2009, NJR
has invested $120 million in Steckman Ridge. This amount excludes capitalized
interest and other direct costs. Total project costs related to the development
of the storage facility are currently estimated at approximately $265 million,
of which NJR is obligated to fund 50 percent or approximately $132.5 million.
NJR anticipates that Steckman Ridge could seek non-recourse financing upon full
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.
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,
2009, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2009.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
|
Financing
Activities
Cash flow
used in financing activities totaled $223.6 million for the nine months ended
June 30, 2009, compared with $48.8 million for the same period in the prior
fiscal year. During the current fiscal period, NJNG repaid its $30 million, 6.27
percent, Series X Mortgage bonds and NJR repaid its $25 million, 3.75 percent,
unsecured senior notes. In addition, the Company was able to reduce its
short-term borrowings as a result of its improved cash from
operations.
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. Although its average
weighted interest rate has decreased to a rate of 0.6 percent as of June 30,
2009, NJNG continues to review alternatives that would eliminate or mitigate the
inherent interest rate risk associated with its variable rate debt.
NJNG
received $6.3 million and $7.5 million in December 2008 and 2007, 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.
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
|
Stable
|
Negative
|
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. On April 30, 2009, S&P
affirmed its ratings and changed its outlook from negative to
stable.
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. If
such ratings are downgraded below investment grade, borrowing costs could
increase, as will the costs of maintaining certain contractual relationships and
for future financing. Even if ratings are downgraded without falling below
investment grade, NJR and NJNG may still face increased borrowing costs under
their respective credit facilities. 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.
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
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
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 regulated 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 3.2 Bcf of natural gas (Gas Sales Contract) to an energy
marketing company.
The
following table reflects the changes in the fair market value of financial
derivatives related to natural gas purchases and sales from September 30, 2008
to June 30, 2009:
(Thousands)
|
Balance
September
30,
2008
|
Increase
(Decrease)
in
Fair
Market
Value
|
Less
Amounts
Settled
|
Balance
June
30,
2009
|
||||||||||||
NJNG
|
$ | (49,610 | ) | $ | (72,061 | ) | $ | (74,375 | ) | $ | (47,296 | ) | ||||
NJRES
|
89,571 | 100,251 | 140,286 | 49,536 | ||||||||||||
NJR
Energy
|
20,190 | (21,034 | ) | (3,651 | ) | 2,807 | ||||||||||
Total
|
$ | 60,151 | $ | 7,156 | $ | 62,260 | $ | 5,047 |
There
were no changes in methods of valuations during the quarter ended June 30,
2009.
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at June 30, 2009, by method of valuation and by
maturity for each fiscal year period:
(Thousands)
|
2009
|
2010
|
2011-2013 |
After
2013
|
Total
Fair
Value
|
|||||||||||||||
Price
based on NYMEX
|
$ | (19,018 | ) | $ | 13,664 | $ | (2,731 | ) | — | $ | (8,085 | ) | ||||||||
Price
based on other external data
|
6,319 | 6,325 | 488 | — | 13,132 | |||||||||||||||
Total
|
$ | (12,699 | ) | $ | 19,989 | $ | (2,243 | ) | — | $ | 5,047 |
The
following is a summary of financial derivatives by type as of June 30,
2009:
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included in Derivatives
(Thousands)
|
|||||||||||
NJNG
|
Futures
|
8.4 | $ | 3.65 - $9.19 | $ | (46,913 | ) | ||||||
Swaps
|
(0.3 | ) | $ | 3.69 - $6.19 | (4,375 | ) | |||||||
Options
|
11.5 | $ | 3.65 - $9.50 | 3,992 | |||||||||
NJRES
|
Futures
|
(16.3 | ) | $ | 3.51 - $10.89 | 23,837 | |||||||
Swaps
|
(18.0 | ) | $ | 2.88 - $12.42 | 25,699 | ||||||||
Options
|
2.5 | $ | 3.30 - $3.65 | — | |||||||||
NJR
Energy
|
Swaps
|
3.2 | $ | 3.38 - $ 4.47 | 2,807 | ||||||||
Total
|
$ | 5,047 |
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2008 to June 30, 2009:
(Thousands)
|
Balance
September
30,
2008
|
Increase
(Decrease)
in Fair
Market
Value
|
Less
Amounts
Settled
|
Balance
June
30,
2009
|
||||||||||||
NJRES
|
$ | 1,714 | $ | 22,883 | $ | 12,102 | $ | 12,495 |
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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The VaR
at June 30, 2009, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $622,000. The VaR with a 99
percent confidence level and a 10-day holding period was $2.8 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, 2009. Gross credit
exposure is defined as the unrealized fair value of physical and financial
derivative commodity 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, 2009, is as follows:
(Thousands)
|
Gross
Credit
Exposure
|
Net
Credit
Exposure
|
||||||
Investment
grade
|
$ | 104,582 | $ | 64,424 | ||||
Noninvestment
grade
|
13,159 | 5,525 | ||||||
Internally
rated investment grade
|
19,585 | 10,903 | ||||||
Internally
rated noninvestment grade
|
3,975 | 1,021 | ||||||
Total
|
$ | 141,301 | $ | 81,873 |
NJNG’s
counterparty credit exposure as of June 30, 2009, is as follows:
(Thousands)
|
Gross
Credit
Exposure
|
Net
Credit
Exposure
|
||||||
Investment
grade
|
$ | 15,347 | $ | 12,332 | ||||
Noninvestment
grade
|
634 | — | ||||||
Internally
rated investment grade
|
269 | 35 | ||||||
Internally
rated noninvestment grade
|
143 | — | ||||||
Total
|
$ | 16,393 | $ | 12,367 |
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, 2009, the Company (excluding NJNG) had no variable-rate long-term
debt.
As of
June 30, 2009, NJNG is obligated with respect to loan agreements securing six
series of auction rate bonds totaling approximately $97 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, 2009, all of the auctions surrounding the EDA ARS have failed,
resulting in the securities bearing interest at their maximum rates, as defined
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 0.6 percent as of June 30, 2009. There can be
no assurance that the ARS securities of the EDA will have enough market
liquidity to avoid failed auctions in the future.
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.
Disclosure
Controls and Procedures
As
discussed in "Part II. Item 9A. Controls and Procedures" in our Form 10-K for
the fiscal year ended September 30, 2008, in connection with the Company’s
preparation of its consolidated financial statements for the fiscal year ended
September 30, 2008, the Company identified an immaterial error in the recording
of certain physical natural gas transactions, which were not recorded at the
appropriate fair value during the interim quarters ended March 31, 2008 and June
30, 2008, as they were valued at an incorrect price. Controls were not designed
properly or operating effectively to prevent or detect these pricing errors.
Natural gas prices are volatile and it is reasonably possible that the volume of
these transactions could have been larger during any interim period or for the
fiscal year ended September 30, 2008. The Company concluded that it was
reasonably possible that this control weakness could have resulted in a material
error in its Consolidated Financial Statements had the volume of these
transactions been larger.
As of
June 30, 2009, 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, since the material weakness
discussed above is not completely remediated, 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 were
not effective to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to the Company’s management, including its principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
In addition,
in conjunction with the filing of this amended Form 10-Q/A, as a result of the
restatement described in Note 2 to the Unaudited Condensed Consolidated
Financial Statements, under the supervision and with the participation of the
Company’s management, including the principal executive officer and principal
financial officer, the Company conducted a re-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. Management, in consultation with the Audit
Committee, has concluded that the restatement errors set forth herein
constituted a material weakness in the Company’s internal controls over
financial reporting as of the date of the original filing, which has since been
remediated.
The
financial statements for the period covered by this report were prepared with
particular attention to the material weakness. Accordingly, management believes
that the condensed consolidated financial statements included in this Quarterly
Report fairly present, in all material respects, our financial condition,
results of operations and cash flows as of and for the periods
presented.
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.
ITEM
4. CONTROLS AND PROCEDURES
(Continued)
|
Changes
in Internal Control over Financial Reporting
Management
and the Board of Directors are committed to the remediation of the material
weaknesses set forth above as well as the continued improvement of the Company’s
overall system of internal control over financial reporting. Management is in
the process of actively addressing and remediating the material weaknesses in
internal control over financial reporting described above. Subsequent to the
quarter and fiscal year ended September 30, 2008, in connection with the
material weaknesses in internal control over financial reporting detailed above,
the Company has implemented or will implement the following controls designed to
substantially reduce the risk of a similar material weaknesses occurring in the
future:
|
Ÿ
|
expand
training, education and accounting reviews for all relevant personnel
involved in the accounting treatment and disclosures for the Company’s
commodity transacting;
|
|
Ÿ
|
invest
in additional resources with appropriate accounting technical expertise,
including the hiring of a Controller-Unregulated Operations in April
2009;
|
|
Ÿ
|
expand
the review of the design of the internal control over financial reporting
related to the accounting of commodity transacting, which will incorporate
an analysis of the current staffing levels, job assignments and the design
of all internal control processes for the accounting for commodity
transacting and implement new and improved processes and controls, if
warranted; and
|
|
Ÿ
|
increase
the level of review and discussion of significant accounting matters and
supporting documentation with senior finance
management.
|
As part
of the Company’s fiscal 2009 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 are designed and are operating effectively. The effectiveness of
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 during fiscal 2009. Management believes,
however, these measures will remediate the above identified material weakness in
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, 2009, that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting. Subsequent to the end of the third fiscal quarter, the Company
upgraded its JD Edwards Oracle Enterprise Resource Planning (“ERP”) software
system to improve functionality associated with the system’s finance, human
resources, supply chain and work management modules. For the quarter ended June
30, 2009, all of the related processes were completed prior to the upgrade.
Management concluded that it did not need to make any changes to its internal
control over financial reporting as a result of this upgrade.
ITEM
1. LEGAL
PROCEEDINGS
|
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, 2008, and is set forth in Part I, Item 1, Note 14,
Commitment and Contingent
Liabilities—Legal Proceedings in the Unaudited Condensed Consolidated
Financial Statements. No legal proceedings became reportable during the quarter
June 30, 2009, and there have been no material developments during such quarter
regarding any previously reported legal proceedings, which have not been
previously disclosed.
ITEM
1A. RISK FACTORS
|
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 2008 Annual Report on Form 10-K includes a detailed discussion of NJR’s
risk factors. These risks and uncertainties have the potential to materially
affect 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
2008 Annual Report on Form 10-K.
ITEM
2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In 1996,
the NJR 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, 2009, the Company has 854,000
shares of its common stock still available for repurchase.
The
following table sets forth NJR’s repurchase activity for the quarter ended June
30, 2009:
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
|
||||||||||||
04/01/09
– 04/30/09
|
246,700 | 32.65 | 246,700 | 1,056,271 | ||||||||||||
05/01/09
– 05/31/09
|
202,100 | 31.70 | 202,100 | 854,171 | ||||||||||||
06/01/09
– 06/30/09
|
— | — | — | 854,171 | ||||||||||||
Total
|
448,800 | — | 448,800 | 854,171 |
Certification
of the Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act
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||
Certification
of the Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act
|
||
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act*
|
||
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act*
|
*This
certificate accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of
Section 18 or any other provision of the Securities Exchange Act of 1934, as
amended.
SIGNATURES
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
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|
(Registrant)
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|
Date:
November 24, 2009
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|
By:/s/
Glenn C. Lockwood
|
|
Glenn
C. Lockwood
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|
Senior
Vice President and
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|
Chief
Financial Officer
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60