Attached files
file | filename |
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EX-23.1 - EXHIBIT 23.1 - NEW JERSEY RESOURCES CORP | ex23_1.htm |
EX-31.2 - EXHIBIT 31.2 - NEW JERSEY RESOURCES CORP | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - NEW JERSEY RESOURCES CORP | ex32_1.htm |
EX-21.1 - EXHIBIT 21.1 - NEW JERSEY RESOURCES CORP | ex21_1.htm |
EX-32.2 - EXHIBIT 32.2 - NEW JERSEY RESOURCES CORP | ex32_2.htm |
EX-31.1 - EXHIBIT 31.1 - NEW JERSEY RESOURCES CORP | ex31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 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 1-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
|
22-2376465
|
|
(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
Employer Identification
Number)
|
|
1415
Wyckoff Road, Wall, New Jersey 07719
|
732-938-1480
|
|
(Address
of principal executive
offices)
|
(Registrant’s
telephone number, including
area code)
|
|
Securities
registered pursuant to Section 12 (b) of the Act:
|
||
Common
Stock - $2.50 Par Value
|
New
York Stock Exchange
|
|
(Title
of each class)
|
(Name
of each exchange on which registered)
|
|
Securities
registered pursuant to Section 12 (g) of the Act:
None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes:
x No:
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes: o No: x
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 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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
aggregate market value of the Registrant’s Common Stock held by nonaffiliates
was $1,417,456,420 based on the closing price of $33.98 per share on March 31,
2009 as reported on the New York Stock Exchange.
The
number of shares outstanding of $2.50 par value Common Stock as of November 24,
2009 was 41,585,243.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Shareowners (Proxy Statement) to be held January 27, 2010, to be filed on or
about December 15, 2009, are incorporated by reference into Part I and Part III
of this report.
New
Jersey Resources Corporation
TABLE
OF CONTENTS
Page
|
|||||
Information
Concerning Forward-Looking Statements
|
1
|
||||
PART
I
|
|||||
ITEM
1.
|
Business
|
2
|
|||
Organizational
Structure
|
2
|
||||
Business
Segments
|
2
|
||||
Natural
Gas Distribution
|
3
|
||||
General
|
3
|
||||
Throughput
|
3
|
||||
Seasonality
of Gas Revenues
|
3
|
||||
Gas
Supply
|
4
|
||||
Regulation
and Rates
|
6
|
||||
Competition
|
6
|
||||
Energy
Services
|
6
|
||||
Other
Business Operations
|
8
|
||||
Retail
and Other
|
8
|
||||
Environment
|
8
|
||||
Employee
Relations
|
9
|
||||
ITEM
1A.
|
Risk
Factors
|
10
|
|||
ITEM
1B.
|
Unresolved
Staff Comments
|
16
|
|||
ITEM
2.
|
Properties
|
16
|
|||
ITEM
3.
|
Legal
Proceedings
|
17
|
|||
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|||
ITEM
4A.
|
Executive
Officers of the Company
|
18
|
|||
PART
II
|
|||||
ITEM
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
20
|
|||
ITEM
6.
|
Selected
Financial Data
|
21
|
|||
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|||
ITEM
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
50
|
|||
ITEM
8.
|
Financial
Statements and Supplementary Data
|
53
|
|||
Management’s
Report on Internal Control over Financial Reporting
|
53
|
||||
Report
of Independent Registered Public Accounting Firm
|
54
|
||||
ITEM
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
100
|
|||
ITEM
9A.
|
Controls
and Procedures
|
100
|
|||
ITEM
9B.
|
Other
Information
|
101
|
|||
PART
III*
|
|||||
ITEM
10.
|
Directors,
Executive Officers and Corporate Governance
|
102
|
|||
ITEM
11.
|
Executive
Compensation
|
102
|
|||
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
102
|
|||
ITEM
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
102
|
|||
ITEM
14.
|
Principal
Accountant Fees and Services
|
102
|
|||
PART
IV
|
|||||
ITEM
15.
|
Exhibits
and Financial Statement Schedules
|
103
|
|||
Index
to Financial Statement Schedules
|
104
|
||||
Signatures
|
107
|
||||
Exhibit
Index
|
108
|
* Portions
of Item 10 and Items 11-14 are Incorporated by Reference from the Proxy
Statement.
i
New
Jersey Resources Corporation
Part
I
INFORMATION
CONCERNING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Item 1.—Business, under
the captions “Natural Gas Distribution—General;—Throughput;—Seasonality of Gas
Revenues;—Gas Supply;—Regulation and Rates;—Competition”; “Energy Services”;
“Retail and Other”; “Environment,” and Item 3.—“Legal Proceedings,” and in Part
II including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7, and “Quantitative and Qualitative Disclosures
About Market Risk” in Item 7A 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 Item 1A, as well as the
following:
|
·
|
weather
and economic conditions;
|
|
·
|
NJR’s
dependence on operating
subsidiaries;
|
|
·
|
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
|
·
|
the
rate of NJNG customer growth;
|
|
·
|
volatility
of natural gas and other commodity prices and their impact on customer
usage, NJR Energy Services’ (NJRES) operations and on the Company’s risk
management efforts;
|
|
·
|
changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the
Company;
|
|
·
|
continued
volatility or seizure of the credit markets that would result in the
increased cost and 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;
|
|
·
|
the
ability to comply with debt
covenants;
|
|
·
|
continued
failures in the market for auction rate
securities;
|
|
·
|
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 a continuing downturn in the financial
markets;
|
|
·
|
the
ability to maintain effective internal
controls;
|
|
·
|
accounting
effects and other risks associated with hedging activities and use of
derivatives contracts;
|
|
·
|
commercial
and wholesale credit risks, including creditworthiness of customers and
counterparties;
|
|
·
|
the
ability to obtain governmental approvals and/or financing for the
construction, development and operation of certain non-regulated energy
investments;
|
|
·
|
risks
associated with the management of the Company’s joint ventures and
partnerships;
|
|
·
|
the
level and rate at which costs and expenses are incurred and the extent to
which they are allowed to be recovered from customers through the
regulatory process in connection with constructing, operating and
maintaining NJNG’s natural gas distribution
system;
|
|
·
|
dependence
on third-party storage and transportation
facilities;
|
|
·
|
operating
risks incidental to handling, storing, transporting and providing
customers with natural gas;
|
|
·
|
access
to adequate supplies of natural
gas;
|
|
·
|
the
regulatory and pricing policies of federal and state regulatory
agencies;
|
|
·
|
the
ultimate outcome of pending regulatory proceedings, including the possible
expiration of the Conservation Incentive Program
(CIP);
|
|
·
|
the
availability of an adequate number of appropriate creditworthy
counterparties and liquidity in the wholesale energy trading
market;
|
|
·
|
the
disallowance of recovery of environmental-related expenditures and other
regulatory changes;
|
|
·
|
environmental-related
and other litigation and other uncertainties;
and
|
|
·
|
the
impact of NJR’s charter and bylaws on a potential
transaction.
|
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.
Page
1
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
ORGANIZATIONAL
STRUCTURE
New
Jersey Resources Corporation (NJR or the Company) is a New Jersey corporation
formed in 1981 pursuant to a corporate reorganization. The Company is an energy
services holding company providing retail and wholesale energy services to
customers in states from the Gulf Coast to the New England regions, including
the Mid-Continent region, the West Coast and Canada. The Company is an exempt
holding company under section 1263 of the Energy Policy Act of 2005. NJR’s
subsidiaries and businesses include:
New
Jersey Natural Gas (NJNG), a local natural gas distribution company that
provides regulated retail natural gas service 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 is
regulated by the New Jersey Board of Public Utilities (BPU) and comprises the
Company’s Natural Gas Distribution segment.
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary. It
maintains and transacts around a portfolio of physical assets consisting of
natural gas storage and transportation contracts. Also, NJRES provides wholesale
energy management services to other energy companies. NJRES comprises the
Company’s Energy Services segment.
NJR also
has retail and other operations (Retail and Other) , which includes the
following companies:
|
Ÿ
|
NJR
Energy Investments (NJREI), an unregulated affiliate that consolidates the
Company’s unregulated energy-related investments. NJREI includes the
following wholly owned
subsidiaries:
|
|
*
|
NJR
Energy Holdings, a company that invests primarily in energy-related
ventures through its subsidiary, NJNR Pipeline (Pipeline), which holds the
Company’s 5.53 percent interest in Iroquois Gas and Transmission System,
LP (Iroquois) and another subsidiary, NJR Storage Holdings Company, which
owns NJR Steckman Ridge Storage Company, which 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 has
been developed with a partner in western
Pennsylvania.
|
|
*
|
NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies.
|
|
*
|
NJR
Energy Corporation (NJR Energy), a company that invests in energy-related
ventures.
|
|
*
|
NJR
Clean Energy Ventures, a subsidiary formed in 2009, which the Company
plans to use to invest in clean energy
projects.
|
|
Ÿ
|
NJR
Retail Holdings (Retail Holdings), an unregulated affiliate that
consolidates the Company’s unregulated retail operations. Retail Holdings
consists of the following wholly owned
subsidiaries:
|
|
*
|
NJR
Home Services (NJRHS), a company that provides heating, ventilation and
cooling (HVAC) service repair and contract
services.
|
|
*
|
Commercial
Realty & Resources (CR&R), a company that holds and develops
commercial real estate.
|
|
*
|
NJR
Plumbing Services (NJRPS), a company that provides plumbing repair and
installation services.
|
|
Ÿ
|
NJR
Service (NJR Service), an unregulated company that provides shared
administrative services, including corporate communications, financial and
planning, internal audit, legal, human resources and information
technology for NJR and all
subsidiaries.
|
BUSINESS
SEGMENTS
The
Company operates within two reportable business segments: Natural Gas
Distribution and Energy Services.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations, and the Energy Services segment
consists of unregulated wholesale energy operations.
Page
2
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
NATURAL
GAS DISTRIBUTION
General
NJNG
provides natural gas service to approximately 487,000 customers. Its service
territory encompasses 1,516 square miles, covering 105 municipalities with an
estimated population of 1.4 million people.
NJNG’s
service territory is in New Jersey’s Monmouth and Ocean counties and parts of
Burlington, Morris and Middlesex counties. It is primarily suburban, with a wide
range of cultural and recreational activities and highlighted by approximately
100 miles of New Jersey coastline. It is in close proximity to New York City,
Philadelphia and the metropolitan areas of northern New Jersey and is accessible
through a network of major roadways and mass transportation. NJNG added 5,841
and 7,175 new customers and added natural gas heat and other services to another
709 and 728 existing customers in fiscal 2009 and 2008, respectively. NJNG’s new
customer annual growth rate of approximately 1.2 percent is expected to continue
with projected additions in the range of approximately 12,000 to 14,000 new
customers over the next two years. This anticipated customer growth represents
approximately $3.4 million in expected new annual utility gross margin as
calculated under NJNG’s Conservation Incentive Program (CIP)
tariff.
In
assessing the potential for future growth in its service area, NJNG uses
information derived from county and municipal planning boards that describes
housing developments in various stages of approval. Furthermore, builders in
NJNG’s service area are surveyed to determine their development plans for future
time periods. NJNG has also periodically engaged outside consultants to assist
in its customer growth projections. In addition to customer growth through new
construction, NJNG’s business strategy includes aggressively pursuing
conversions from other fuels, such as electricity, propane and oil. The Company
estimates that, during fiscal 2010, approximately 50 percent of NJNG’s projected
customer growth will consist of conversions.
Throughput
For the
fiscal year ended September 30, 2009, operating revenues and throughput by
customer class were as follows:
Operating
Revenues
|
Throughput
|
|||||||||||||||
(Thousands)
|
(Bcf)
|
|||||||||||||||
Residential
|
$ | 686,798 | 63 | % | 43.6 | 33 | % | |||||||||
Commercial
and other
|
144,565 | 13 | 9.8 | 7 | ||||||||||||
Firm
transportation
|
40,356 | 4 | 9.4 | 7 | ||||||||||||
Total
residential and commercial
|
871,719 | 80 | 62.8 | 47 | ||||||||||||
Interruptible
|
5,711 | 1 | 4.1 | 3 | ||||||||||||
Total
system
|
877,430 | 81 | 66.9 | 50 | ||||||||||||
Incentive
programs
|
204,571 | 19 | 66.1 | 50 | ||||||||||||
Total
|
$ | 1,082,001 | 100 | % | 133.0 | 100 | % |
In fiscal
2009, no single customer represented more than 10 percent of total NJNG
operating revenue.
Seasonality
of Gas Revenues
As a
result of the heat-sensitive nature of NJNG’s residential customer base, therm
sales are significantly affected by weather conditions. Specifically, customer
demand substantially increases during the winter months when natural gas is used
for heating purposes. Weather conditions directly influence the volume of
natural gas delivered to customers. The relative measurement of the impact of
weather is in degree-days. Degree-day data is used to estimate amounts of energy
required to maintain comfortable indoor temperature levels based on each day’s
average temperature. A degree-day is the measure of the variation in the weather
based on the extent to which the average daily temperature falls below 65
degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is
counted as one heating degree-day. Normal heating degree-days are based on a
20-year average, calculated based upon three reference areas representative of
NJNG’s service territory.
Effective
October 1, 2006, the New Jersey Board of Public Utilities (BPU) authorized a
three-year CIP pilot program, which decoupled the link between customer usage
and NJNG’s utility gross margin, allowing NJNG to promote energy conservation
measures. During the term of the pilot, the Weather Normalization Clause (WNC)
was suspended and replaced with the CIP tracking mechanism, which addresses
utility gross margin variations related to both weather and customer usage.
Recovery of such utility gross margin is subject to additional conditions
including an earnings test and an evaluation of Basic Gas Supply Service-related
savings achieved. In May 2008, NJNG filed its Petition for the annual review of
its CIP. 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. As of October 1, 2009, the CIP
will remain in effect for an additional year or until a final order is issued by
the BPU.
Page
3
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
As a
result of increases in NJNG’s operation, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for delivery
service. This request is consistent with NJNG’s objectives of providing safe and
reliable service to its customers and earning a market-based return on its
regulated investments. On October 3, 2008, the BPU unanimously approved a
revenue increase in NJNG’s base rates of $32.5 million as well as certain
changes in the design of its tariff rates.
For
additional information regarding the CIP, see Management’s Discussion and
Analysis—Natural Gas Distribution Operations and Note 2. Regulation in the
accompanying Consolidated Financial Statements.
Gas
Supply
Firm Natural Gas
Supplies
NJNG’s
gas supply portfolio consists of long-term (over seven months), winter-term (for
the five winter months of November through March) and short-term contracts. In
fiscal 2009, NJNG purchased gas from 95 suppliers under contracts ranging from
one day to one year. In fiscal 2009, NJNG purchased over 10 percent of its
natural gas from two suppliers, Southwestern Energy Services Company and Devon
Gas Services, LP. NJNG believes the loss of any one or all of these suppliers
would not have a material adverse impact on its results of operations, financial
position or cash flows as an adequate number of alternative suppliers exist.
NJNG believes that its supply strategy should adequately meet its expected firm
load over the next several years.
Firm Transportation and
Storage Capacity
In order
to take delivery of firm natural gas supplies, which ensures the ability to
reliably service its customers, NJNG maintains agreements for firm
transportation and storage capacity with several interstate pipeline companies.
NJNG receives natural gas at eight city gate stations located in Middlesex,
Morris and Passaic counties in New Jersey.
The
pipeline companies that provide firm transportation service to NJNG’s city gate
stations, the maximum daily deliverability of that capacity in dekatherms (dths)
and the contract expiration dates are as follows:
Pipeline
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
Algonquin
Gas Transmission
|
12,000
|
2011
|
|
Columbia
Gas Transmission Corp.
|
20,000
|
2024
|
|
Tennessee
Gas Pipeline Co.
|
35,894
|
Various
dates between 2011 and 2013
|
|
Texas
Eastern Transmission, L.P.
|
488,738
|
Various
dates between 2014 and 2023
|
|
Transcontinental
Gas Pipe Line Corp.
|
22,531
|
2014
|
|
579,163
|
The
pipeline companies that provide firm contract transportation service for NJNG
and supply the above pipelines are ANR Pipeline Company, Iroquois Gas
Transmission System, Tennessee Gas Pipeline, Dominion Transmission Corporation
and Columbia Gulf Transmission Company.
In
addition, NJNG has storage and related transportation contracts that provide
additional maximum daily deliverability to NJNG’s city gate stations of 102,941
dths from storage fields in its Northeast market area. The storage suppliers,
the maximum daily deliverability of that storage capacity and the contract
expiration dates are as follows:
Pipeline
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
Texas
Eastern Transmission, L.P.
|
94,557
|
2014
|
|
Transcontinental
Gas Pipe Line Corp.
|
8,384
|
2014
|
|
102,941
|
Page
4
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS (Continued)
NJNG also
has upstream storage contracts, maximum daily deliverability and contract
expiration dates as follows:
Company
|
Maximum
daily
|
Expiration
|
|
deliverability
(dths)
|
|||
ANR
Pipeline Company
|
39,831
|
2013
|
|
Central
NY Oil & Gas (Stagecoach)
|
47,065
|
2011
|
|
Dominion
Transmission Corporation
|
103,714
|
Various
dates between 2012 and 2016
|
|
190,610
|
NJNG
utilizes its transportation contracts to transport gas from the ANR, Dominion
and Stagecoach storage fields to NJNG’s city gates.
Peaking
Supply
To manage
its winter peak day demand NJNG maintains two liquefied natural gas (LNG)
facilities with a combined deliverability of approximately 170,000 dths per day,
which represents approximately 21 percent of its estimated peak day sendout. See
Item 2. Properties–NJNG
for additional information regarding the LNG storage facilities.
Basic Gas Supply
Service
Wholesale
natural gas prices are, by their very nature, volatile. NJNG has mitigated the
impact of volatile price changes on customers through the use of financial
derivative instruments, which are part of its financial risk management program,
its storage incentive program and its Basic Gas Supply Service (BGSS) clause.
BGSS is a BPU-approved clause designed to allow for the recovery of natural gas
commodity costs. The clause also requires all New Jersey natural gas utilities
to make an annual filing by each June 1 for review of BGSS rates and to request
a potential rate change to be effective the following October 1. The BGSS also
is designed to allow each natural gas utility to provisionally increase
residential and small commercial customer BGSS rates up to 5 percent on December
1 and February 1 on a self-implementing basis, after proper notice and BPU
action on the June filing. Such increases are subject to subsequent BPU review
and final approval. Decreases in the BGSS rate and BGSS refunds can be
implemented upon five days’ notice to the BPU.
In March
2008, NJNG, the BPU Staff and the New Jersey Department of the Public Advocate,
Division of Rate Counsel (Rate Counsel) entered into a stipulation to resolve
certain matters related to NJNG’s fiscal 2007 BGSS filing. This stipulation was
approved by the BPU in May 2008, and resulted in NJNG recording a non-recurring
settlement charge to its BGSS costs of $300,000.
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 18.0 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 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 BPU order.
In June
2009, NJNG filed its annual BGSS and 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 and a minor reduction to the rate related to collecting
the remaining balance under the WNC.
In
September 2009, the BPU approved, on a provisional basis a decrease of
approximately 19 percent to the average residential heating customer of which
17.2 percent stems from the reduction to the BGSS price and the balance of rate
change is related to the CIP and WNC rates as discussed above.
These
rate changes, as well as other regulatory actions, are discussed further in
Note 2. Regulation in
the accompanying Consolidated Financial Statements in Part II, Item
8.
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Part
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ITEM
1. BUSINESS (Continued)
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Future Natural Gas
Supplies
NJNG
expects to meet the natural gas requirements for existing and projected firm
customers into the foreseeable future. If NJNG’s long-term natural gas
requirements change, NJNG would renegotiate and restructure its contract
portfolio components to better match the changing needs of its
customers.
Regulation
and Rates
State
NJNG is
subject to the jurisdiction of the BPU with respect to a wide range of matters
such as rates, the issuance of securities, the adequacy of service, the manner
of keeping its accounts and records, the sufficiency of natural gas supply,
pipeline safety, compliance with affiliate standards and the sale or encumbrance
of its properties.
See Note 2. Regulation in the
accompanying Consolidated Financial Statements for additional information
regarding NJNG’s rate proceedings.
Federal
The
Federal Energy Regulatory Commission (FERC) regulates rates charged by
interstate pipeline companies for the transportation and storage of natural gas.
This affects NJNG’s agreements for the purchase of such services with several
interstate pipeline companies. Any costs associated with these services are
recoverable through the BGSS.
Competition
Although
its franchises are nonexclusive, NJNG is not currently subject to competition
from other natural gas distribution utilities with regard to the transportation
of natural gas in its service territory. Due to significant distances between
NJNG’s current large industrial customers and the nearest interstate natural gas
pipelines, as well as the availability of its transportation tariff, NJNG
currently does not believe it has significant exposure to the risk that its
distribution system will be bypassed. Competition does exist from suppliers of
oil, coal, electricity and propane. At the present time, however, natural gas is
used in favor of alternate fuels in over 95 percent of new construction due to
its efficiency and reliability. Natural gas prices are a function of market
supply and demand, although NJNG believes natural gas will remain competitive
with alternate fuels, no assurance can be given in this regard.
The BPU,
within the framework of the Electric Discount and Energy Competition Act
(EDECA), fully opened NJNG’s residential markets to competition, including
third-party suppliers, and restructured rates to segregate its BGSS and delivery
(i.e., transportation) prices. In the absence of any third-party supplier, BGSS
must be provided by the state’s natural gas utilities. On September 30, 2009,
NJNG had 14,608 residential and
6,357 commercial
and industrial customers utilizing the transportation service. Based on its
current and projected level of transportation customers, NJNG expects to use its
existing firm transportation and storage capacity to fully meet its firm sales
contract obligations.
ENERGY
SERVICES
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, the West Coast
and Canada.
More
specifically, NJRES activities consist of the following elements, while focusing
on maintaining a low-risk operating and counterparty credit
profile:
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Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate financial margin (as defined
below);
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Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
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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
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1. BUSINESS (Continued)
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Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
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NJRES
views “financial margin” as its key 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
transactions that have not been settled, which represent unrealized gains and
losses, and the effects of economic hedging on the value of our natural gas in
storage. 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 NJRES believes it is more
representative of its 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 the Northeast, Gulf Coast, Mid-continent and
Appalachian regions, the West Coast and Canada. These assets become more
valuable when prices change between these areas and across time periods. On a
forward basis, NJRES will lock in these price differentials through the use of
financial instruments. In addition, NJRES seeks to optimize these assets on a
daily basis as market conditions change by evaluating all the natural gas
supplies, transportation and opportunities to which it has access. 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
also participates in park-and-loan transactions with pipeline counterparties,
where NJRES will park (store on the pipeline) natural gas to be redelivered to
NJRES at a later date or borrow (receive a loan of natural gas from the
pipeline) to be returned to the pipeline at a later date. In these cases, NJRES
evaluates the economics of the transaction to determine if it can capture
pricing differentials in the marketplace in order to be able to generate
financial margin. In evaluating these transactions NJRES will compare the fixed
fee it will pay to or receive from the pipeline, along with other costs such as
time value of money, and the resulting spread it can generate when considering
the market price at the beginning and end of the time period of the park or
loan. When the transaction allows NJRES to generate a financial margin, NJRES
will fix the financial margin by economically hedging the transaction with
natural gas futures.
NJRES has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators, retail aggregators and other
wholesale marketing companies. Sales to these customers have allowed NJRES to
leverage its transportation and storage capacity and manage sales to these
customers in an aggregate fashion. This strategy allows NJRES to extract more
value from its portfolio of natural gas storage and pipeline transportation
capacity through the arbitrage of pricing differences as a result of locational
differences or over different periods of time.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
In fiscal
2009, NJRES had one customer, who represented 14 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.
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1. BUSINESS (Continued)
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OTHER
BUSINESS OPERATIONS
RETAIL
AND OTHER
Retail
and Other operations consist primarily of the following unregulated
affiliates:
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NJRHS,
which provides service, sales and installation of
appliances;
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NJR
Energy Holdings, a company that invests in energy-related ventures through
its subsidiary, Pipeline, which consists primarily of its 5.53 percent
equity investment in Iroquois, which is a 412-mile natural gas pipeline
from the New York-Canadian border to Long Island, New
York;
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NJR
Steckman Ridge Storage Company, which holds the Company’s 50 percent
equity investment in Steckman Ridge. Steckman Ridge is a partnership,
jointly owned and controlled by subsidiaries of the Company and
subsidiaries of Spectra Energy Corporation, that built, owns and operates
a 17.7 Bcf natural gas storage facility in western
Pennsylvania.
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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. An additional
drilling program will be reviewed in the third quarter of fiscal 2010. As
of September 30, 2009, NJR has invested approximately $122.5 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. Steckman
Ridge may seek non-recourse financing upon completion of the construction
and development of its facilities, thereby potentially reducing the final
expected recourse obligation of NJR. There can be no assurances that such
non-recourse project financing will be secured or available for Steckman
Ridge;
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CR&R,
which holds and develops commercial real
estate.
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As
of September 30, 2009, CR&R’s real estate portfolio consisted of 31
acres of undeveloped land in Monmouth County with a net book value of $6.5
million, 52 acres of undeveloped land in Atlantic County with a net book
value of $2.1 million and a 56,400-square-foot office building on 5 acres
of land in Monmouth County with a net book value of $8.9 million. The
Atlantic County location has 11 acres under contract for sale and will be
sold as undeveloped land, subject to all approvals being obtained. An
additional 5 acres of undeveloped land in Monmouth County, with a net book
value of $1.7 million, is also under contract for sale and such sale is
estimated to close in fiscal 2010, subject to all approvals being
obtained. The remaining 26 acres of undeveloped land in Monmouth County
with a net book value of $4.8 million will be developed or sold based on
market conditions. The specific time frame for development or sale is
currently unknown;
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NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies:
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NJR Energy, a company that
invests in energy-related ventures;
and
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NJR
Service, which provides shared administrative and financial services to
the Company and all its
subsidiaries.
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ENVIRONMENT
The
Company and its subsidiaries are subject to legislation and regulation by
federal, state and local authorities with respect to environmental matters. The
Company believes that it is in compliance in all material respects with all
applicable environmental laws and regulations.
NJNG is
responsible for the environmental remediation of five manufactured gas plant
(MGP) sites, which contain contaminated residues from former gas manufacturing
operations that ceased at these sites by the mid-1950s and, in some cases, had
been discontinued many years earlier. In September 2009, NJNG updated an
environmental review of the MGP sites, including a review of potential liability
related to the investigation and remedial action on these sites. Based on this
review, NJNG estimated that the total future expenditures to remediate and
monitor the five MGP sites for which it is responsible will range from $146.7
million to $244.3 million.
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1. BUSINESS (Continued)
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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. Where
available information is sufficient to estimate the amount of the liability, it
is NJNG’s policy to accrue the full amount of such estimate. Where the
information is sufficient only to establish a range of possible liability, and
no point within the range is more likely than the other, it is NJNG’s policy to
accrue the lower end of the range. As a result, NJNG has recorded an MGP
remediation liability and a corresponding Regulatory asset of $146.7 million on
the Consolidated Balance Sheet; however, actual costs may differ from these
estimates. NJNG will continue to seek recovery of these costs through its
remediation rider. See Item 3.
Legal Proceedings and Note 13. Commitments and Contingent
Liabilities in the accompanying Consolidated Financial Statements for
information with respect to environmental matters and material expenditures for
the remediation of the MGP sites.
CR&R
is the owner of certain undeveloped land in Monmouth and Atlantic counties, New
Jersey, with a net book value at September 30, 2009, of $8.6 million that is
regulated by the provisions of the Freshwater Wetlands Protection Act (Wetlands
Act), which restricts building in areas defined as “freshwater wetlands” and
their transition areas. Based upon a third-party environmental engineer’s
delineation of the wetlands and transition areas in accordance with the
provisions of the Wetlands Act, CR&R will file for a Letter of
Interpretation from the New Jersey Department of Environmental Protection
(NJDEP) as parcels of land are selected for development. If the NJDEP reduces
the amount of developable yield from CR&R’s current estimates, a write-down
of the carrying value of the undeveloped land may be required.
Taking
into consideration the environmental engineer’s revised estimated developable
yield for undeveloped acreage and recently negotiated sales, the Company does
not believe that a write-down of the carrying value of the Monmouth and Atlantic
counties land is necessary as of September 30, 2009.
Although
the Company cannot estimate with certainty future costs of environmental
compliance, which, among other factors, are subject to changes in technology and
governmental regulations, the Company does not presently anticipate any
additional significant future expenditure for compliance with existing
environmental laws and regulations, other than for the remediation of the MGP
sites discussed in Note 13.
Commitments and Contingent Liabilities in the accompanying Consolidated
Financial Statements, which would have a material effect upon the capital
expenditures, results of operations or competitive position of the Company or
its subsidiaries.
EMPLOYEE
RELATIONS
As of
September 30, 2009, the Company and its subsidiaries employed 900 employees
compared with 854 employees as of September 30, 2008. Of the total number of
employees, NJNG had 402 and 399 and NJRHS had 97 and 94 union employees as of
September 30, 2009 and 2008, respectively. NJNG and NJRHS have collective
bargaining agreements with local 1820 of the International Brotherhood of
Electrical Workers (IBEW), AFL-CIO expiring in December 2011 and April 2010,
respectively. The labor agreements cover wage increases and other benefits
during the term of the agreements. The Company considers its relationship with
employees, including those covered by collective bargaining agreements, to be
good.
AVAILABLE
INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS
The
following items are available free of charge on our website at http://njr360.client.shareholder.com/sec.cfm
as soon as reasonably possible after filing or furnishing them with the
Securities and Exchange Commission (SEC):
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Annual
reports on Form 10-K;
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Quarterly
reports on Form 10-Q; and
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Current
reports on Form 8-K.
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In
addition, on our website at http://njr360.client.shareholder.com/governance.cfm, the following documents are
also available free of charge:
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Corporate
governance guidelines;
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Principal
Executive Officer and Senior Financial Officers Code of
Ethics;
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Wholesale Trading Code of
Conduct;
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NJR
Code of Conduct; and
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the
charters of the following Board Committees: Audit, Leadership Development
and Compensation and Nominating/Corporate
Governance.
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New
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ITEM
1. BUSINESS (Continued)
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A printed
copy of each is available free of charge to any shareholder who requests it by
contacting the Corporate Secretary at New Jersey Resources Corporation, 1415
Wyckoff Road, Wall, NJ 07719.
ITEM
1A. RISK FACTORS
|
When
considering any investment in NJR’s securities, investors should consider the
following information, as well as the information contained under the caption
“Forward Looking Statements,” in analyzing the Company’s present and future
business performance. While this list is not exhaustive, NJR’s management also
places no priority or likelihood based on their descriptions or orders of
presentation.
Financial
Risks
Inability
of NJR and/or NJNG to access the financial markets and conditions in the credit
markets could affect management’s ability to execute their respective business
plans.
NJR
relies on access to both short-term and long-term credit as significant sources
of liquidity for capital requirements not satisfied by its cash flow from
operations. Any deterioration in NJR’s financial condition could hamper its
ability to access the credit markets or otherwise obtain debt financing. Because
certain state regulatory approvals may be necessary in order for NJNG to incur
debt, NJNG may not be able to access credit markets on a timely
basis.
External
events could also increase the cost of borrowing or adversely affect the ability
to access the financial markets. Such external events could include the
following:
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economic
weakness in the United States or in the regions where NJR
operates;
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financial
difficulties of unrelated energy
companies;
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capital
market conditions generally;
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market
prices for natural gas;
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the
overall health of the natural gas utility industry;
and
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fluctuations
in interest rates.
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NJR and
its subsidiaries’ ability to secure short-term financing is subject to
conditions in the credit markets. The volatility in the U.S. credit markets and
stricter bank credit policies have contributed to a slowdown of lending by
banks. A prolonged constriction of credit availability could affect management’s
ability to execute NJR’s, NJRES’ and NJNG’s business plan. An inability to
access capital may limit the ability to pursue improvements or acquisitions that
NJR, or its subsidiaries, may otherwise rely on for both current operations and
future growth.
Although
NJRES and NJNG have strict credit risk management policies and procedures, they
execute derivative transactions with financial institutions as a part of their
economic hedging strategy and could incur losses associated with the inability
of a financial counterparty to meet or perform under its obligations as a result
of adverse conditions in the credit markets or their ability to access capital
or post collateral.
NJR
is a holding company and depends on its operating subsidiaries to meet its
financial obligations.
NJR is a
holding company with no significant assets other than possible cash investments
and the stock of its operating subsidiaries. NJR relies exclusively on dividends
from its subsidiaries, on intercompany loans from its non-regulated
subsidiaries, and on the repayments of principal and interest from intercompany
loans made to its subsidiaries for its cash flows. NJR’s ability to pay
dividends on its common stock and to pay principal and accrued interest on its
outstanding debt depends on the payment of dividends to NJR by certain of its
subsidiaries or the repayment of loans to NJR by its principal subsidiaries. The
extent to which NJR’s subsidiaries do not pay dividends or repay funds to NJR
may adversely affect its ability to pay dividends to holders of its common stock
and principal and interest to holders of its debt.
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1A. RISK FACTORS (Continued)
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Credit
rating downgrades could increase financing costs, limit access to the financial
markets and negatively affect NJR and its subsidiaries.
The debt
of NJNG is currently rated by the rating agencies Moody’s Investor Services,
Inc. and Standard & Poor’s as investment grade. If such ratings are
downgraded below investment grade, borrowing costs could increase, as will the
costs of maintaining certain contractual relationships and obtaining future
financing. Even if ratings are downgraded without falling below investment
grade, NJR and NJNG can still face increased borrowing costs under their
currently existing credit facilities. NJR and its subsidiaries’ ability to
borrow and costs of borrowing have a direct impact on its subsidiaries' ability
to execute their operating strategies.
Additionally,
lower credit ratings could adversely affect relationships with NJNG’s state
regulators, who may be unwilling to allow NJNG to pass along increased costs to
its natural gas customers.
NJR
is dependent on credit facilities and continued access to capital markets to
execute its operating strategies, and failure by NJR and/or NJNG to comply with
debt covenants may impact NJR’s financial condition.
NJR and
NJNG’s long-term debt obligations contain financial covenants related to
debt-to-capital ratios and an interest coverage ratio for NJNG. These debt
obligations also contain provisions that put certain limitations on NJR’s
ability to finance future operations or capital needs or to expand or pursue
certain business activities. For example, certain of these agreements contain
provisions that, among other things, put limitations on our ability to make
loans or investments, make material changes to the nature of our businesses,
merge, consolidate or engage in asset sales, grant liens, or make negative
pledges. Furthermore, the debt obligations contain covenants and other
provisions requiring NJR or NJNG to make timely delivery of accurate financial
statements prepared in accordance with GAAP. The failure to comply with any of
these covenants could result in an event of default, which, if not cured or
waived, could result in the acceleration of outstanding debt obligations and/or
the inability to borrow under existing revolving credit facilities. NJNG has
relied, and continues to rely, upon short-term bank borrowings or commercial
paper supported by its revolving credit facility to finance the execution of a
portion of its operating strategies. NJNG is dependent on these capital sources
to purchase its natural gas supply and maintain its properties. The acceleration
of outstanding debt obligations of NJR or NJNG and their inability to borrow
under their existing revolving credit facilities would cause a material adverse
change in NJR or NJNG’s financial condition.
NJRES’
ability to conduct its business is dependent upon the creditworthiness of
NJR.
If NJR
suffers a reduction in its credit and borrowing capacity or in its ability to
issue parental guarantees, the business prospects of NJRES, which rely on the
creditworthiness of NJR, would be adversely affected. NJRES would possibly be
required to comply with various margin or other credit enhancement obligations
under its trading and marketing contracts, and it may be unable to continue to
trade or be able to do so only on less favorable terms with certain
counterparties.
Continued
failures in the market for auction-rate securities could have a negative impact
on NJNG’s financial condition.
NJNG is
obligated with respect to a total of six series of auction rate bonds totaling
approximately $97 million (collectively, auction-rate securities or “ARS”). All
of the ARS are investment grade rated by Moody’s Investor Services and Standard
& Poor’s. NJNG has been experiencing ARS failed auctions, which occur when
there are not enough orders to purchase all of the securities being sold at the
auction. The result of a failed auction, which does not signify a default by
NJNG, is that the ARS continue to pay interest in accordance with their terms
until there is a successful auction or until such time as other markets for
these securities develop. However, upon an auction failure, the interest rates
do not reset at a market rate established at an auction, but instead reset based
upon a formula contained within the ARS, otherwise known as a “maximum auction
rate,” which may be materially higher than the previous auction rate. The
“maximum auction rate” for the ARS is the lesser of (i) 175 percent of one-month
LIBOR or (ii) either 10 percent or 12 percent per annum, as applicable to such
series of the ARS. Should future auctions fail and interest rates on the ARS
continue to be established at the maximum auction rate, NJNG’s average cost of
borrowing could rise above historic levels, which could materially and adversely
affect both NJNG’s and NJR’s cash flows, results of operations and financial
condition. Although NJR is reviewing alternative methods for refinancing the ARS
at NJNG on a continuing basis, NJR cannot assure that alternative sources of
financing can be implemented in a timely manner.
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1A. RISK FACTORS (Continued)
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The cost of providing pension and
postemployment health care benefits to eligible former employees is subject to
changes in pension fund values and changing demographics and may have a material
adverse effect on NJR’s financial results.
NJR has
two defined benefit pension plans and two postemployment health care plans
(OPEB) for the benefit of substantially all full-time employees and qualified
retirees. The cost of providing these benefits to eligible current and former
employees is subject to changes in the market value of the pension and OPEB fund
assets, changing discount notes and changing demographics, including longer life
expectancy of beneficiaries, an expected increase in the number of eligible
former employees over the next five years and increases in health care
costs.
Any
sustained declines in equity markets and reductions in bond yields may have a
material adverse effect on the funded status of NJR’s pension and OPEB plans. In
these circumstances, NJR may be required to recognize increased pension and OPEB
expenses and/or be required to make additional cash contributions into the
plans.
The
funded status of these plans, and the related cost reflected in NJR’s financial
statements, are affected by various factors that are subject to an inherent
degree of uncertainty, particularly in the current economic environment. Under
the Pension Protection Act of 2006, continued losses of asset values may
necessitate increased funding of the plans in the future to meet minimum federal
government requirements. A continued downward pressure on the asset values of
these plans may require NJR to fund obligations earlier than it had originally
planned, which would have a negative impact on cash flows from operations,
decrease NJR’s borrowing capacity and increase its interest expense as a result
of having to fund these obligations.
If
we do not maintain an effective system of internal control we could have one or
more material weaknesses in internal control over financial reporting, which may
result in unreliable financial statements.
Section
404 of the Sarbanes-Oxley Act of 2002 requires NJR’s management to make an
assessment of the design and effectiveness of internal controls. It also
requires NJR’s independent registered public accounting firm to audit the design
and effectiveness of these controls and to form an opinion on both management’s
assessment and the effectiveness of these controls. Management’s ongoing
assessment of these controls may identify areas of weakness in control design or
effectiveness, which may lead to the conclusion that a material weakness in
internal control exists. NJR’s independent public registered accounting firm may
also identify control deficiencies, which may lead to identification of a
material weakness in internal control. While NJR’s system of internal controls
is reviewed periodically, there exist inherent limitations to control
effectiveness. To the extent NJR identifies future weaknesses or deficiencies,
NJR may not be able to produce reliable financial statements, which could result
in a loss of investor confidence and a decline in its stock value. In addition,
should NJR not be able to produce reliable financial statements, it could limit
NJR’s and NJNG’s ability to access the capital markets.
Economic
hedging activities of NJR designed to protect against commodity and financial
market risks may cause fluctuations in reported financial results, and NJR’s
stock price could be adversely affected as a result.
Although
NJR uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks, the timing of the recognition of gains or
losses on these economic hedges in accordance with generally accepted accounting
principles used in the United States of America (GAAP) does not always coincide
with the gains or losses on the items being hedged. The difference in accounting
can result in volatility in reported results, even though the expected profit
margin is essentially unchanged from the dates the transactions were
consummated.
Operational
Risks
NJNG’s
operations are subject to certain operating risks incidental to handling,
storing, transporting and providing customers with natural gas.
NJNG’s
operations are subject to all operating hazards and risks incidental to
handling, storing, transporting and providing customers with natural gas. These
risks include explosions, pollution, release of toxic substances, fires, storms
and other adverse weather conditions and hazards, each of which could result in
damage to or destruction of facilities or damage to persons and property. If any
of these events were to occur, NJR could suffer substantial losses. Moreover, as
a result, NJR has been, and likely will be, a defendant in legal proceedings and
litigation arising in the ordinary course of business. Although NJR maintains
insurance coverage, insurance may not be sufficient to cover all material
expenses related to these risks.
Page
12
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Major
changes in the supply and price of natural gas may affect financial
results.
While
NJNG expects to provide for the demand of its customers for the foreseeable
future, factors impacting suppliers and other third parties, including increased
competition, further deregulation, transportation costs, possible climate change
legislation, transportation availability and drilling for new natural gas
resources, may impact the supply and price of natural gas. NJNG actively hedges
against the fluctuation in the price of natural gas by entering into forward and
financial contracts with third parties. Should these third parties fail to
perform, it may result in a loss that could have a material impact on the
financial position, cash flows and statement of operations of NJR.
NJNG
and NJRES rely on third parties to supply natural gas.
NJNG’s
ability to provide natural gas for its present and projected sales will depend
upon its suppliers’ ability to obtain and deliver additional supplies of natural
gas, as well as NJNG’s ability to acquire supplies directly from new sources.
Factors beyond the control of NJNG, its suppliers and the independent suppliers
who have obligations to provide natural gas to certain NJNG customers, may
affect NJNG’s ability to deliver such supplies. These factors include other
parties’ control over the drilling of new wells and the facilities to transport
natural gas to NJNG’s city gate stations, competition for the acquisition of
natural gas, priority allocations, impact of severe weather disruptions to
natural gas supplies, the regulatory and pricing policies of federal and state
regulatory agencies, as well as the availability of Canadian reserves for export
to the United States. Energy deregulation legislation may increase competition
among natural gas utilities and impact the quantities of natural gas
requirements needed for sales service.
NJRES
also relies on a firm supply source to meet its energy management obligations
for its customers. Should NJRES’ suppliers fail to deliver supplies of natural
gas, there could be a material impact on its cash flows and statement of
operations.
The
use of derivative contracts in the normal course of NJRES’ business could result
in financial losses that negatively impact results of operations.
NJRES
uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks. NJRES could recognize financial losses on
these contracts as a result of volatility in the market values of the underlying
commodities or if a counterparty fails to perform under a contract. In the
absence of actively quoted market prices and pricing information from external
sources, the valuation of these financial instruments can involve management’s
judgment or use of estimates. As a result, changes in the underlying assumptions
or use of alternative valuation methods could adversely affect the value of the
reported fair value of these contracts.
Adverse
economic conditions including inflation, increased natural gas costs,
foreclosures, and business failures could adversely impact NJNG’s customer
collections and increase its level of indebtedness.
Inflation
has caused increases in certain operating and capital costs. NJR has a process
in place to continually review the adequacy of NJNG’s rates in relation to the
increasing cost of providing service and the inherent regulatory lag in
adjusting those rates. The ability to control expenses is an important factor
that will influence future results.
Rapid
increases in the price of purchased gas may cause NJNG to experience a
significant increase in short-term debt because it must pay suppliers for gas
when it is purchased, which can be significantly in advance of when these costs
may be recovered through the collection of monthly customer bills for gas
delivered. Increases in purchased gas costs also slow collection efforts as
customers are more likely to delay the payment of their gas bills, leading to
higher-than-normal accounts receivable. In addition, the extended recession in
the U.S. has led to increasing unemployment, foreclosures in the housing
markets, and the discontinuation of some commercial businesses that fall within
NJNG’s service territory. These situations can result in higher short-term debt
levels and increased bad debt expense.
Changes
in weather conditions may affect earnings and cash flows.
Weather
conditions and other natural phenomena can have an adverse impact on earnings
and cash flows. Severe weather conditions can impact suppliers and the pipelines
that deliver gas to NJNG’s distribution system. Extended mild weather, during
either the winter period or summer period, can have a significant impact on
demand for and the cost of natural gas. While NJR believes the CIP mitigates the
impact of weather variations on its gross margin, severe weather conditions may
still have an impact on the ability of suppliers and pipelines to deliver the
natural gas to NJNG, which can negatively affect NJR’s earnings. The CIP does
not mitigate the impact of unusual weather conditions on its cash
flows.
Page
13
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Termination
of NJNG’s CIP may lead to a decrease in earnings and cash flows.
Customer
conservation efforts have been increasing and as a result NJNG has seen a
decrease in volumes of natural gas delivered to its customers. NJNG’s CIP has a
usage component that is intended to mitigate the impact to earnings as a result
of reductions in customer usage. NJNG has requested an extension of the CIP, but
if it is not renewed or replaced with a similar mechanism to decouple the link
between customer usage and NJNG’s utility gross margin, NJNG’s results from
operations and cash flows, and NJR’s results from operations and cash flows,
could be adversely affected.
Changes
in customer growth may affect earnings and cash flows.
NJNG’s
ability to increase its utility firm gross margin is dependent upon the new
construction housing market, as well as the additional conversion of customers
to natural gas from other fuel sources. Should there be continued weakness in
the housing market or a slowdown in the conversion market, there could be an
adverse impact on NJNG’s utility firm gross margin, earnings and cash
flows.
NJRES’
earnings and cash flows are dependent upon an asset optimization strategy of its
physical assets using financial transactions.
NJRES’
earnings and cash flows are based, in part, on its ability to optimize its
portfolio of contractual-based natural gas storage and pipeline assets. The
optimization strategy involves utilizing its physical assets to take advantage
of differences in natural gas prices between geographic locations and/or time
periods. Any change among various pricing points could affect these
differentials, which in turn could affect NJRES’ earnings and cash flows. NJRES
incurs fixed demand fees to acquire its contractual rights to storage and
transportation assets. Should commodity prices at various locations or time
periods change in such a way that NJRES is not able to recover these costs from
its customers, the cash flows and earnings at NJRES, and ultimately NJR, could
be adversely impacted.
NJRES
is exposed to market risk and may incur losses in wholesale
services.
The
storage and transportation portfolios at NJRES consist of contracts to transport
and store natural gas commodities. If the values of these contracts change in a
direction or manner that NJRES does not anticipate, the value of NJRES’
portfolio could be negatively impacted. In addition, upon expiration of these
storage and transportation contracts, to the extent that they are renewed or
replaced at less favorable terms, NJR’s results of operations and cash flows
could be negatively impacted.
NJNG
and NJRES rely on storage and transportation assets that they do not own or
control to deliver natural gas.
NJNG and
NJRES depend on natural gas pipelines and other storage and transportation
facilities owned and operated by third parties to deliver natural gas to
wholesale markets and to provide retail energy services to customers. If
transportation or storage is disrupted, including for reasons of force majeure,
the ability of NJNG and NJRES to sell and deliver their products and services
may be hindered. As a result, they may be responsible for damages incurred by
their customers, such as the additional cost of acquiring alternative supply at
then-current market rates.
Investing
through partnerships or joint ventures decreases NJR’s ability to manage
risk.
NJR and
its subsidiaries have utilized joint ventures for certain non-regulated energy
investments, including Steckman Ridge and Iroquois, and although they currently
have no specific plans to do so, NJR and its subsidiaries may acquire interests
in other joint ventures in the future. In these joint ventures, NJR and its
subsidiaries may not have the right or power to direct the management and
policies of the joint ventures, and other participants may take action contrary
to their instructions or requests and against their policies and objectives. In
addition, the other participants may become bankrupt or have economic or other
business interests or goals that are inconsistent with those of NJR and its
subsidiaries. If a joint venture participant acts contrary to the interests of
NJR or its subsidiaries, it could harm NJR’s financial condition, results of
operations or cash flows.
Page
14
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
Regulatory
and Legal Risks
NJR
is subject to governmental regulation. Compliance with current and future
regulatory requirements and procurement of necessary approvals, permits and
certificates may result in substantial costs to NJR.
NJR and
its subsidiaries are subject to substantial regulation from federal, state and
local regulatory authorities. They are required to comply with numerous laws and
regulations and to obtain numerous authorizations, permits, approvals and
certificates from governmental agencies. These agencies regulate various aspects
of their business, including customer rates, services and natural gas pipeline
operations.
The
Federal Energy Regulatory Commission (FERC) has regulatory authority over some
of NJR’s operations, including sales of natural gas in the wholesale market and
the purchase and sale of interstate pipeline and storage capacity. Any
Congressional legislation or agency regulation that would alter these or other
similar statutory and regulatory structures in a way to significantly raise
costs that could not be recovered in rates from customers, that would reduce the
availability of supply or capacity, or that would reduce NJR’s competitiveness
would negatively impact its earnings.
NJR and
its subsidiaries cannot predict the impact of any future revisions or changes in
interpretations of existing regulations or the adoption of new laws and
regulations applicable to them. Changes in regulations or the imposition of
additional regulations could influence their operating environment and may
result in substantial costs to them.
Risks
related to the regulation of NJNG could affect the rates it is able to charge,
its costs and its profitability.
NJNG is
subject to regulation by federal, state and local authorities. These authorities
regulate many aspects of NJNG’s distribution operations, including construction
and maintenance of facilities, operations, safety, rates that NJNG can charge
customers, rates of return, the authorized cost of capital, recovery of pipeline
replacement and environmental remediation costs and relationships with its
affiliates. NJNG’s ability to obtain rate increases, including base rate
increases, extend its incentive programs and maintain its currently authorized
rates of return may be impacted by events, including regulatory or legislative
actions. There can be no assurance that NJNG will be able to obtain rate
increases, continue its incentive programs or continue the opportunity to earn
its currently authorized rates of return.
Significant
regulatory assets recorded by NJNG could be disallowed for recovery from
customers in the future.
NJNG
records regulatory assets on its financial statements to reflect the ratemaking
and regulatory decision-making authority of the BPU as allowed by current GAAP.
The creation of a regulatory asset allows for the deferral of costs which,
absent a mechanism to recover such costs from customers in rates approved by the
BPU, would be charged to expense on its income statement. Primary regulatory
assets that are subject to BPU approval include the recovery of BGSS and
Universal Service Fund (USF) costs, remediation costs associated with its MGP
sites, the CIP, WNC, the New Jersey Clean Energy program, economic stimulus
plans and pension and other postemployment plans. If there were to be a change
in regulatory position surrounding the collection of these deferred costs there
could be a material impact on NJNG’s financial position, operations and cash
flows.
NJR’s
charter and bylaws may delay or prevent a transaction that stockholders would
view as favorable.
The
certificate of incorporation and bylaws of NJR, as well as New Jersey law,
contain provisions that could have the effect of delaying, deferring or
preventing an unsolicited change in control of NJR, which may negatively affect
the market price of the common stock or the ability of stockholders to
participate in a transaction in which they might otherwise receive a premium for
their shares over the then current market price. These provisions also may have
the effect of preventing changes in management. In addition, the board of
directors is authorized to issue preferred stock without stockholder approval on
such terms as the board of directors may determine. The common stockholders will
be subject to, and may be negatively affected by, the rights of any preferred
stock that may be issued in the future. In addition, NJR is subject to the New
Jersey Shareholders’ Protection Act, which could have the effect of delaying or
preventing a change of control of NJR.
Page
15
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS (Continued)
|
NJR
and its subsidiaries may be unable to obtain governmental approvals, property
rights and/or financing for the construction, development and operation of its
non-regulated energy investments.
Construction,
development and operation of energy investments, such as natural gas storage
facilities and pipeline transportation systems, are subject to federal and state
regulatory oversight and require certain property rights and approvals,
including permits and licenses for such facilities and systems. NJR, its
subsidiaries, or its joint venture partnerships may be unable to obtain, in a
cost-efficient or timely manner, all such needed property rights, permits and
licenses in order to successfully construct and develop its non-regulated energy
facilities and systems. Successful financing of NJR’s energy investments will
require participation by willing financial institutions and lenders, as well as
acquisition of capital at favorable interest rates. If NJR and its subsidiaries
do not obtain the necessary regulatory approvals and financing, their equity
investments could become impaired, and such impairment could have a materially
adverse effect on NJR’s financial condition, results of operations or cash
flows.
NJR
is involved in legal or administrative proceedings before various courts and
governmental bodies that could adversely affect the company's results of
operations, cash flows and financial condition.
NJR is
involved in legal or administrative proceedings before various courts and
governmental bodies with respect to general claims, rates, taxes, environmental
issues, gas cost prudence reviews and other matters. Adverse decisions regarding
these matters, to the extent they require NJR to make payments in excess of
amounts provided for in its financial statements, could adversely affect NJR’s
results of operations, cash flows and financial condition.
Environmental
Risks
NJR
costs of compliance with present and future environmental laws are significant
and could adversely affect its cash flows and profitability.
NJR’s
operations are subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and site remediation. Compliance with these laws
and regulations may require NJR to expend significant financial resources to,
among other things, conduct site remediation and perform environmental
monitoring. If NJR fails to comply with applicable environmental laws and
regulations, even if it is unable to do so due to factors beyond its control, it
may be subject to civil liabilities or criminal penalties and may be required to
incur significant expenditures to come into compliance. Additionally, any
alleged violations of environmental laws and regulations may require NJR to
expend significant resources in its defense against alleged
violations.
Furthermore,
the United States Congress has for some time been considering various forms of
climate change legislation. There is a possibility that, when and if enacted,
the final form of such legislation could impact NJR’s costs and put upward
pressure on wholesale natural gas prices. Higher cost levels could impact the
competitive position of natural gas and negatively affect our growth
opportunities, cash flows and earnings.
ITEM
1B. UNRESOLVED STAFF COMMENTS
|
None
ITEM
2. PROPERTIES
|
NJNG (All properties are
located in New Jersey)
NJNG owns
approximately 6,710 miles of distribution main, 6,660 miles of service main, 214
miles of transmission main and approximately 503,000 meters. Mains are primarily
located under public roads. Where mains are located under private property, NJNG
has obtained easements from the owners of record.
Additionally,
NJNG owns and operates two LNG storage plants in Stafford Township, Ocean
County, and Howell Township, Monmouth County. The two LNG plants have an
aggregate estimated maximum capacity of approximately 170,000 dths per day.
These facilities are used for peaking natural gas supply and
emergencies.
Page
16
New
Jersey Resources Corporation
Part
I
ITEM
2. PROPERTIES (Continued)
|
NJNG owns
four service centers located in Rockaway Township, Morris County; Atlantic
Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These
service centers house storerooms, garages and gas distribution and
administrative offices. NJNG leases its headquarters and customer service
facilities in Wall Township, customer service offices in Asbury Park, Monmouth
County, and a service center in Manahawkin, Ocean County. These customer service
offices support customer contact, marketing, economic development and other
functions.
Substantially
all of NJNG’s properties, not expressly excepted or duly released, are subject
to the lien of an Indenture of Mortgage and Deed of Trust to BNY Midwest Trust
Company, Chicago, Illinois, dated April 1, 1952, as amended by 32 supplemental
indentures (Indenture), as security for NJNG’s bonded debt, which totaled
approximately $290 million at September 30, 2009. In addition, under the terms
of the Indenture, NJNG could have issued up to approximately $448 million of
additional first mortgage bonds as of September 30, 2009.
All
Other Business Operations
At
September 30, 2009, CR&R owned 83 acres of undeveloped land, of which 16
acres are under contract for sale, and a 56,400-square-foot office building on 5
acres.
A total
of 52 acres of undeveloped land is located in Atlantic County with a net book
value of $2.1 million, 11 acres at this location are under contract for sale and
will be sold as undeveloped land, subject to all approvals being obtained. An
additional 5 acres of undeveloped land under contract for sale is in Monmouth
County, with a net book value of $1.7 million and such sale is estimated to
close in fiscal 2010, subject to all approvals being obtained. The remaining 26
acres of undeveloped land in Monmouth County with a net book value of $4.8
million will be developed or sold based on market conditions. The specific time
frame for development or sale is currently unknown.
As of
September 30, 2009, NJRES currently leases office space in Wall Township, New
Jersey and in Houston, Texas for its business activities
As of
September 30, 2009, the Steckman Ridge partnership owns and/or leases mineral
rights on approximately 8,300 acres of land in Bedford County, Pennsylvania,
where it has developed a 17.7 billion cubic foot (Bcf) natural gas storage
facility with up to 12 Bcf of working gas capacity for an estimated project cost
of approximately $265 million. The Company is obligated to fund up to $132.5
million associated with the construction and development of Steckman Ridge. As
of September 30, 2009, NJR has invested approximately $122.5 million. Equipment
on the property includes a compressor station, gathering pipelines and pipeline
interconnections. 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. An additional drilling program will be reviewed in the third
quarter of fiscal 2010.
NJRHS
leases service centers in Dover, Morris County, and Wall, Monmouth County, New
Jersey.
Capital
Expenditure Program
See Item 7. Management Discussion and
Analysis–Cash Flows for a discussion of anticipated fiscal 2010 and 2011
capital expenditures as applicable to NJR’s business segments and business
operations.
ITEM
3. LEGAL PROCEEDINGS
|
Manufactured
Gas Plant Remediation
NJNG is
responsible for the remedial cleanup of five Manufactured Gas Plant (MGP) sites,
dating back to gas operations in the late 1800s and early 1900s, which contain
contaminated residues from former gas manufacturing operations. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP), as well as participating in various studies
and investigations by outside consultants to determine the nature and extent of
any such contaminated residues and to develop appropriate programs of remedial
action, where warranted, under Administrative Consent Orders or Memoranda of
Agreement with the NJDEP.
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a Remediation Adjustment
(RA) approved by the BPU. In June 2009, the BPU approved $17.7 million in
eligible costs to be recovered annually for MGP remediation expenditures
incurred through June 30, 2007. As of September 30, 2009, $85.5 million of
previously incurred remediation costs, net of recoveries from customers and
insurance proceeds, are included in Regulatory assets on the Consolidated
Balance Sheet.
Page
17
New
Jersey Resources Corporation
Part
I
ITEM
3. LEGAL PROCEEDINGS (Continued)
|
In
September 2009, 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 five MGP sites for which it is responsible will range from
approximately $146.7 million to $244.3 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
$146.7 million on the Consolidated Balance Sheet. The actual costs to be
incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the five MGP sites.
NJDEP has not made any specific demands for compensation for alleged injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify the amount
of compensation, if any, that NJDEP might seek to recover. NJNG anticipates any
costs associated with this matter would be recoverable through the
RA.
NJNG will
continue to seek recovery of MGP-related costs through the RA. 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 RA or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed in this Item 3, the ultimate disposition of these matters will not
have a material adverse effect on its financial condition, results of operations
or cash flows.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY
|
The
Company’s Executive Officers and their business experience, age, and office are
set forth below.
Office
|
Name
|
Age
|
Officer
Since
|
Chairman
of the Board, President and Chief Executive Officer
|
Laurence
M. Downes
|
52
|
1986
|
Executive
Vice President and Chief Operating Officer, NJNG and Senior Vice
President, Corporate Affairs and Marketing
|
Kathleen
T. Ellis
|
56
|
2004
|
Executive
Vice President and Chief Operating Officer, NJRES and Senior Vice
President, Energy Services, NJNG
|
Joseph
P. Shields
|
52
|
1996
|
Senior
Vice President and Chief Financial Officer
|
Glenn
C. Lockwood
|
48
|
1990
|
Senior
Vice President and General Counsel
|
Mariellen
Dugan
|
43
|
2005
|
Vice
President, Corporate Services, NJR Service
|
Deborah
G. Zilai
|
56
|
1996
|
Laurence
M. Downes, Chairman of the Board, President and Chief Executive
Officer
Mr.
Downes has held the position of Chairman of the Board since September 1996. He
has held the position of President and Chief Executive Officer since July 1995.
From January 1990 to July 1995, he held the position of Senior Vice President
and Chief Financial Officer.
Page
18
New
Jersey Resources Corporation
Part
I
ITEM
4A. EXECUTIVE OFFICERS OF THE COMPANY (Continued)
|
Kathleen
T. Ellis, Executive Vice President, Chief Operating Officer, NJNG and Senior
Vice President, Corporate Affairs and Marketing
Ms. Ellis
has held the position of Senior Vice President, Corporate Affairs since December
2004 and the position of Executive Vice President and Chief Operating Officer of
NJNG since February 2008. She also held the position of Senior Vice President,
Corporate Affairs and Marketing of NJNG from July 2007 to February 2008. From
December 2002 to November 2004, she held the position of Director of
Communications for the Governor of the State of New Jersey, and from August 1998
to December 2002, she held the position of Manager of Communications and
Director, State Governmental Affairs for Public Service Electric and Gas Company
(PSE&G), a combined gas and electric utility company based in Newark,
NJ.
Joseph
P. Shields, Executive Vice President and Chief Operating Officer, NJRES and
Senior Vice President, Energy Services, NJNG
Mr.
Shields joined NJNG in 1983 and has been Senior Vice President, Energy Services,
NJNG since January 1996. He has been Executive Vice President and Chief
Operating Officer of NJRES since February 2008 and held the position of Senior
Vice President at NJRES from January 1996 to February 2008. As head of the
energy services business unit, he is responsible for natural gas supply
acquisitions, negotiating transportation agreements and monitoring natural gas
control activities as well as regulated wholesale marketing activity for
NJNG.
Glenn
C. Lockwood, Senior Vice President and Chief Financial Officer
Mr.
Lockwood has held the position of Chief Financial Officer since September 1995
and the added position of Senior Vice President since January 1996. From January
1994 to September 1995, he held the position of Vice President, Controller and
Chief Accounting Officer. From January 1990 to January 1994, he held the
position of Assistant Vice President, Controller and Chief Accounting
Officer.
Mariellen
Dugan, Senior Vice President and General Counsel
Ms. Dugan
has held the position of Senior Vice President and General Counsel since
February 2008. She previously held the position of Vice President and General
Counsel from December 2005 to February 2008. Prior to joining NJR, from February
2004 to November 2005, she held the position of First Assistant Attorney General
for the State of New Jersey, and from February 2003 to February 2004, she held
the position of Chief of Staff, Executive Assistant Attorney General of the
State of New Jersey. From July 1999 to January 2003, Ms. Dugan was Of Counsel to
the law firm of Kevin H. Marino P.C. in Newark, NJ.
Deborah
G. Zilai, Vice President, Corporate Services, NJR Service
Mrs.
Zilai has held the position of Vice President, Corporate Services, NJR Service
since June 2005. She joined New Jersey Resources in June 1996 after a
twenty-year career at International Business Machines Corporation, where she
held various management positions. Her current responsibilities include
technology, human resources and supply chain management. From June 1996 to May
2005, she served as Vice President, Information Systems and
Services.
Page
19
New
Jersey Resources Corporation
Part
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
NJR’s
Common Stock is traded on the New York Stock Exchange under the ticker symbol
NJR. As of September 30, 2009, NJR had 42,261 holders of record of its common
stock.
NJR’s
common stock high and low sales prices and dividends paid per share were as
follows:
2009
|
2008
|
Dividends
Paid
|
||||||||||||||||||||||
High
|
Low
|
High
|
Low
|
2009
|
2008
|
|||||||||||||||||||
Fiscal
Quarter
|
||||||||||||||||||||||||
First
|
$ | 40.22 | $ | 21.90 | $ | 34.71 | $ | 31.00 | $ | 0.28 | $ | 0.25 | ||||||||||||
Second
|
$ | 42.37 | $ | 29.95 | $ | 33.50 | $ | 29.22 | $ | 0.31 | $ | 0.27 | ||||||||||||
Third
|
$ | 37.57 | $ | 30.79 | $ | 34.63 | $ | 30.95 | $ | 0.31 | $ | 0.28 | ||||||||||||
Fourth
|
$ | 40.61 | $ | 35.64 | $ | 41.13 | $ | 31.68 | $ | 0.31 | $ | 0.28 |
The
following table sets forth NJR’s repurchase activity for the quarter ended
September 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
|
||||||||||||
07/01/09
– 07/31/09
|
— | — | — | 854,171 | ||||||||||||
08/01/09
– 08/31/09
|
— | — | — | 854,171 | ||||||||||||
09/01/09
– 09/30/09
|
529,400 | $ | 36.30 | 529,400 | * | 324,771 | ||||||||||
Total
|
529,400 | $ | 36.30 | 529,400 | 324,771 |
*The stock repurchase plan, which was
authorized by our Board of Directors, became effective in September 1996 and
includes 6,750,000 shares of common stock for repurchase, of which, as of
September 30, 2009, 324,771 shares remained for repurchase. The stock repurchase
plan will expire when we have repurchased all shares authorized for repurchase
there under, unless the repurchase plan is earlier terminated by action of our
Board of Directors or further shares are authorized for
repurchase.
Our
Chairman and Chief Executive Officer certified to the New York Stock Exchange
(NYSE) on February 12, 2009 that, as of that date, he was unaware of any
violation by NJR of the NYSE’s corporate governance listing
standards.
Page
20
New
Jersey Resources Corporation
Part
II
ITEM
6. SELECTED FINANCIAL DATA
|
CONSOLIDATED
FINANCIAL STATISTICS
(Thousands,
except per share data)
|
||||||||||||||||||||
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||
Operating
Revenues
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | $ | 3,271,229 | $ | 3,184,582 | ||||||||||
Operating
Expenses
|
||||||||||||||||||||
Gas
purchases
|
2,245,169 | 3,330,756 | 2,625,560 | 2,639,489 | 2,914,387 | |||||||||||||||
Operation
and maintenance
|
149,151 | 148,384 | 136,601 | 121,384 | 108,441 | |||||||||||||||
Regulatory
rider expenses
|
44,992 | 39,666 | 37,605 | 28,587 | 31,594 | |||||||||||||||
Depreciation
and amortization
|
30,328 | 38,464 | 36,235 | 34,753 | 33,675 | |||||||||||||||
Energy
and other taxes
|
74,750 | 65,602 | 62,499 | 58,632 | 56,211 | |||||||||||||||
Total
Operating Expenses
|
2,544,390 | 3,622,872 | 2,898,500 | 2,882,845 | 3,144,308 | |||||||||||||||
Operating
Income
|
48,070 | 193,338 | 123,265 | 388,384 | 40,274 | |||||||||||||||
Other
income
|
4,409 | 4,368 | 4,294 | 4,725 | 4,814 | |||||||||||||||
Interest
expense, net of capitalized interest
|
21,014 | 25,811 | 27,613 | 25,669 | 20,474 | |||||||||||||||
Income
before Income Taxes
|
31,465 | 171,895 | 99,946 | 367,440 | 24,614 | |||||||||||||||
Income
tax provision
|
8,488 | 64,715 | 38,675 | 147,349 | 7,832 | |||||||||||||||
Equity
in earnings, net of tax
|
4,265 | 1,988 | 1,662 | 1,817 | 1,753 | |||||||||||||||
Net
Income
|
$ | 27,242 | $ | 109,168 | $ | 62,933 | $ | 221,908 | $ | 18,535 | ||||||||||
Total
Assets
|
$ | 2,321,030 | $ | 2,635,297 | $ | 2,210,354 | $ | 2,398,928 | $ | 2,330,248 | ||||||||||
CAPITALIZATION
|
||||||||||||||||||||
Common
stock equity
|
$ | 689,726 | $ | 728,068 | $ | 650,648 | $ | 629,861 | $ | 438,052 | ||||||||||
Long-term
debt
|
455,492 | 455,117 | 383,184 | 332,332 | 317,204 | |||||||||||||||
Total
Capitalization
|
$ | 1,145,218 | $ | 1,183,185 | $ | 1,033,832 | $ | 962,193 | $ | 755,256 | ||||||||||
COMMON
STOCK DATA
|
||||||||||||||||||||
Earnings
per share–Basic
|
$ | 0.65 | $ | 2.61 | $ | 1.50 | $ | 5.31 | $ | 0.45 | ||||||||||
Earnings
per share–Diluted
|
$ | 0.64 | $ | 2.59 | $ | 1.49 | $ | 5.27 | $ | 0.44 | ||||||||||
Dividends
declared per share
|
$ | 1.24 | $ | 1.11 | $ | 1.01 | $ | 0.96 | $ | 0.91 |
Page
21
New
Jersey Resources Corporation
Part
II
ITEM
6. SELECTED FINANCIAL DATA (Continued)
NJNG
OPERATING STATISTICS
Fiscal
Years Ended September 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Operating
Revenues ($ in
thousands)
|
||||||||||||||||||||
Residential
|
$ | 686,798 | $ | 594,147 | $ | 584,727 | $ | 598,274 | $ | 568,324 | ||||||||||
Commercial,
Industrial and other
|
144,565 | 149,177 | 132,113 | 172,465 | 143,211 | |||||||||||||||
Firm
transportation
|
40,356 | 28,634 | 36,794 | 28,656 | 29,566 | |||||||||||||||
Total
residential and commercial
|
871,719 | 771,958 | 753,634 | 799,395 | 741,101 | |||||||||||||||
Interruptible
|
5,711 | 11,840 | 7,141 | 12,134 | 14,377 | |||||||||||||||
Total
system
|
877,430 | 783,798 | 760,775 | 811,529 | 755,478 | |||||||||||||||
Incentive
programs
|
204,571 | 295,026 | 244,813 | 327,245 | 382,802 | |||||||||||||||
Total
Operating Revenues
|
$ | 1,082,001 | $ | 1,078,824 | $ | 1,005,588 | $ | 1,138,774 | $ | 1,138,280 | ||||||||||
Throughput
(Bcf)
|
||||||||||||||||||||
Residential
|
43.6 | 40.8 | 41.8 | 39.4 | 43.7 | |||||||||||||||
Commercial,
Industrial and other
|
9.8 | 9.0 | 9.4 | 10.4 | 11.3 | |||||||||||||||
Firm
transportation
|
9.4 | 8.9 | 8.6 | 7.4 | 7.6 | |||||||||||||||
Total
residential and commercial
|
62.8 | 58.7 | 59.8 | 57.2 | 62.6 | |||||||||||||||
Interruptible
|
4.1 | 6.4 | 6.5 | 7.2 | 9.7 | |||||||||||||||
Total
system
|
66.9 | 65.1 | 66.3 | 64.4 | 72.3 | |||||||||||||||
Incentive
programs
|
66.1 | 34.5 | 36.5 | 38.4 | 52.4 | |||||||||||||||
Total
Throughput
|
133.0 | 99.6 | 102.8 | 102.8 | 124.7 | |||||||||||||||
Customers
at Year-End
|
||||||||||||||||||||
Residential
|
437,793 | 437,655 | 435,169 | 429,834 | 418,646 | |||||||||||||||
Commercial,
Industrial and other
|
27,771 | 29,002 | 28,916 | 28,914 | 28,878 | |||||||||||||||
Firm
transportation
|
20,965 | 16,830 | 14,104 | 12,874 | 15,246 | |||||||||||||||
Total
residential and commercial
|
486,529 | 483,487 | 478,189 | 471,622 | 462,770 | |||||||||||||||
Interruptible
|
45 | 46 | 45 | 48 | 47 | |||||||||||||||
Incentive
programs
|
36 | 27 | 26 | 35 | 39 | |||||||||||||||
Total
Customers at Year-End
|
486,610 | 483,560 | 478,260 | 471,705 | 462,856 | |||||||||||||||
Interest
Coverage Ratio (1)
|
8.19 | 6.08 | 6.03 | 7.63 | 6.38 | |||||||||||||||
Average
Therm Use per Customer
|
||||||||||||||||||||
Residential
|
995 | 931 | 960 | 920 | 1,045 | |||||||||||||||
Commercial,
Industrial and other
|
4,777 | 5,303 | 5,710 | 5,084 | 5,443 | |||||||||||||||
Degree
Days
|
4,791 | 4,399 | 4,481 | 4,367 | 4,927 | |||||||||||||||
Weather
as a Percent of Normal (2)
|
101 | % | 91 | % | 94 | % | 90 | % | 102 | % | ||||||||||
Number
of Employees
|
613 | 572 | 548 | 516 | 518 |
(1)
NJNG’s
Income from Operations divided by interest expense.
(2)
Normal
heating degree-days are based on a 20-year average, calculated based upon three
reference areas representative of NJNG’s service
territory.
Page
22
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking
and Cautionary Statements
From time
to time, we may make statements that may constitute “forward-looking statements”
within the meaning of the “safe-harbor” provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on the Company’s
then-current expectations and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those addressed in the
forward-looking statements. Information concerning forward-looking statements is
set forth on page 1 of this annual report and is incorporated herein, and the
risk factors that may cause such differences are summarized in Item 1A beginning
on page 10 and are incorporated herein.
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast and
Mid-Continent regions to the New England region, the West Coast and Canada
through its two principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR
Energy Services (NJRES).
Comprising
the Natural Gas Distribution segment, NJNG is a natural gas utility that
provides regulated retail natural gas service in central and northern New Jersey
and also participates in the off-system sales and capacity release markets. NJNG
is regulated by the New Jersey Board of Public Utilities (BPU).
NJRES
comprises the Energy Services segment. NJRES maintains and transacts around a
portfolio of physical assets consisting of natural gas storage and
transportation contracts. In addition, NJRES provides wholesale energy services
to non-affiliated utility and energy companies.
The
retail and other business operations (Retail and Other) includes NJR Energy
Holdings, an investor in energy-related ventures, most significantly through
NJNR Pipeline, which holds the Company’s 5.53 percent interest in Iroquois Gas
and Transmission System, LP (Iroquois), a 412-mile natural gas pipeline from the
New York-Canadian border to Long Island, New York, and NJR Steckman Ridge
Storage Company, which has a 50 percent equity ownership interest in Steckman
Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a 17.7
billion cubic foot (Bcf) natural gas storage facility, with up to 12 Bcf of
working capacity, which was jointly developed and constructed with a partner in
western Pennsylvania; NJR Investment, which makes energy-related equity
investments; NJR Energy Corporation (NJR Energy), a company that invests in
energy-related ventures, NJR Clean Energy Ventures, a company that will invest
in clean energy projects, NJR Home Services (NJRHS), which provides service,
sales and installation of appliances; NJR Plumbing Services (NJRPS), which
provides plumbing repair and installation services, Commercial Realty and
Resources (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 operations are as follows:
($
in thousands)
|
2009
|
2008
|
||||||||||||||
Assets
|
||||||||||||||||
Natural
Gas Distribution
|
$ | 1,797,165 | 77 | % | $ | 1,761,964 | 66 | % | ||||||||
Energy
Services
|
327,532 | 14 | 699,897 | 27 | ||||||||||||
Retail
and Other
|
223,020 | 10 | 231,551 | 9 | ||||||||||||
Intercompany
Assets
(1)
|
(26,687 | ) | (1 | ) | (58,115 | ) | (2 | ) | ||||||||
Total
|
$ | 2,321,030 | 100 | % | $ | 2,635,297 | 100 | % | ||||||||
(1) Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation.
|
NJRES’
assets decreased 53.2 percent from September 30, 2008 to September 30, 2009, due
primarily to lower inventory values resulting from a decline in commodity
prices.
Net
income (loss) by business segment and operations are as follows:
($
in Thousands)
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
Net
Income (Loss)
|
||||||||||||||||||||||||
Natural
Gas Distribution
|
$ | 65,403 | 240 | % | $ | 42,479 | 39 | % | $ | 44,480 | 71 | % | ||||||||||||
Energy
Services
|
(32,632 | ) | (120 | ) | 67,166 | 61 | 18,950 | 30 | ||||||||||||||||
Retail
and Other
|
(5,529 | ) | (20 | ) | (477 | ) | — | (497 | ) | (1 | ) | |||||||||||||
Total
|
$ | 27,242 | 100 | % | $ | 109,168 | 100 | % | $ | 62,933 | 100 | % |
Page
23
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Included
in Net income are unrealized (losses) gains in the Energy Services segment of
$(29.3) million, $10.8 million, and $(38) million, after taxes, for the fiscal
years ended September 30, 2009, 2008 and 2007, respectively. Also included in
Net income are realized (losses) gains of $(34.5) million, $9.3 million and
$16.8 million, after taxes, for the fiscal years ended September 30, 2009, 2008
and 2007, respectively, which are related to financial derivative instruments
that have settled and are designed to economically hedge natural gas that is
still in inventory.
NJR
Energy records unrealized losses and gains with respect to the change in fair
value of the financial natural gas swaps that are used to economically hedge a
long-term natural gas sale contact. Included in Net income in Retail and Other
are unrealized (losses) of $(9.9) million, $(4.8) million and $(4.2) million,
after taxes, for the fiscal years ended September 30, 2009, 2008 and 2007,
respectively.
NJRES and
NJR Energy account for their financial derivative instruments used to
economically hedge the forecasted purchase, sale and transportation of natural
gas at fair value. In addition, all physical commodity contracts at NJRES are
accounted for at fair value. Prior to October 1, 2007, gains (losses) associated
with physical commodity contracts at NJRES were not reflected in earnings until
the individual contracts settled and the natural gas was delivered when certain
delivery conditions were met. During fiscal 2007 and 2008, NJRES changed the
accounting treatment for certain of its physical commodity contracts so that
effective October 1, 2008, all NJRES’ physical commodity contracts are accounted
for at fair value with changes in the fair value of these contracts included in
earnings as a component of Operating revenue and Gas purchases, as appropriate,
in the Consolidated Statements of Income.
All
physical commodity contracts at NJNG and NJR Energy continue to meet the
delivery conditions and, therefore, are accounted for under accrual accounting.
Accordingly, gains (losses) are recognized in earnings when the contract settles
and the natural gas is delivered.
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. 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. 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. Volatility in earnings also occurs as a result of timing
differences between the settlement of the financial derivative and the sale of
the corresponding natural gas that was hedged with the financial instrument.
When the financial instrument settles and the natural gas is placed in
inventory, the realized gains (losses) associated with the financial instrument
are recognized in earnings. However, the gains (losses) associated with the
economically hedged natural gas are not recognized in earnings until the natural
gas inventory is sold.
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably and providing safe and reliable service 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, continuing review and
proposed extension 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
its new customer growth rate, which is expected to be approximately 1.2
percent annually over the next two years. In fiscal 2010 and 2011, NJNG
currently expects to add, in total, approximately 12,000 to 14,000 new
customers. The Company believes that this growth would increase utility
gross margin (as defined below) under its base rates as provided by
approximately $3.4 million annually, as calculated under NJNG’s CIP
tariff;
|
|
Ÿ
|
Opportunity
to generate earnings from various BPU-authorized gross margin-sharing
incentive programs; and
|
Page
24
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
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.
|
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 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 of $22.4 million, which included
amounts accrued and estimated through September 30, 2008. On June 10, 2009,
these provisional rates were approved by the BPU on a permanent basis. In the
period January 2009 through March 2009, NJNG provided approximately $45 million
of rate credits to BGSS residential and small commercial customers. 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. On September 16, 2009, the BPU provisionally
approved the rates. As of September 30, 2009, NJNG has $5.8 million accrued to
be recovered in Regulatory Assets in the Consolidated Balance Sheets related to
CIP. On April 1, 2009, NJNG filed a letter with the BPU requesting a 1-year
extension to its CIP through October 1, 2010. As a result of no action by the
BPU as of October 1, 2009, the CIP will remain in effect for an additional year
or until a final order is issued by the BPU. In October 2009, NJNG provided its
BGSS residential and small commercial customers with refunds of approximately
$37.4 million.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of September 30, 2009 and September 30, 2008,
the obligation to fund these conservation programs was reflected at its present
value of $248,000 and $864,000, respectively in the 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 (recovered through BGSS).
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 Accelerated Infrastructure Program (AIP)
permitting 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.
Page
25
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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.
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 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 areas in
which we have expertise and include states from the Gulf Coast and Mid-continent
regions to the Appalachian and Northeast regions, the West Coast and
Canada.
More
specifically, NJRES activities consist of the following elements, 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 the
effects of economic hedging on the value of our natural gas in storage. 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 or as a result of conditions in the markets 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,
Appalachian, and West Coast regions of the United States and 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 risk management policies. In addition, NJRES seeks
to optimize these assets on a daily basis as market conditions change by
evaluating all the natural gas supplies, transportation and opportunities to
which it has access. 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, retail aggregators and
other wholesale marketing companies. 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 mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
Page
26
New
Jersey Resources Corporation
Part
II
ITEM
7. 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’s subsidiary, NJR Energy Holdings, holds
investments in natural gas “mid-stream” assets, such as 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 growth opportunity
for the Company. To that end, NJR has ownership interests in Iroquois, a natural
gas pipeline operating with a regulated rate and Steckman Ridge, a storage
facility that operates under market-based rates, 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 approximately 150,000 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 earnings attributable to the Company’s equity investments in
Iroquois and Steckman Ridge, 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. An additional drilling program will be reviewed in the third quarter of
fiscal 2010. As of September 30, 2009, NJR has invested approximately $122.5
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. Steckman Ridge may seek
non-recourse financing upon completion of the construction and development of
its facilities, thereby potentially reducing the final expected recourse
obligation of NJR. There can be no assurances that such non-recourse project
financing will be secured or available for Steckman Ridge.
Critical
Accounting Policies
The
Company prepares its financial statements in accordance with GAAP. Application
of these accounting principles requires the use of estimates and assumptions
that affect the reported amounts of liabilities, revenues and expenses, and
related disclosures of contingencies during the reporting period. The Company
regularly evaluates its estimates, including those related to the calculation of
the fair value of derivative instruments, unbilled revenues, provisions for
depreciation and amortization, regulatory assets, income taxes, pension and
postemployment benefits other than pensions and contingencies related to
environmental matters and litigation. NJR bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. In the normal course of business, estimated
amounts are subsequently adjusted to actual results that may differ from
estimates.
Regulatory
Accounting
NJNG
maintains its accounts in accordance with the FERC Uniform System of Accounts as
prescribed by the BPU. As a result of the ratemaking process, NJNG is required
to apply the accounting principles in the Regulated Operations Topic
980 of the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC), which differ in certain respects from those applied by
unregulated businesses. Specifically, regulated operations record assets when it
is probable that certain operating costs will be recoverable from customers in
future periods and liabilities associated with probable future obligations to
customers. Accordingly, NJNG recognizes the impact of regulatory decisions on
its financial statements. NJNG’s BGSS requires NJNG to project its natural gas
costs and provides the ability, subject to BPU approval, to recover or refund
the difference, if any, of such actual costs as compared with the projected
costs included in prices through a BGSS charge to customers. Any underrecovery
or overrecovery is recorded as a Regulatory asset or liability on the
Consolidated Balance Sheets and reflected in the BGSS charge to customers in
subsequent years. NJNG also enters into derivatives that are used to hedge
natural gas purchases, and the offset to the resulting fair value of derivative
assets or liabilities is recorded as a Regulatory asset or liability on the
Consolidated Balance Sheets.
Page
27
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Derivative
Instruments
NJR
records its derivative instruments held as assets and liabilities at fair value
in the Consolidated Balance Sheet in accordance with GAAP. In addition, changes
in the fair value of NJRES’ and NJR Energy’s financial derivatives, as well as
NJRES’ contracts for the purchase and sales of natural gas are recognized in
earnings, as they occur, as a component of Operating revenues or Gas purchases
in the Consolidated Statements of Income. Gains (losses) associated with NJR
Energy’s physical commodity contracts are recorded in earnings as a component of
Operating revenues when the underlying commodity is delivered.
NJNG’s
derivatives that are used to manage price risk of its natural gas purchasing
activities are recoverable through its BGSS, subject to BPU approval.
Accordingly, the offset to the change in fair value of these derivatives is
recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
In
providing its unregulated wholesale energy services, NJRES enters into physical
contracts to buy and sell natural gas. GAAP permits companies to apply an
exception for certain contracts intended for normal purchases and normal sales
(“normal”) for which physical delivery is probable. Prior to October 1, 2007,
NJRES elected to use normal accounting treatment and, therefore, recognized the
related liabilities incurred and assets acquired when title to the underlying
natural gas commodity passed. However, during fiscal 2007 and 2008, NJRES
elected to discontinue normal accounting treatment for certain of its physical
forward contracts, so that as of October 1, 2008, all NJRES’ physical commodity
contracts are recorded at fair value with related changes in fair value included
in current earnings.
The fair
value of derivative instruments is determined by reference to quoted market
prices of listed contracts, published quotations or quotations from independent
parties. NJRES’ portfolio is valued using the most current market information.
However, if the price underlying a physical commodity transaction does not
represent a visible and liquid market, NJRES utilizes non-binding broker
quotations and/or other pricing services to derive an equivalent market price.
As of September 30, 2009, fair values based on market prices that are not
visible and liquid represent less than one percent of total fair value of its
derivative assets and liabilities reported in the Consolidated Balance
Sheets.
Should
there be a significant change in the underlying market prices or pricing
assumptions, NJRES may experience a significant impact on its financial
position, results of operations and cash flows. The valuation methods remained
consistent for fiscal 2009, 2008 and 2007. NJR applies a discount to its
derivative assets to factor in an adjustment associated with the credit risk of
its counterparties. NJR determines this amount by using historical default
probabilities corresponding to the appropriate Standard and Poor’s issuer
ratings. Since the majority of NJR’s counterparties are investment
grade rated, this resulted in an immaterial credit risk adjustment.
NJR has
not designated any derivatives as fair value hedges as of September 30, 2009 and
2008.
Capitalized
Financing Costs
NJNG
capitalizes an allowance for funds used during construction (AFUDC) as a
component of Utility plant in the Consolidated Balance Sheets. AFUDC is recorded
as an increase to Interest income or a reduction to Interest expense as
applicable in the Consolidated Statements of Income. Under regulatory rate
practices and in accordance with GAAP applicable to regulated operations, NJNG
fully recovers AFUDC through base rates. As a result of the BPU’s base rate
order (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 were lower than its construction work
in progress balance. This results in a non-cash income statement recognition
that is capitalized as a component of Utility plant. If any of these amounts are
deemed to be unrecoverable, NJNG records a charge for the unrecovered portion in
the Consolidated Statements of Income.
Environmental
Costs
At the
end of each fiscal year, NJNG updates the environmental review of its MGP sites,
including a review of its potential liability for investigation and remedial
action, based on assistance from an independent external consulting firm. From
this review, NJNG estimates expenditures that will be necessary to remediate and
monitor these MGP sites. NJNG’s estimate of these liabilities is developed from
then currently available facts, existing technology and presently enacted laws
and regulations.
Page
28
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Where it
is probable that the cost will be incurred, but the information is sufficient to
establish only 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. Since management believes that recovery of these expenditures, as well as
related litigation costs, is possible through the regulatory process, it has
recorded a regulatory asset corresponding to the related accrued liability.
Accordingly, NJNG has recorded an MGP remediation liability and a corresponding
Regulatory asset of $146.7 million on the Consolidated Balance
Sheets.
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, as well as the potential impact of any litigation and any insurance
recoveries. If there are changes in future regulatory positions that indicate
the recovery of all or a portion of such regulatory asset is not probable, the
related cost and carrying costs would be charged to income in the period of such
determination. As of September 30, 2009 and 2008, $85.5 million and $92.2
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds received, are included in Regulatory assets on
the Consolidated Balance Sheet, respectively.
If there
are changes in the regulatory position surrounding these costs, or should actual
expenditures vary significantly from estimates in that these costs are
disallowed for recovery by the BPU, such costs would be charged to income in the
period of such determination.
Postemployment
Employee Benefits
NJR’s
costs of providing postemployment employee benefits are dependent upon numerous
factors including actual plan experience and assumptions of future experience.
Postemployment employee benefit costs, for example, are impacted by actual
employee demographics including age, compensation levels and employment periods,
the level of contributions made to the plans, changes in long-term interest
rates and the return on plan assets. Changes made to the provisions of the plans
may also impact current and future postemployment employee benefit costs.
Postemployment employee benefit costs may also be significantly affected by
changes in key actuarial assumptions, including anticipated rates of return on
plan assets, health care cost trends and discount rates used in determining the
projected benefit obligations (PBO). In determining the PBO and cost amounts,
assumptions can change from period to period and could result in material
changes to net postemployment employee benefit periodic costs and the related
liability recognized by NJR.
NJR’s
postemployment employee benefit plan assets consist primarily of U.S. equity
securities, international equity securities and fixed-income investments, with a
targeted allocation, effective October 1, 2009, of 39 percent, 20 percent and 41
percent, respectively. Fluctuations in actual market returns, as well as changes
in interest rates, may result in increased or decreased postemployment employee
benefit costs in future periods. Postemployment employee benefit expenses are
included in Operations and maintenance expense on the Consolidated Statements of
Income.
The
following is a summary of a sensitivity analysis for each actuarial
assumption:
Pension
Plans
Estimated
|
Estimated
|
|||||||||||
Increase/(Decrease)
|
Increase/(Decrease)
|
|||||||||||
Increase/
|
on
PBO
|
to
Expense
|
||||||||||
Actuarial
Assumptions
|
(Decrease)
|
(Thousands)
|
(Thousands)
|
|||||||||
Discount
rate
|
1.00 | % | $ | (16,660 | ) | $ | (982 | ) | ||||
Discount
rate
|
(1.00 | )% | $ | 20,778 | $ | 1,238 | ||||||
Rate
of return on plan assets
|
1.00 | % | n/a | $ | (976 | ) | ||||||
Rate
of return on plan assets
|
(1.00 | )% | n/a | $ | 976 |
Other
Postemployment Benefits
Actuarial
Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on
PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to
Expense
(Thousands)
|
|||||||||
Discount
rate
|
1.00 | % | $ | (11,077 | ) | $ | (774 | ) | ||||
Discount
rate
|
(1.00 | )% | $ | 14,028 | $ | 932 | ||||||
Rate
of return on plan assets
|
1.00 | % | n/a | $ | (222 | ) | ||||||
Rate
of return on plan assets
|
(1.00 | )% | n/a | $ | 222 |
Page
29
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
Actuarial
Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on
PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to
Expense
(Thousands)
|
|||||||||
Heath
care cost trend rate
|
1.00 | % | $ | 13,181 | $ | 1,534 | ||||||
Health
care cost trend rate
|
(1.00 | )% | $ | (10,617 | ) | $ | (1,228 | ) |
Recently
Issued Accounting Standards and Updates
Effective
July 1, 2009, the FASB ASC became the single source of authoritative GAAP,
restructuring previously issued standards into a topical based model. As of the
effective date, new guidance will be issued in the form of Accounting Standards
Updates (ASU’s), which will replace accounting changes that were historically
issued as FASB Standards. For a more detailed description of the ASC, recently
issued accounting standards that have been reorganized within the ASC and ASU’s
issued since July 1, 2009, see Note 1. Summary of Significant
Accounting Policies in the accompanying Consolidated Financial
Statements.
Results
of Operations
Consolidated
Net
income decreased 75 percent to $27.2 million in fiscal 2009 from $109.2 million
in fiscal 2008 and increased 73.5 percent in fiscal 2008 from $62.9 million in
fiscal 2007. The fiscal 2009 results were $0.65 per basic share and and $0.64
per diluted share, compared with the fiscal 2008 results of $2.61 per basic
share and $2.59 per diluted share and fiscal 2007 results of $1.50 per basic
share and $1.49 per diluted share on a split adjusted basis. Changes in Net
income were primarily driven by unrealized (losses) and gains of $(39.3)
million, $6 million and $(42.2) million, after taxes, for the years ended
September 30, 2009, 2008 and 2007, respectively, as well as certain realized
(losses) and gains associated with natural gas in inventory of $(34.5) million,
$9.3 million and $16.8 million, after taxes, for the years ended September 30,
2009, 2008 and 2007, respectively, which were primarily due to the change in the
fair market value of financial derivative instruments as a result of market
conditions.
The
Company’s Operating revenues and Gas purchases for the fiscal years ended
September 30, are as follows:
($
in Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Operating
revenues
|
$ | 2,592,460 | $ | 3,816,210 | $ | 3,021,765 | ||||||
Gas
purchases
|
$ | 2,245,169 | $ | 3,330,756 | $ | 2,625,560 |
Operating
revenues decreased $1.2 billion and Gas purchases decreased $1.1 billion for
fiscal, 2009 compared with fiscal 2008 due primarily to:
|
Ÿ
|
a
decrease in Operating revenues of $1.2 billion and Gas purchases of $1
billion at NJRES and a decrease in Operating revenues of $8.8 million at
Retail and Other all as a result of lower average prices on the
NYMEX;
|
|
Ÿ
|
an
increase in Operating revenues of $3.2 million and a decrease in Gas
purchases of $43.3 million at NJNG. The increase in Operating revenue was
due primarily to an increase in base rates, while increased credits from
incentive programs contributed to the decrease in Gas
purchases.
|
Operating
revenues increased $794.4 million during fiscal 2008, compared with fiscal 2007
due primarily to an increase in sales transaction volume and prices at NJRES.
NJRES transaction volumes increased 12 percent and coupled with an average 21
percent increase in sales prices over the corresponding period resulted in an
increase in revenues of approximately $720.1 million. Moderate increases in
customer growth and greater off-system sales at NJNG, partially offset by
reduced customer usage at NJNG also contributed to the increase in Operating
revenues.
The
factors that resulted in the increase in revenues described above similarly
affected an increase of $705.2 million in Gas purchases for fiscal 2008, as
compared with fiscal 2007. NJRES gas purchase transaction volumes increased 11
percent, and coupled with an average 20 percent increase in gas purchases prices
over the corresponding period, resulted in an increase in gas purchases of
approximately $639.3 million.
Page
30
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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
financial results for the fiscal years ended September 30 are as
follows:
(Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Utility
Gross Margin
|
||||||||||||
Operating
revenues
|
$ | 1,082,001 | $ | 1,078,824 | $ | 1,005,588 | ||||||
Less:
|
||||||||||||
Gas
purchases
|
709,906 | 753,249 | 687,201 | |||||||||
Energy
and other taxes
|
66,768 | 58,539 | 56,475 | |||||||||
Regulatory
rider expense
|
44,992 | 39,666 | 37,605 | |||||||||
Total
Utility Gross Margin
|
$ | 260,335 | $ | 227,370 | $ | 224,307 | ||||||
Operation
and maintenance expense
|
106,814 | 98,035 | 97,006 | |||||||||
Depreciation
and amortization
|
29,417 | 37,723 | 35,648 | |||||||||
Other
taxes not reflected in utility gross margin
|
3,740 | 3,476 | 3,125 | |||||||||
Operating
income
|
$ | 120,364 | $ | 88,136 | $ | 88,528 | ||||||
Other
income
|
3,474 | 3,460 | 3,468 | |||||||||
Interest
expense, net of capitalized interest
|
18,706 | 21,277 | 21,182 | |||||||||
Income
tax provision
|
39,729 | 27,840 | 26,334 | |||||||||
Net
income
|
$ | 65,403 | $ | 42,479 | $ | 44,480 |
The
following table summarizes Utility Gross Margin and Throughput in billion cubic
feet (Bcf) of natural gas by type:
2009
|
2008
|
2007
|
||||||||||||||||||||||
($
in thousands)
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
||||||||||||||||||
Utility
Gross Margin/Throughput
|
||||||||||||||||||||||||
Residential
|
$ | 170,509 | 43.6 | $ | 154,307 | 40.8 | $ | 152,129 | 41.8 | |||||||||||||||
Commercial,
Industrial and other
|
47,767 | 9.8 | 45,503 | 9.0 | 45,418 | 9.4 | ||||||||||||||||||
Firm
Transportation
|
29,683 | 9.4 | 19,722 | 8.9 | 17,963 | 8.6 | ||||||||||||||||||
Total
Firm Margin/Throughput
|
247,959 | 62.8 | 219,532 | 58.7 | 215,510 | 59.8 | ||||||||||||||||||
Incentive
programs
|
12,057 | 66.1 | 7,656 | 34.5 | 8,125 | 36.5 | ||||||||||||||||||
Interruptible
|
319 | 4.1 | 482 | 6.4 | 672 | 6.5 | ||||||||||||||||||
BPU
settlement
|
— | — | (300 | ) | — | — | — | |||||||||||||||||
Total
Utility Gross Margin/Throughput
|
$ | 260,335 | 133.0 | $ | 227,370 | 99.6 | $ | 224,307 | 102.8 |
Utility
Gross Margin
NJNG’s
utility gross margin is a non-GAAP financial measure 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 utility firm
gross margin, incentive programs and utility gross margin from interruptible
customers. Management
Page
31
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
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 in the 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, the remediation
adjustment (RA) and energy efficiency costs. These expenses are offset by
corresponding revenues and are calculated on a per-therm basis.
NJNG’s
Operating revenues increased by $3.2 million, or 0.3 percent, and Gas purchases
decreased by $43.3 million, or 5.8 percent, for fiscal 2009, as compared with
fiscal 2008 as a result of:
|
Ÿ
|
an
increase in Operating revenue related to firm sales in the amount of $79.9
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 $39.2 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 $52.2 million and $34.2 million, respectively, due primarily
to weather being 8.9 percent colder than the same period of the prior
fiscal year, partially offset by a decrease in Operating revenue of $19.2
million, as a result of lower accruals relating to the CIP during fiscal
2009;
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $85.4 million and $86.6 million, respectively, as a
result of a 47 percent lower average sales prices that decreased from
$10.13/dth to $5.37/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 $6.5 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 $6.1 million and $5.4 million, respectively, due to
a decrease in sales to electric co-generation customers;
and
|
|
Ÿ
|
a
decrease of $1.7 million in Gas purchases related to increased amounts
earned through the financial risk management (FRM) and capacity release
incentive programs of $3.8 million in fiscal 2009 as compared with $2.1
million 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.
|
NJNG’s
Operating revenues increased by $73.2 million, or 7.3 percent, and Gas purchases
increased by $66.0 million, or 9.6 percent, respectively, for fiscal 2008, as
compared with fiscal 2007, primarily as a result of:
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an
increase in Operating revenue and Gas purchases related to off-system
sales in the amount of $49.2 million and $47.5 million, respectively, due
primarily to the change in the wholesale price of natural gas. During
fiscal 2008, NJNG sold 29.2 Bcf at an average price of $10.13 per Bcf
compared with 32.0 Bcf at an average price of $7.54 per Bcf during fiscal
2007 in the off-system market;
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New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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a
reduction in BGSS customer refunds provided to residential and small
commercial customers of $44.3 million for Operating revenue, inclusive of
sales tax refunds of $2.9 million, resulting in a reduction of $41.4
million for Gas purchases. In fiscal 2008 BGSS customer refunds were $32.1
million, as compared with $76.4 million in fiscal 2007. These customer
refunds were the result of anticipated reductions in cost to acquire
wholesale natural gas, compared with the established rate included in
NJNG’s BGSS tariff;
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an
increase of $5.6 million in Operating revenue due to an increase of the
amounts accrued through the CIP program as a result of lower customer
usage and warmer weather, as described
below;
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an
increase in Operating revenue and Gas purchases related to interruptible
sales in the amount of $4.7 million and $4.5 million, respectively, due to
an increase in sales to electric co-generation
customers;
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an
increase in Operating revenue related to storage incentive revenue in the
amount of $1.0 million, as a result of opportunities available in the
wholesale energy market due to changing market conditions relative to
established benchmarks;
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an
increase in Operating revenue related to natural gas transport in the
amount of $3.2 million due to an increase in sales as a result of an
increase in customers using transportation only
service;
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an
increase in Gas purchases of $300,000 as a result of a non-recurring
charge to the BGSS associated with a settlement agreement related to a
BGSS filing for fiscal 2007 partially offset
by;
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a
decrease in Operating revenue and Gas purchases of $34.9 million and $30.2
million, respectively, as a result of a decrease in firm sales due to a
decline in customer usage.
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Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Consolidated Statements of Income, totaled $66.8 million, $58.5
million and $56.5 million in fiscal years 2009, 2008 and 2007, respectively. For
fiscal 2009, sales tax increased as a result of the increase of $120.1 million
in Operating revenue from firm sales, as compared with fiscal 2008. This
increase in fiscal 2008 as compared with fiscal 2007 is due primarily to an
increase in Operating revenue of 7.3 percent.
Regulatory
rider expenses are calculated on a per-therm basis. Regulatory rider expenses
totaled $45 million, $39.7 million and $37.6 million in fiscal 2009, 2008, and
2007, respectively. The increase in regulatory rider expenses in fiscal 2009 is
due primarily to an increase in the rider rate along with an increase in firm
throughput of 4.1 Bcf compared with fiscal 2008. The increase in regulatory
rider expenses in fiscal 2008 compared with fiscal 2007 was a result of an
increase in the rider rate offset by a decrease in therms sold to customers as a
result of reduced usage.
Utility
gross margin is comprised of three major categories:
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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;
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Incentive
programs, where revenues or margins generated or savings achieved from
BPU-approved off-system sales, capacity release, Financial Risk Management
or storage incentive programs (defined in Incentive Programs, below) are
shared between customers and NJNG; and
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Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels.
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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.
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33
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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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 $28.4 million, or 12.9 percent, in fiscal
2009, as compared with fiscal 2008, due primarily to an increase in residential
and commercial 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 residential
and commercial firm and transport customers of approximately 3,000 over fiscal
2008.
Total
utility firm gross margin increased $4.0 million, or 1.9 percent, in fiscal
2008. The changes in fiscal 2008 were due primarily to a $1.9 million increase
in residential sales service due to an increase in customer growth of 0.6
percent and a $1.8 million increase in residential and commercial transport
margin due to an increase in customer growth of 16.2 percent.
Utility
firm gross margin from residential service sales increased to $170.5 million for
fiscal 2009, as compared with $154.3 million for fiscal 2008. NJNG delivered
43.6 Bcf compared with 40.8 Bcf, to its firm residential customers, due
primarily to weather being 8.9 percent colder. Utility firm gross margin from
residential service sales increased $2.2 million for fiscal 2008, as compared
with $152.1 million in fiscal 2007. NJNG delivered 41.8 Bcf in fiscal 2007, to
its firm residential customers.
The
weather for fiscal 2009, was 0.9 percent colder-than-normal, based on a 20-year
average, which resulted in a negative adjustment of utility gross margin under
the weather component of the CIP of $(177,000), compared with fiscal 2008, which
was 8.7 percent warmer than normal and had an accrual of $9.1 million. The
weather in fiscal 2007 was 5.6 percent warmer than normal, which resulted in an
accrual of $8.2 million. Under the provisions of the CIP, accruals related to
the weather portion are dependent on the occurrence of degree days and the
magnitude of the variance in relation to a normal degree day.
Customer
usage was lower than the established benchmark during fiscal 2009, which
resulted in an accrual of utility gross margin under the CIP of $3.1 million,
compared with $13 million for fiscal 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. Customer usage was also lower than the established
benchmark during fiscal 2007, which resulted in an accrual of $8.3
million.
NJNG
added 5,841, 7,175 and 8,421 new customers and added natural gas heat and other
services to another 709, 728 and 770 existing customers in fiscal 2009, 2008 and
2007, respectively. The decline in customer growth rate is driven by a slower
new construction market.
In fiscal
2010 and 2011, NJNG currently expects to add, in total, approximately 12,000 to
14,000 new customers. In addition, NJNG expects to convert an additional 700
existing customers per year to natural gas heat and other services. Achieving
these expectations would represent an estimated annual customer growth rate of
approximately 1.2 percent and result in an estimated sales increase of
approximately 0.85 Bcf, annually. The Company believes that this growth would
increase utility gross margin under NJNG’s CIP tariff, as provided by the Rate
Order, by approximately $3.4 million annually.
These
growth expectations are based upon management’s review of local planning board
data, recent market research performed by third parties, builder surveys and
studies of population growth rates in NJNG’s service territory.