Form 10_Q 12-31-06
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
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
|
732-938-1489
|
(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 whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES: x No: o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12-b-2 of the Exchange Act.
(Check one):
Large
accelerated filer: x Accelerated
filer: o
Non-accelerated filer: o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES: o No: x
The
number of shares outstanding of $2.50 par value Common Stock as of February
6,
2007 was 27,833,620.
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about
Market Risk,” Part II, Item 1. “Legal Proceedings” and in the notes to the
financial statements are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
can
also be identified by the use of forward-looking terminology such as “may,”
“intend,” “expect,” “believe” or “continue” or comparable terminology and are
made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will
be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market
risk
and other matters for fiscal 2007 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 the following:
· |
weather
and economic conditions;
|
· |
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
· |
the
rate of NJNG customer growth;
|
· |
volatility
of natural gas commodity prices and its impact on customer usage,
NJR
Energy Services’ (NJRES) operations and on the Company’s risk management
efforts;
|
· |
changes
in rating agency requirements and/or credit ratings and their effect
on
availability and cost of capital to the
Company;
|
· |
commercial
and wholesale credit risks, including creditworthiness of customers
and
counterparties;
|
· |
the
impact of governmental regulation (including the regulation of
rates);
|
· |
fluctuations
in energy-related commodity prices;
|
· |
conversion
activity and other marketing
efforts;
|
· |
actual
energy usage of NJNG’s customers;
|
· |
the
pace of deregulation of retail gas
markets;
|
· |
access
to adequate supplies of natural
gas;
|
· |
the
regulatory and pricing policies of federal and state regulatory
agencies;
|
· |
changes
due to legislation at the federal and state
level;
|
· |
the
availability of an adequate number of appropriate counterparties
in the
wholesale energy trading market;
|
· |
sufficient
liquidity in the wholesale energy trading market and continued access
to
the capital markets;
|
· |
the
disallowance of recovery of environmental-related expenditures and
other
regulatory changes;
|
· |
environmental-related
and other litigation and other
uncertainties;
|
· |
the
effects and impacts of inflation on NJR and its subsidiaries
operations;
|
· |
change
in accounting pronouncements issued by the appropriate standard setting
bodies; and
|
· |
terrorist
attacks or threatened attacks on energy facilities or unrelated energy
companies.
|
While
the
Company periodically reassesses material trends and uncertainties affecting
the
Company’s results of operations and financial condition in connection with its
preparation of management’s discussion and analysis of results of operations and
financial condition contained in its Quarterly and Annual Reports, the Company
does not, by including this statement, assume any obligation to review or revise
any particular forward-looking statement referenced herein in light of future
events.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
Three
Months Ended
|
|
December
31,
|
(Thousands, except per share data)
|
2006
|
2005
|
OPERATING
REVENUES
|
$
|
741,465
|
$
|
1,164,576
|
OPERATING
EXPENSES
|
|
|
|
|
Gas
purchases
|
|
628,685
|
|
1,038,475
|
Operation
and maintenance
|
|
28,316
|
|
27,731
|
Regulatory
rider expenses
|
|
9,466
|
|
9,458
|
Depreciation
and amortization
|
|
8,902
|
|
8,576
|
Energy
and other taxes
|
|
13,952
|
|
18,667
|
Total
operating expenses
|
|
689,321
|
|
1,102,907
|
OPERATING
INCOME
|
|
52,144
|
|
61,669
|
Other
income
|
|
1,989
|
|
1,642
|
Interest
charges, net
|
|
7,875
|
|
6,483
|
INCOME
BEFORE INCOME TAXES
|
|
46,258
|
|
56,828
|
Income
tax provision
|
|
18,134
|
|
22,564
|
NET
INCOME
|
$
|
28,124
|
$
|
34,264
|
EARNINGS
PER COMMON SHARE
|
|
|
|
|
BASIC
|
$
|
1.01
|
$
|
1.24
|
DILUTED
|
$
|
1.01
|
$
|
1.23
|
DIVIDENDS
PER COMMON SHARE
|
$
|
0.38
|
$
|
0.36
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
BASIC
|
|
27,713
|
|
27,550
|
DILUTED
|
|
27,904
|
|
27,960
|
See
Notes
to Condensed Unaudited Consolidated Financial Statements
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three
Months Ended
|
|
|
December
31,
|
|
(Thousands)
|
2006
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income
|
$
|
28,124
|
$
|
34,264
|
|
ADJUSTMENTS
TO RECONCILE NET INCOME TO CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES
|
|
|
|
|
|
Depreciation
and amortization
|
|
8,977
|
|
8,651
|
|
Unrealized
loss (gain) on derivatives
|
|
120
|
|
(2,135
|
)
|
Deferred
income taxes
|
|
2,842
|
|
(2,867
|
)
|
Manufactured
gas plant remediation costs
|
|
(4,235
|
) |
(13,380
|
)
|
Cost
of removal - asset retirement obligations
|
|
(257
|
) |
—
|
|
Contribution
to employee benefit plans
|
|
(150
|
) |
(150
|
)
|
Changes
in:
|
|
|
|
|
|
Working
capital
|
|
(14,579
|
) |
(207,555
|
)
|
Other
noncurrent assets
|
|
1,218
|
|
13,954
|
|
Other
noncurrent liabilities
|
|
(9,703
|
) |
939
|
|
Cash
flows from (used in) operating activities
|
|
12,357
|
|
(168,279
|
)
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds
from common stock
|
|
4,976
|
|
4,048
|
|
Tax
benefit from stock options exercised
|
|
769
|
|
—
|
|
Proceeds
from long-term debt
|
|
—
|
|
35,800
|
|
Proceeds
from sale-leaseback transaction
|
|
5,482
|
|
4,090
|
|
Purchases
of treasury stock
|
|
—
|
|
(10,723
|
)
|
Payments
of long-term debt
|
|
(775
|
) |
(21,462
|
)
|
Payments
of common stock dividends
|
|
(10,056
|
) |
(9,366
|
)
|
Proceeds
from short-term debt
|
|
4,900
|
|
174,100
|
|
Cash
flows from financing activities
|
|
5,296
|
|
176,487
|
|
|
|
|
|
|
|
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
|
|
|
|
|
Expenditures
for:
|
|
|
|
|
|
Utility
plant
|
|
(12,463
|
) |
(11,678
|
)
|
Real
estate properties and other
|
|
(569
|
) |
(84
|
)
|
Cost
of removal and other
|
|
(1,283
|
) |
(777
|
)
|
Investment
in restricted cash construction fund
|
|
—
|
|
(12,500
|
)
|
Proceeds
from asset sales
|
|
1,792
|
|
—
|
|
Cash
flows used in investing activities
|
|
(12,523
|
) |
(25,039
|
)
|
Change
in cash and temporary investments
|
|
5,130
|
|
(16,831
|
)
|
Cash
and temporary investments at beginning of period
|
|
4,991
|
|
25,008
|
|
Cash
and temporary investments at end of period
|
$
|
10,121
|
$
|
8,177
|
|
|
|
|
|
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
|
Receivables
|
$
|
(146,039
|
)
$
|
(249,995
|
)
|
Inventories
|
|
23,569
|
|
(44,572
|
)
|
Underrecovered
gas costs
|
|
(28,758
|
) |
18,278
|
|
Gas
purchases payable
|
|
124,439
|
|
66,444
|
|
Prepaid
and accrued taxes, net
|
|
19,154
|
|
24,301
|
|
Accounts
payable and other
|
|
(3,654
|
) |
(17,373
|
)
|
Restricted
broker margin accounts
|
|
5,875
|
|
(7,076
|
)
|
Customers’
credit balances and deposits
|
|
(10,029
|
) |
3,606
|
|
Other
current assets
|
|
864
|
|
(1,168
|
)
|
Total
|
$
|
(14,579
|
) $
|
(207,555
|
)
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$
|
7,599
|
$
|
6,334
|
|
Income
taxes
|
$
|
8,000
|
$
|
16,853
|
|
See
Notes
to Condensed Consolidated Financial Statements
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
December
31,
|
September
30,
|
|
(Thousands)
|
2006
|
2006
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
Utility
plant, at cost
|
$
|
1,257,052
|
$
|
1,243,586
|
|
Real
estate properties and other, at cost
|
|
26,450
|
|
27,136
|
|
|
|
1,283,502
|
|
1,270,722
|
|
Accumulated
depreciation and amortization
|
|
(341,203
|
) |
(335,783
|
)
|
Property,
plant and equipment, net
|
|
942,299
|
|
934,939
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and temporary investments
|
|
10,121
|
|
4,991
|
|
Accounts
receivable:
Billed
|
|
236,845
|
|
133,615
|
|
Unbilled
|
|
55,585
|
|
12,543
|
|
Allowance
for doubtful accounts
|
|
(2,912
|
|
(2,679
|
)
|
Regulatory
assets
|
|
35,153
|
|
8,105
|
|
Gas
in storage, at average cost
|
|
487,203
|
|
512,942
|
|
Materials
and supplies, at average cost
|
|
3,770
|
|
3,599
|
|
Prepaid
state taxes
|
|
11,290
|
|
26,343
|
|
Derivatives,
at fair value
|
|
218,015
|
|
223,559
|
|
Broker
margin account
|
|
24,711
|
|
30,833
|
|
Other
|
|
9,080
|
|
11,665
|
|
Total
current assets
|
|
1,088,861
|
|
965,516
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
Equity
investments
|
|
28,683
|
|
27,208
|
|
Regulatory
assets
|
|
334,208
|
|
322,986
|
|
Derivatives,
at fair value
|
|
75,647
|
|
94,638
|
|
Prepaid
pension
|
|
20,177
|
|
21,045
|
|
Restricted
cash construction fund
|
|
8,500
|
|
8,500
|
|
Deferred
finance charges
|
|
8,699
|
|
8,876
|
|
Other
|
|
13,281
|
|
15,220
|
|
Total
noncurrent assets
|
|
489,195
|
|
498,473
|
|
Total
Assets
|
$
|
2,520,355
|
$
|
2,398,928
|
|
See
Notes
to Condensed Unaudited Consolidated Financial Statements
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
CAPITALIZATION
AND LIABILITIES
|
December
31,
|
September
30,
|
|
(Thousands)
|
2006
|
2006
|
|
CAPITALIZATION
|
|
|
|
Common
stock equity
|
$
|
645,154
|
$
|
621,662
|
|
Long-term
debt
|
|
336,725
|
|
332,332
|
|
Total
capitalization
|
|
981,879
|
|
953,994
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
4,053
|
|
3,739
|
|
Short-term
debt
|
|
285,600
|
|
280,700
|
|
Gas
purchases payable
|
|
422,318
|
|
297,879
|
|
Accounts
payable and other
|
|
45,485
|
|
46,823
|
|
Dividends
payable
|
|
10,549
|
|
10,056
|
|
Accrued
taxes
|
|
27,601
|
|
9,267
|
|
Regulatory
liabilities
|
|
—
|
|
1,710
|
|
Clean
energy program
|
|
8,024
|
|
8,244
|
|
Derivatives,
at fair value
|
|
154,436
|
|
163,557
|
|
Broker
margin account
|
|
13,973
|
|
14,220
|
|
Customers’
credit balances and deposits
|
|
50,931
|
|
60,960
|
|
Total
current liabilities
|
|
1,022,970
|
|
897,155
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
Deferred
income taxes
|
|
217,314
|
|
227,100
|
|
Deferred
investment tax credits
|
|
7,755
|
|
7,835
|
|
Deferred
revenue
|
|
10,325
|
|
10,206
|
|
Derivatives,
at fair value
|
|
70,828
|
|
85,036
|
|
Manufactured
gas plant remediation
|
|
105,400
|
|
105,400
|
|
Regulatory
liabilities
|
|
60,371
|
|
64,220
|
|
Clean
energy program
|
|
9,194
|
|
11,335
|
|
Asset
retirement obligation
|
|
23,364
|
|
23,293
|
|
Other
|
|
10,955
|
|
13,354
|
|
Total
noncurrent liabilities
|
|
515,506
|
|
547,779
|
|
Total
Capitalization and Liabilities
|
$
|
2,520,355
|
$
|
2,398,928
|
|
See
Notes
to Condensed Unaudited Consolidated Financial Statements
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The
condensed consolidated financial statements have been prepared without audit,
as
of December 31, 2006 and for three months ended December 31, 2006 and 2005,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). The September 30, 2006 balance sheet data is derived from the audited
financial statements of New Jersey Resources Corporation (NJR or the Company).
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in NJR’s 2006
Annual Report on Form 10-K.
The
consolidated financial statements include the accounts of NJR and its
subsidiaries, New Jersey Natural Gas (NJNG), NJR Energy Services (NJRES), NJR
Retail Holdings (Retail Holdings), NJR Capital Services (Capital) and NJR
Service. Significant intercompany transactions and accounts have been
eliminated. Retail Holdings principal subsidiary is NJR Home Services
(NJRHS).
In
the
opinion of management, the information furnished reflects all adjustments
necessary for a fair presentation of the results of the interim periods. Because
of the seasonal nature of NJR’s utility and wholesale energy services
operations, in addition to other factors, the financial results for the interim
periods presented are not indicative of the results to be expected for the
fiscal year ending September 30, 2007.
Recently
Issued Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157). SFAS 157 defines fair value as the amount that would be exchanged to
sell
an asset or transfer a liability in an orderly transaction between market
participants and establishes a fair value hierarchy of quotes and unobservable
data that should be used to develop pricing assumptions. In addition, for assets
and liabilities that are not actively traded, for example, certain kinds of
derivatives, SFAS 157 requires that a fair value measurement include an
adjustment for risks inherent in a valuation technique and/or inputs, such
as
those used in pricing models. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, however, early adoption is permitted. The Company
will
adopt the provisions of the statement prospectively and is evaluating the
adoption date and its effect on its financial condition.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postemployment Plans” (SFAS 158). The statement
requires an employer to recognize the funded status, measured as the difference
between the fair value of plan assets and the projected benefit obligation,
of
its benefit plans. SFAS 158 does not change how pensions and other
postemployment benefits are accounted for and reported in the income statement.
Certain economic events, which previously required disclosure only in the notes
to the financial statements, will be recognized as assets and liabilities and
offset in Accumulated other comprehensive income, net of tax, to the extent
such
amounts are not recognized in earnings as part of net periodic benefit costs.
Amounts recognized in Accumulated other comprehensive income are adjusted as
they are subsequently recognized in earnings. The Company will adopt SFAS 158
on
September 30, 2007 and will apply the provisions of the statement prospectively.
The Company is currently evaluating the effect of adoption on its financial
condition.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. REGULATION
Basic
Gas Supply Service (BGSS)
On
October 25, 2006, NJNG filed supporting documentation with the Board of Public
Utilities (BPU) for a self-implementing BGSS price reduction effective November
1, 2006, which lowered residential and small commercial customers’ bills by
approximately 4 percent. This decrease was due to the continued reduction in
the
wholesale cost of natural gas, reduced demand charges and lower than expected
pipeline fuel costs.
On
December 1, 2006, NJNG filed notification with the BPU and the representative
of
the Public Advocate Division of Rate Counsel (Rate Counsel) to refund, in the
form of a bill credit, approximately $51.5 million to residential and small
commercial customers in December 2006. The refund was the result of a continued
reduction in the wholesale cost of natural gas.
Societal
Benefits Clause (SBC) and Weather Normalization Clause
(WNC)
On
October 25, 2006, NJNG filed its SBC and WNC requests for a price adjustment
for
all applicable service customers, which is expected to result in an approximate
aggregate 1.6 percent increase in those service customers’ prices. On November
10, 2006, NJNG filed a separate petition with the BPU for its annual review
and
revision of the WNC recovery component relying on the information provided
in
the October 25, 2006 filing. The SBC and WNC rate increases, currently pending
before the BPU, were proposed to be effective on January 1, 2007. Pending review
and approval by the BPU and Rate Counsel, the results of the SBC and WNC will
be
implemented upon receipt of a BPU order.
The
SBC
portion of the filed increase is approximately 0.3 percent. The aggregate
increase is comprised of an increase in rates for the Transportation Initiation
Clause (TIC) and an increase in the recovery related to the New Jersey Clean
Energy Program (NJCEP) from $7.1 million to $13.6 million for the calendar
year
2007. This increase was partially offset by a decrease to the Remediation
Adjustment Clause (RAC) recovery from $19.2 million to $15.9 million annually.
The
RAC
decrease reflects expenditures through June 30, 2006 related to NJNG’s
remediation of its former Manufactured Gas Plant (MGP) sites, except for those
expenditures related to the Mass Tort Litigation related to the Long Branch
MGP
sites (see Note
11. Commitments and Contingent Liabilities).
There
was
no change in the Universal Service Fund (USF) rate.
The
WNC
portion of the filed rate increase, which represents approximately 1.3 percent,
is proposed to increase the WNC recovery component in order to recover deferred
utility gross margin of approximately $8.1 million from October 2005 through
May
2006.
Incentive
Programs
NJNG
is
eligible to receive incentives for reducing BGSS costs through a series of
utility gross margin-sharing programs that include off-system sales, capacity
release, storage incentive and financial risk management programs. On December
15, 2006, NJNG filed a petition with the BPU requesting that it approve an
extension of the existing incentive mechanisms to coincide with the end of
NJNG’s Conservation Incentive Program (CIP). The extension would preserve the
status quo of the incentive programs to coincide with the term of the
CIP.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Conservation
Incentive Program
On
December 12, 2006, the BPU issued its Decision and Order and approved the CIP
stipulation, reached on September 30, 2006, without modification.
The
CIP
is a three-year pilot program, effective October 1, 2006, which is designed
to decouple the link between customer usage and NJNG’s utility gross margin to
allow NJNG to encourage its customers to conserve energy. Absent BPU action,
the
CIP program is extended for up to one additional year, or until the issuance
of
a BPU order. For the term of the program, the WNC has been suspended and
replaced with the CIP tracking mechanism, which addresses utility gross margin
variations related to both weather and customer usage in comparison to
established benchmarks. Recovery of such utility gross margin variations is
subject to additional conditions including an earnings test and an evaluation
of
BGSS-related savings under the CIP agreement. If NJNG does not file for a rate
review with the BPU by October 1, 2008, the return on equity for the earnings
test will decline from 10.50 percent to 10.25 percent.
To
encourage energy efficiency, NJNG is obligated to initiate and fund programs
to
further customer conservation efforts over the term of the pilot. An annual
filing reporting on NJNG’s conservation efforts will be made in June of each
year, commencing in June 2007, coincident with its annual BGSS filing. The
minimum expected liability for funding these programs was recorded, at its
present value of $1.8 million, as of September 30, 2006.
The
commencement of the CIP does not have any impact on the collection of previously
deferred amounts for utility gross margin recovery under the WNC.
Regulatory
Assets and Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Condensed Consolidated Balance Sheets:
|
December 31,
|
September 30,
|
|
(Thousands)
|
2006
|
2006
|
Recovery Period
|
Regulatory
assets-current
|
|
|
|
Underrecovered
gas costs
|
$
|
27,048
|
$
|
—
|
|
Less
than one year (1)
|
WNC
|
|
8,105
|
|
8,105
|
|
Less
than one year (2)
|
Total
|
$
|
35,153
|
$
|
8,105
|
|
|
Regulatory
assets-noncurrent
|
|
|
|
|
|
|
Remediation
costs (Notes 2 and 11)
|
|
|
|
|
|
|
Expended,
net
|
$
|
86,110
|
$
|
83,746
|
|
(3)
|
Liability
for future expenditures
|
|
105,400
|
|
105,400
|
|
(4)
|
CIP
|
|
11,335
|
|
—
|
|
Less
than one year (5)
|
Deferred
income and other taxes
|
|
13,447
|
|
13,476
|
|
Various
|
Postemployment
benefit costs (Note 9)
|
|
2,041
|
|
2,117
|
|
Through
Sept. 2014 (6)
|
Derivatives
(Note 7)
|
|
88,102
|
|
82,451
|
|
Through
Oct. 2011 (1)
|
SBC
|
|
27,773
|
|
35,796
|
|
Various
(7)
|
Total
|
$
|
334,208
|
$
|
322,986
|
|
|
(1) Recoverable,
subject to BPU approval, through BGSS, without interest.
(2) Recoverable
or refundable, subject to BPU approval, without interest. This balance relates
to results from the winter 2005-2006 period. No new WNC activity is being
recorded due to the existence of the CIP.
(3) Recoverable,
subject to BPU approval, with interest over rolling 7-year periods. Also net
of
estimated future insurance proceeds of $10 million at December 31, 2006 and
September 30, 2006. On January 24, 2007, NJNG settled the recovery of these
estimated insurance proceeds for $12.8 million (see Note
11. Commitments and Contingent Liabilities - Legal Proceedings).
(4) |
Estimated
future expenditures. Recovery will be requested when actual expenditures
are incurred (see
Note 11. Commitments and Contingent Liabilities - Legal
Proceedings).
|
(5) Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $8.0 million relating to the weather component of the
calculation and approximately $3.3 million relating to the customer usage
component of the calculation.
(6) Recoverable
or refundable, subject to BPU approval, without interest.
(7) Recoverable
with interest, subject to BPU approval.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
If
there
are any changes in regulatory positions that indicate the recovery of any of
the
regulatory assets are not probable, the related cost would be charged to income
in the period of such determination.
The
Company had the following regulatory liabilities, all related to NJNG, on the
Condensed Consolidated Balance Sheets:
|
December 31,
|
September 30,
|
(Thousands)
|
2006
|
2006
|
Regulatory
liabilities-current
|
|
|
Overrecovered
gas costs (1)
|
$
|
—
|
$
|
1,710
|
Total
|
$
|
—
|
$
|
1,710
|
|
|
|
|
|
Regulatory
liabilities-noncurrent
|
|
|
|
|
Cost
of removal obligation (2)
|
$
|
59,237
|
$
|
58,161
|
Market
development fund (MDF) (3)
|
|
1,134
|
|
6,059
|
Total
|
$
|
60,371
|
$
|
64,220
|
(1) Refundable,
subject to BPU approval, through BGSS, with interest.
(2) NJNG
accrues and collects for cost of removal in rates. This liability represents
collections in excess of actual expenditures. Approximately $18.3 million,
including accretion of $328 thousand for the three-months ended December 31,
2006, of regulatory assets relating to asset retirement obligations have been
netted against the cost of removal obligation as of December 31, 2006 (see
Note
10. Asset Retirement Obligations).
(3) The
MDF,
created with funds available as a result of the implementation of the Energy
Tax
Reform Act of 1997, provided financial incentives to encourage customers to
switch to third party suppliers and has supported other unbundling related
initiatives. Balance earns interest at prevailing SBC rate. The MDF funding
obligations terminated as of October 31, 2006. $4.9 million of this fund
was credited to the NJCEP, as a result of the CIP Decision and Order of the
BPU
on December 12, 2006. The remaining balance is being held until final
resolution of NJNG’s fiscal 2005 SBC filing.
3. CAPITALIZED
AND DEFERRED INTEREST
Included
in Utility plant on the Condensed Consolidated Balance Sheets and reflected
in
the Condensed Consolidated Statements of Income as a reduction to interest
charges, net, are the following amounts recorded for capitalized
interest:
|
Three
Months Ended
|
|
December
31,
|
($
in Thousands)
|
2006
|
2005
|
Capitalized
interest
|
$
|
379
|
$
|
261
|
Weighted
average interest rates
|
|
5.36%
|
|
3.91%
|
NJNG
does
not capitalize a cost of equity for its utility plant construction
activities.
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures (see Note
2. Regulation).
Accordingly, Other income includes $854,000 and $610,000 of interest related
to
these SBC program costs for the three months ended December 31, 2006
and 2005, respectively.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. EARNINGS
PER SHARE
The
following table presents the calculation of the Company’s basic and diluted
Earnings per share:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
Net
income, as reported
|
$
|
28,124
|
$
|
34,264
|
|
|
|
|
|
Basic
Earnings per share:
|
|
|
|
|
Average
shares of common stock outstanding - basic
|
|
27,713
|
|
27,550
|
Basic
Earnings per Common Share
|
$
|
1.01
|
$
|
1.24
|
|
|
|
|
|
Diluted
Earnings per share:
|
|
|
|
|
Average
shares of common stock outstanding - basic
|
|
27,713
|
|
27,550
|
Incremental
shares (1)
|
|
191
|
|
410
|
Average
shares of common stock outstanding - diluted
|
|
27,904
|
|
27,960
|
Diluted
Earnings per Common Share
|
$
|
1.01
|
$
|
1.23
|
(1) Incremental
shares consist of stock options, stock awards and performance
units.
5. STOCK
BASED COMPENSATION
There
were no new awards granted during the three months ended December 31, 2006.
As
of December 31, 2006, 678,751 shares remain available for future
awards.
Effective
January 24, 2007, the shareholders of NJR ratified the NJR 2007 Stock Award
and
Incentive Plan (the 2007 Plan) which replaces the 2002 Employee and Outside
Director Long-Term Incentive Plan (Long-Term Plan). In addition to the 678,751
shares that remain available from the Long-Term Plan, the 2007 Plan reserves
an
additional 750,000 shares for issuance and provides for a broader range of
equity awards. On January 24, 2007, the Company issued 36,688 shares of
Restricted Stock under the 2007 Plan which vest in equal annual installments
over three years beginning on January 24, 2008, subject to certain
conditions.
6.
DEBT
In
October 2005, under the New Jersey Economic Development Authority (EDA) Act,
NJNG used proceeds from EDA Series 2005A and 2005B bonds to refinance NJNG’s
$10.3 million, 5.38 percent Series W First Mortgage Bonds and its $10.5
million, 6.25 percent Series Y First Mortgage Bonds. Also in October 2005,
the EDA issued its 4.9 percent (Series 2005C) Natural Gas Facilities Revenue
Bonds. The net proceeds from the 2005C bonds were deposited into a construction
fund. NJNG immediately drew down $2.5 million from the construction fund and
issued its $15 million 4.9 percent Series KK bonds to the EDA with a maturity
date of October 1, 2040. NJNG drew down an additional $4 million from the
construction fund in the fourth quarter of fiscal 2006.
In
October 2006, NJRES entered into a 3-year $30 million committed credit facility
with a multinational financial institution. Borrowings under this facility
are
guaranteed by NJR.
In
December 2006, NJNG had a $38 million letter of credit outstanding, which will
expire on June 30, 2007, in conjunction with a long-term gas swap
agreement. It replaced a $45 million letter of credit which expired in December
2006. The long-term gas swap agreement was entered into as a hedge related
to an
offsetting physical purchase of natural gas for the same period and volume.
This
letter of credit reduces the amount available under NJNG’s committed credit
facility by the same amount. NJNG does not anticipate that this letter of credit
will be drawn upon by the counterparty and it will be renewed as necessary.
NJNG
expects to renew this letter of credit agreement upon its
expiration.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In
December 2006 and 2005, NJNG received $5.5 million and $4.1 million in
connection with the sale-leaseback of its vintage 2006 and 2005 meters,
respectively. NJNG plans to continue the sale-leaseback meter program on an
annual basis.
There
were no other new issuances or redemptions of long-term debt securities for
NJR,
NJNG or NJRES during the first quarter of fiscal 2007.
The
following is a summary of debt and committed credit facilities outstanding
as of
December 31, 2006 and September 30, 2006:
|
December
31,
|
September
30,
|
(Thousands)
|
2006
|
2006
|
NJR
|
|
|
Long
- term debt (1)
|
$
|
25,000
|
$
|
25,000
|
Bank
credit facilities
|
$
|
325,000
|
$
|
325,000
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
$
|
109,800
|
$
|
129,200
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
|
5.9%
|
|
6.0%
|
NJNG
|
|
|
|
|
Long
- term debt (1)
|
$
|
254,800
|
$
|
254,800
|
Bank
credit facilities
|
$
|
250,000
|
$
|
250,000
|
Amount
outstanding at end of period
|
|
|
|
|
Commercial
paper
|
$
|
159,800
|
$
|
151,500
|
Weighted
average interest rate at end of period
|
|
|
|
|
Commercial
paper
|
|
5.3%
|
|
4.7%
|
NJRES
|
|
|
|
|
Bank
credit facilities
|
$
|
30,000
|
$
|
—
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
$
|
16,000
|
$
|
—
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
|
5.8%
|
|
—
|
(1)
Long - term debt excludes lease obligations of $56.9 million and $52.5 million
at December 31, 2006 and September 30, 2006, respectively.
7.
FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT
The
Company and its subsidiaries are subject to market risk due to fluctuations
in
the price of natural gas. To hedge against such fluctuations, the Company and
its subsidiaries enter into futures contracts, option agreements and swap
agreements to hedge purchases and sales of natural gas.
Generally,
all of the commodity contracts of NJRES meet the “normal purchase normal sale”
scope exception of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities (as amended)” (SFAS 133) and are accounted for under accrual
accounting, or are designated as a hedge for accounting purposes. If these
commodity contracts do not meet the normal purchase normal sale scope exception,
or if they do not qualify as a hedge, they are recorded at fair value as a
component of operating revenues.
The
amounts included in other comprehensive income related to natural gas
instruments, which have been designated as cash flow hedges, will reduce or
increase gas costs as the underlying physical transaction occurs and is settled.
Based on the amount recorded in Accumulated other comprehensive income as of
December 31, 2006, $98.2 million is expected to be recorded as a decrease to
Gas
purchases in fiscal 2007. For the three months ended December 31, 2006 and
2005,
$24.3 million and $20.6 million, respectively, were charged to Gas
purchases.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table summarizes the ineffective portions of the Company’s cash flow
hedges that are included as a benefit (expense) as part of Gas purchases in
the
Condensed Consolidated Statements of Income for the three months ended December
31, 2006, and 2005, respectively:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
|
NJRES
|
$
|
(232
|
)
$
|
3,594
|
|
NJR
Energy
|
|
29
|
|
15
|
|
Total
Consolidated
|
$
|
(203
|
)
$
|
3,609
|
|
Generally,
exchange-traded futures contracts require a deposit of margin cash, the amount
of which is subject to change based on market movements and in accordance with
exchange rules. The Company maintains separate broker margin accounts for NJNG
and NJRES. The balances as of December 31 and September 30, 2006 are as
follows:
|
December
31,
|
September
30,
|
|
(Thousands)
|
2006
|
2006
|
|
NJNG
broker margin deposit
|
$
|
24,711
|
$
|
30,833
|
|
NJRES
broker margin liability
|
$
|
(13,973
|
)
$
|
(14,220
|
)
|
8. BUSINESS
SEGMENT DATA
Information
related to the Company’s various business segments, is detailed
below.
The
Natural Gas Distribution segment consists of regulated natural gas delivery,
as
well as off-system, capacity and storage management operations related to NJNG.
The Energy Services segment consists of the unregulated wholesale energy
operations of NJRES. The Retail and Other segment consists of appliance and
installation services, commercial real estate development, investments and
other
corporate activities.
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
|
Operating
Revenues
|
|
|
|
Natural
Gas Distribution
|
$
|
239,407
|
$
|
394,346
|
|
Energy
Services
|
|
495,787
|
|
763,195
|
|
Retail
and Other
|
|
6,340
|
|
7,103
|
|
Subtotal
|
|
741,534
|
|
1,164,644
|
|
Intersegment
revenues (1)
|
|
(69
|
) |
(68
|
)
|
Total
|
$
|
741,465
|
$
|
1,164,576
|
|
Operating
Income
|
|
|
|
|
|
Natural
Gas Distribution
|
$
|
36,716
|
$
|
33,447
|
|
Energy
Services
|
|
14,846
|
|
27,101
|
|
Retail
and Other
|
|
582
|
|
1,121
|
|
Total
|
$
|
52,144
|
$
|
61,669
|
|
Net
Income
|
|
|
|
|
|
Natural
Gas Distribution
|
$
|
19,908
|
$
|
18,683
|
|
Energy
Services
|
|
7,819
|
|
14,897
|
|
Retail
and Other
|
|
397
|
|
684
|
|
Total
|
$
|
28,124
|
$
|
34,264
|
|
(1) Consists
of transactions between subsidiaries that are eliminated in
consolidation.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
Company’s assets for the various business segments are detailed
below:
|
December
31,
|
September
30,
|
|
(Thousands)
|
2006
|
2006
|
|
Assets
at end of period
|
|
|
|
Natural
Gas Distribution
|
$
|
1,618,845
|
$
|
1,586,934
|
|
Energy
Services
|
|
809,680
|
|
714,867
|
|
Retail
and Other
|
|
102,404
|
|
107,213
|
|
Intersegment
Assets (1)
|
|
(10,574
|
) |
(10,086
|
)
|
Total
|
$
|
2,520,355
|
$
|
2,398,928
|
|
(1) Consists
of transactions between subsidiaries that are eliminated in
consolidation.
9. EMPLOYEE
BENEFIT PLANS
Pension
and Other Postemployment Benefit Plans (OPEB)
The
components of the net periodic cost for pension benefits and OPEB costs
(principally health care and life insurance) for employees and covered
dependents were as follows:
|
Pension
|
OPEB
|
|
Three
Months Ended
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
(Thousands)
|
2006
|
2005
|
2006
|
2005
|
|
Service
cost
|
$
|
713
|
$
|
751
|
$
|
454
|
$
|
380
|
|
Interest
cost
|
|
1,525
|
|
1,408
|
|
757
|
|
615
|
|
Expected
return on plan assets
|
|
(2,052
|
)
|
(1,782
|
) |
(541
|
) |
(458
|
)
|
Prior
service cost amortization
|
|
21
|
|
21
|
|
20
|
|
19
|
|
Transition
obligation amortization
|
|
—
|
|
—
|
|
89
|
|
89
|
|
Recognized
actuarial loss
|
|
399
|
|
433
|
|
266
|
|
206
|
|
Net
initial obligation
|
|
—
|
|
(3
|
) |
—
|
|
—
|
|
Recognized
net periodic cost
|
$
|
606
|
$
|
828
|
$
|
1,045
|
$
|
851
|
|
In
fiscal
2007, the Company has no minimum pension funding requirements. The Company’s
funding level to its OPEB plans is expected to be approximately $600,000
annually over the next five years. Additional contributions may be made based
on
market conditions and various assumptions.
10. ASSET
RETIREMENT OBLIGATIONS (ARO)
Effective
September 30, 2006, NJR adopted FASB Interpretation Number 47, “Accounting for
Conditional Asset Retirement Obligations” (FIN 47), which requires NJR to
recognize a reasonably estimated liability for the fair value of an ARO. NJR
has
AROs related to the costs associated with cutting and capping its main and
service gas distribution pipelines of NJNG, which is required by New Jersey
law
when taking such gas distribution pipeline out of service.
The
following is an analysis of the change in the ARO liability for the three months
ended December 31, 2006, in thousands:
|
|
|
Balance
at October 1, 2006
|
$
|
23,293
|
|
Accretion
|
|
328
|
|
Additions
|
|
—
|
|
Retirements
|
|
(257
|
)
|
Balance
at December 31, 2006
|
$
|
23,364
|
|
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accretion
amounts will not be reflected as expense on NJR’s Condensed Consolidated
Statements of Income, but rather are deferred as a regulatory asset and netted
against NJNG’s regulatory liabilities, for presentation purposes, on the
Condensed Consolidated Balance Sheet.
11. COMMITMENTS
AND CONTINGENT LIABILITIES
Cash
Commitments
NJNG
has
entered into long-term contracts, expiring at various dates through 2022, for
the supply, storage and delivery of natural gas. These contracts include current
annual fixed charges of approximately $102.5 million at current contract rates
and volumes, which are recovered through the BGSS.
As
of
December 31, 2006, there were NJR guarantees covering approximately $248 million
of natural gas purchases, demand fee commitments and swap agreements of NJRES,
NJNG and NJR Energy, not yet reflected in Accounts payable on the Condensed
Consolidated Balance Sheet. These NJR guarantees are related to transactions
with various expiration dates through October 2010. NJR would have to provide
for payment in the event of default by NJRES, NJNG and NJR Energy.
NJNG’s
capital expenditures are estimated at $50.5 million for the remainder of fiscal
2007 and $63.3 million in fiscal 2008, consisting primarily of its construction
program to support customer growth, maintenance of its distribution system
and
replacement needed under proposed pipeline safety rulemaking.
The
Company’s future minimum lease payments under various operating leases are less
than $3.8 million annually for the next five years and $653,000 in the aggregate
for all years thereafter.
Legal
Proceedings
Manufactured
Gas Plant Remediation
NJNG
has
identified 11 former MGP sites, dating back to the late 1800s and early 1900s,
which contain contaminated residues from the former gas manufacturing
operations. Ten of the 11 sites in question were acquired by NJNG in 1952.
Gas
manufacturing operations ceased at these sites at least by the mid-1950s and,
in
some cases, had been discontinued many years earlier. Since October 1989, NJNG
has been operating under Administrative Consent Orders or Memoranda of Agreement
with the New Jersey Department of Environmental Protection (NJDEP) covering
all
11 sites. These orders and agreements establish the procedures to be followed
in
developing a final remedial cleanup plan for each site. NJNG is currently
involved in administrative proceedings with the NJDEP with respect to the MGP
sites in question, 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. Until September 2000, most of the cost of such
studies and investigations had been shared under an agreement with the former
owner and operator of 10 of the MGP sites, Jersey Central Power & Light
Company (JCP&L), a subsidiary of FirstEnergy Corporation
(FirstEnergy).
In
September 2000, a revised agreement was executed pursuant to which NJNG is
responsible for two of the sites— Long Branch and Toms River, New Jersey— while
JCP&L is responsible for the remaining eight sites. On September 14,
2004, the BPU approved a simultaneous transfer of properties whereby, upon
closing of the transfer, NJNG will take ownership of two sites and JCP&L
will take ownership of eight sites. NJNG continues to participate in the
investigation and remedial action and bears the cost related to the one MGP
site
that was not subject to the original cost-sharing agreement.
In
June
1992, the BPU approved the RAC through which NJNG may, subject to BPU approval,
recover its remediation expenditures, including carrying costs, over rolling
7-year periods. Currently, NJNG is recovering $19.2 million annually for MGP
remediation expenditures incurred through June 30, 2004. The remediation
expenditures for the 12-month periods
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ending
June 30, 2005 and 2006 are pending BPU approval. As of December 31, 2006, $86.1
million of previously incurred remediation costs, net of recoveries from
customers as well as received and anticipated insurance proceeds, are included
in Regulatory assets on the Condensed Consolidated Balance Sheet.
In
September 2006, with the assistance of an outside consulting firm, NJNG updated
an environmental review of the MGP sites, including a review of potential
liability for investigation and remedial action. Based on this review, NJNG
estimated at the time of the review that, exclusive of any insurance recoveries,
total future expenditures to remediate and monitor the three MGP sites for
which
it is responsible, will range from $105.4 million to $174.6 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,
actual costs are expected to differ from these estimates. Where available
information is sufficient to estimate the amount of the liability, it is NJNG’s
policy to accrue the full amount of such estimate. Where the information is
sufficient only to establish a range of probable liability, and no point within
the range is more likely than any other, it is NJNG’s policy to accrue the lower
end of the range. Accordingly, NJNG has recorded an MGP remediation liability
and a corresponding Regulatory asset of $105.4 million on the Condensed
Consolidated Balance Sheet. The actual costs to be incurred by NJNG are
dependent upon several factors, including final determination of remedial
action, changing technologies and governmental regulations, the ultimate ability
of other responsible parties to pay and any insurance recoveries.
NJNG
will
continue to seek recovery of such costs through the RAC. If any future
regulatory position indicates that the recovery of such costs is not probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there can
be
no assurance as to the ultimate recovery through the RAC or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
NJNG
is
presently investigating the potential settlement of alleged Natural Resource
Damage (NRD) claims that might be brought by the NJDEP concerning the three
MGP
sites. NJDEP has not made any specific demands for compensation for alleged
injury to groundwater or other natural resources. NJNG’s evaluation of these
potential claims is in the early stages, and it is not yet possible to quantify
the amount of compensation, if any, that NJDEP might seek to recover. NJNG
anticipates any costs associated with this matter would be recoverable through
the RAC.
Kemper
Insurance Company Litigation
In
September 2000, NJNG purchased two insurance policies from Kemper Insurance
Company (Kemper): (i) a 20-year Clean-Up Cost-Containment insurance policy
(Cost-Cap) and (ii) an Environmental Response Compensation and Liability
Insurance Policy (ERCLIP). The policies were intended to limit NJNG’s liability
for remediation and third-party claims arising from environmental contamination
at the former MGP sites in Long Branch and Toms River.
Beginning
in July 2003, a series of complaints were filed in the New Jersey Superior
Court against NJNG, NJR, JCP&L and FirstEnergy alleging, among other things,
personal injuries, wrongful death, survivorship actions, property damage and
claims for medical monitoring stemming from the operation and remediation of
the
former MGP site in Long Branch, New Jersey (the Mass Tort Litigation). The
relief sought included compensatory damages, the establishment of a medical
monitoring fund, disgorgement of alleged profits, cost of cleanup and
remediation, natural resource damages and punitive damages.
In
December 2005, a confidential settlement between NJNG and the plaintiffs
in the
Mass Tort Litigation was finalized and approved by the New Jersey Superior
Court
in Bergen County. Subsequent to the settlement, JCP&L and FirstEnergy made a
demand upon NJNG and NJR for indemnification pursuant to the September 2000
agreement among these entities and NJNG, whereby NJNG assumed responsibility
for
the Long Branch site. NJNG agreed to honor the indemnification terms of the
agreement.
NEW
JERSEY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NJNG
requested that Kemper defend and indemnify NJNG for claims involving the Mass
Tort Litigation and reimburse NJNG for remediation costs for the Long Branch
site that exceeded the self-insured retention. Kemper reserved its rights
regarding various allegations and agreed to participate in the defense of the
claims against NJNG. Although Kemper did not deny coverage, it did not reimburse
NJNG for any costs incurred, including the subsequently settled claims.
Consequently, in October 2004, NJNG filed a lawsuit in the Superior Court of
New
Jersey, Law Division, Ocean County, seeking declaratory relief against Kemper
(the “Lawsuit”).
On
January 24, 2007, NJNG entered into a written Settlement Agreement and Mutual
Release (the "Settlement Agreement") with Kemper and certain of its affiliates
pursuant to which the parties settled the Lawsuit. Pursuant to the terms of
the
Settlement Agreement, NJNG received a payment in the amount of $12.8 million
on
January 26, 2007 (the "Settlement Payment"). The Settlement Agreement provides
for a mutual and global release of all claims against the Company or Kemper
that
were or could have been made in the litigation, including all claims NJNG could
have made under the ERCLIP and Cost-Cap policies. The Settlement Payment was
made in exchange for a general release of all such claims asserted in the
litigation; no portion of the Settlement Payment was allocated to any particular
claim. NJNG will apply the entire amount of the Settlement Payment against
its
regulatory assets for expended remediation costs (see Note
2. Regulation).
Pursuant
to the RAC, NJNG will seek recovery of costs in excess of those recovered from
Kemper and other insurers. The RAC does not, however, permit NJNG to recover
costs, expenses or other liabilities incurred in connection with personal injury
claims. Management believes that, subject to BPU approval, these costs, net
of
all insurance proceeds, are recoverable pursuant to the RAC. However, because
recovery of all costs is subject to BPU approval, there can be no assurance
as
to the ultimate recovery of outstanding costs through the RAC or the impact
of
these matters on the Company's financial condition, results of operations or
cash flows, which could be material.
General
The
Company is a party to various other claims, legal actions, complaints and
investigations arising in the ordinary course of business. In the Company’s
opinion, the ultimate disposition of these matters will not have a material
adverse effect on its financial condition, results of operations or cash
flows.
12. OTHER
At
December 31, 2006, there were 27,760,054
shares
of
common stock outstanding and the book value per share was $23.24.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast
and
Mid-Continent to New England and Canada through its two principal subsidiaries,
New Jersey Natural Gas (NJNG) and NJR Energy Services (NJRES).
NJNG
is a
natural gas utility which provides regulated retail natural gas service in
central and northern New Jersey and also participates in the off-system sales
and capacity release markets, and comprises the Natural Gas Distribution
segment. NJNG is regulated by the New Jersey Board of Public Utilities
(BPU).
NJRES
maintains and trades around a portfolio of physical assets consisting of natural
gas storage and transportation contracts. NJRES also provides wholesale energy
services to non-affiliated utility and energy companies. NJRES comprises the
Energy Services segment.
The
Retail and Other segment includes NJR Home Services (NJRHS), which provides
service, sales and installation of appliances; NJR Energy, an investor in
energy-related ventures, most significantly, through NJNR Pipeline which holds
the Company’s 5.53 percent interest in Iroquois Gas and Transmission System, LP
(Iroquois), which is a 412-mile natural gas pipeline from the New York-Canadian
border to Long Island, New York; Commercial Realty and Resources (CR&R),
which holds and develops commercial real estate; and NJR Investment, which
makes
energy-related equity investments.
Net
income by business segment is as follows:
|
Three
Months Ended
|
|
December
31,
|
($
in Thousands)
|
2006
|
2005
|
Net
Income
|
|
|
|
|
Natural
Gas Distribution
|
$
|
19,908
|
|
71%
|
$
|
18,683
|
|
55%
|
Energy
Services
|
|
7,819
|
|
28
|
|
14,897
|
|
43
|
Retail
and Other
|
|
397
|
|
1
|
|
684
|
|
2
|
Total
|
$
|
28,124
|
|
100%
|
$
|
34,264
|
|
100%
|
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have focused on the following to provide for
growth:
· |
Working
with the BPU and New Jersey Department of the Public Advocate, Division
of
Rate Counsel, for the development of the decoupling of the impact
of
customer usage on utility gross margin, which has allowed for the
implementation of the Customer Incentive Program (CIP). The CIP allows
NJNG to promote conservation programs to its customers while maintaining
protection of its utility gross margin associated with reduced customer
usage;
|
· |
Managing
its customer growth, which is expected to total about 2.0 percent
annually;
|
· |
Generating
earnings from various BPU-authorized gross margin-sharing incentive
programs, which are currently approved through October 31, 2007. An
extension has been requested to link these programs with the end
of
the term of the CIP;
|
· |
Managing
the volatility of wholesale natural gas prices through a hedging
program
to help keep customers’ prices as stable as possible;
and
|
· |
Improving
its cost structure through various productivity
initiatives.
|
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.
For
the
reporting period through September 30, 2006, which includes the three month
period ending December 31, 2005, the impact on weather was mitigated by a
Weather Normalization Clause (WNC). The WNC did not, however, capture lower
customer usage per degree day. To mitigate this, NJNG has obtained approval
of
the CIP effective as of October 1, 2006. Therefore, for the three months ended
December 31, 2006, the impact of weather and usage on NJNG’s utility gross
margin has been significantly mitigated due to the CIP.
The
CIP
is a three-year pilot program, effective October 1, 2006, designed to
decouple the link between customer usage and NJNG’s utility gross margin to
allow NJNG to encourage its customers to conserve energy. Absent BPU action,
the
CIP program is extended for up to one additional year, or until the issuance
of
a BPU order. For the term of the program the existing WNC has been suspended
and
replaced with the CIP tracking mechanism, which addresses utility gross margin
variations related to both weather and customer usage in comparison to
established benchmarks. Recovery of such utility gross margin variations is
subject to additional conditions including an earnings test and an evaluation
of
Basic Gas Supply Service (BGSS)-related savings achieved. Under the CIP
agreement, if NJNG does not file for a rate review with the BPU by October
1,
2008, the return on equity for the earnings test will decline from 10.50 percent
to 10.25 percent.
To
encourage energy efficiency, NJNG is also required to initiate programs to
further customer conservation efforts over the term of the pilot. NJNG is
required to provide a minimum $2 million in funding for such programs and will
continue to fund programs throughout the term of the pilot. At December 31,
2006, the obligation to fund these conservation programs has a present value
of
$1.5 million, which is included in the Condensed Consolidated Balance Sheets.
An
annual filing of the conservation efforts will be made in June of each
year, commencing in June 2007, coincident with NJNG’s annual BGSS
filing.
NJNG’s
operating expenses are heavily influenced by labor costs, large components
of
which are covered by a negotiated collective bargaining agreement that expires
in 2008. Labor-related fringe benefit costs, which are also subject to numerous
factors, may also influence NJNG’s results.
As
a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding
their
ultimate recovery from customers. The most significant costs incurred that
are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs. Actual remediation costs
may
vary from management’s estimates due to the developing nature of remediation
requirements and related litigation. If there are changes in the regulatory
position on the recovery of these costs, such costs would be charged to
income.
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’
unregulated energy trading and wholesale energy operations incorporates the
following elements to provide for growth, while focusing on a low-risk
profile:
· |
Providing
natural gas portfolio management services to nonaffiliated utilities
and
electric generation facilities;
|
· |
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences to generate
gross
margin;
|
· |
Managing
hedging programs designed to mitigate adverse market price fluctuations
in
natural gas transportation and storage commitments;
and
|
· |
Monitoring
and reducing risk associated with various counterparties credit
exposure.
|
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including trading limits, approval processes, segregation
of duties, as well as formal contract and credit review and approval procedures.
The Risk Management Committee (RMC) of NJR, which consists of senior officers
from several business units of NJR, oversees compliance with these established
guidelines.
Critical
Accounting Policies
A
summary
of NJR’s critical accounting policies is included in Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of our
Annual Report on Form 10-K for the period ended September 30, 2006. NJR’s
critical accounting policies have not changed materially from those reported
in
the 2006 Annual Report on Form
10-K.
Recently
Issued Accounting Standards
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which alters the
framework for recognizing income tax contingencies. Previously, under Statement
of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,”
the focus was on the subsequent liability recognition for estimated losses
from
tax contingencies where such losses were probable and the related amounts could
be reasonably estimated. Under this new interpretation, a contingent tax asset
(i.e., an uncertain tax position) may only be recognized if it is more likely
than not that it will ultimately be sustained upon audit. The Company will
adopt
FIN 48 by the commencement of fiscal 2008. The Company is evaluating its tax
positions for all jurisdictions and all years for which the statute of
limitations remains open, as well as evaluating the impact that the adoption
will have on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157). SFAS 157 defines fair value as the amount that would be exchanged to
sell
an asset or transfer a liability in an orderly transaction between market
participants and establishes a fair value hierarchy of quotes and unobservable
data that should be used to develop pricing assumptions. In addition, for assets
and liabilities that are not actively traded, for example, certain kinds of
derivatives, SFAS 157 requires that a fair value measurement include an
adjustment for risks inherent in a valuation technique and/or inputs, such
as
those used in pricing models. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, however, early adoption is permitted. The Company
will
adopt the provisions of the statement prospectively and is evaluating the
adoption date and its effect on its financial condition.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postemployment Plans” (SFAS 158). The statement
requires an employer to recognize the funded status, measured as the difference
between the fair value of plan assets and the projected benefit obligation,
of
its benefit plans. SFAS 158 does not change how pensions and other
postemployment benefits are accounted for and reported in the income statement.
Certain economic events, which previously required disclosure only in the notes
to the financial statements, will be recognized as assets and liabilities and
offset in Accumulated other comprehensive income, net of tax, to the extent
such
amounts are not recognized in earnings as part of net periodic benefit costs.
Amounts recognized in Accumulated other comprehensive income are adjusted as
they are subsequently recognized in earnings. The Company will adopt SFAS 158
on
September 30, 2007 and will apply the provisions of the statement prospectively.
The Company is currently evaluating the effect of adoption on its financial
condition.
Results
of Operations
Net
income for the quarter ended December 31, 2006 decreased by 17.9 percent to
$28.1 million, compared with $34.3 million for the same period last fiscal
year.
Basic earnings per share (EPS) decreased by 18.6 percent to $1.01, compared
with
$1.24 last fiscal year. Diluted EPS decreased 17.9 percent to $1.01, compared
with $1.23 last fiscal year.
Revenue
decreased by approximately $423.1 million, or 36.3 percent, for the three months
ended December 31, 2006 as compared to the same period in the prior fiscal
year,
as a result of lower customer usage and off-system sales at NJNG and lower
sales
at NJRES, which were the result of lower prices due to the absence of extreme
weather events that did not
recur
in
the first quarter of fiscal 2007. These same factors resulted in a decrease
in
Gas purchases of $409.8 million, or 39.5 percent, for the three months ended
December 31, 2006, as compared to the same period in the prior fiscal
year.
The
decrease in earnings for the quarter ended December 31, 2006, as compared with
the same quarter in the prior fiscal year, was due primarily to lower earnings
at NJRES due to higher market volatility and lower natural gas prices, as a
result of the absence of certain weather-related events in the southeastern
and
Gulf-Coast regions of the United States, and reduced impact of the ineffective
portion of transactions accounted for as cash flow-hedges under SFAS No. 133,
“Accounting for Derivative Instruments (as amended)” (SFAS 133), offset by
improved earnings at NJNG. Increased earnings at NJNG were due primarily to
the
impact of the CIP tariff and continued customer growth, partially offset by
higher interest expense, which was due primarily to an increase in short-term
borrowings and higher rates over the same period last year.
Natural
Gas Distribution Operations
NJNG
is a
local natural gas distribution company that provides regulated retail energy
services to approximately 474,000 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.
In
February 1999, the Electric Discount and Energy Competition Act (EDECA),
which provides the framework for the restructuring of New Jersey’s energy
markets, became law. In March 2001, the BPU issued an order to fully open
NJNG’s residential markets to competition, restructure its rates to segregate
its BGSS and delivery (i.e., transportation) service prices as required by
EDECA
and expand an incentive for residential and small commercial customers to switch
to transportation service. 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. In January 2002, the BPU ordered
that BGSS could be provided by suppliers other than the state’s natural gas
utilities, but BGSS should be provided by the state’s natural gas utilities
until further BPU action. No additional action has been taken by the BPU
subsequent to its initial order in January 2002.
NJNG’s
financial results are summarized as follows:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
Utility
Gross Margin
|
|
|
Operating
revenues
|
$
|
239,407
|
$
|
394,346
|
Gas
purchases
|
|
150,993
|
|
305,132
|
Energy
and other taxes
|
|
12,520
|
|
17,285
|
Regulatory
rider expense
|
|
9,466
|
|
9,458
|
Total
Utility Gross Margin
|
$
|
66,428
|
$
|
62,471
|
|
|
|
|
|
Utility
Gross Margin
|
|
|
|
|
Residential
and commercial
|
$
|
54,509
|
$
|
52,669
|
Transportation
|
|
8,437
|
|
6,382
|
Total
Utility Firm Gross Margin
|
|
62,946
|
|
59,051
|
Incentive
programs
|
|
3,278
|
|
3,114
|
Interruptible
|
|
204
|
|
306
|
Total
Utility Gross Margin
|
|
66,428
|
|
62,471
|
Operation
and maintenance expense
|
|
20,255
|
|
19,867
|
Depreciation
and amortization
|
|
8,738
|
|
8,423
|
Other
taxes not reflected in utility gross margin
|
|
719
|
|
734
|
Operating
income
|
$
|
36,716
|
$
|
33,447
|
Other
income
|
|
1,047
|
|
825
|
Interest
charges, net
|
|
5,393
|
|
3,784
|
Income
tax provision
|
|
12,462
|
|
11,805
|
Net
income
|
$
|
19,908
|
$
|
18,683
|
Utility
Gross Margin
NJNG’s
utility gross margin is defined as natural gas revenues less natural gas
purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA) and
regulatory rider expenses. Management believes that utility gross margin
provides a more meaningful basis than revenue for evaluating utility operations
since natural gas costs, sales tax, TEFA and regulatory rider expenses are
included in operating revenue and passed through to customers and, therefore,
have no effect on utility gross margin. This definition of utility gross margin
may not be comparable to the definition of gross margin used by others in the
natural gas distribution business and other industries.
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 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 in subsequent periods.
Sales
tax
was calculated at 6 percent of revenue during the first quarter of fiscal 2006,
and at 7 percent, during the first quarter of fiscal 2007. The sales tax
calculation excludes sales to cogeneration facilities, other utilities,
off-system sales and federal accounts.
TEFA,
which is included in Energy and other taxes on the Condensed Consolidated
Statements of Income, is calculated on a per-therm basis and excludes sales
to
cogeneration facilities, other utilities and off-system sales. TEFA represents
a
regulatory allowed assessment imposed on all energy providers in the state,
as
TEFA has previously replaced the utility gross receipts tax formula.
Regulatory
rider expenses consist of recovery of state-mandated programs and the
remediation adjustment clause costs. These expenses are designed to be offset
by
corresponding revenues and are calculated on a per-therm basis.
NJNG’s
operating revenues decreased by $154.9 million, or 39.3 percent, and gas
purchases decreased by $154.1 million, or 50.5 percent, for the three months
ended December 31, 2006, compared with the same period in the prior fiscal
year.
These decreases were the result of weather being 18.2 percent warmer for the
three months ended December 31, 2006, as
compared
to the same period in the prior fiscal year, coupled with a reduction in
customer usage per degree day and a $51.5 million refund provided to residential
and small commercial customers in December 2006, partially offset by customer
growth. Sales tax and TEFA, which are presented as both components of Revenues
and Cost of Revenues in the Condensed Consolidated Statements of Income, totaled
$12.5 million and $17.3 million for the three months ended December 31, 2006
and
2005, respectively. The sales tax decrease is a direct result of the decrease
in
NJNG’s operating revenues. TEFA decreased due to a reduction in customer usage.
Regulatory rider expenses remained at $9.5 million for the three months ended
December 31, 2006 and 2005, respectively. The flat regulatory rider expense
is
due to an increase in the Universal Service Fund (USF) rate as approved by
the
Board of Public Utilities, offset by the decrease in customer
usage.
Utility
gross margin is comprised of three major categories:
· |
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;
|
· |
Incentive
programs, where margins generated or savings achieved from BPU-approved
off-system sales, capacity release, Financial Risk Management (defined
in
Incentive Programs, below) or storage incentive programs are shared
between customers and NJNG; and
|
· |
Utility
gross margin from interruptible customers, which is generated from
large
commercial and industrial customers who receive non-firm natural
gas
service at lower rates, is subject to BPU-approved
incentives.
|
Utility
Firm Gross Margin
Effective
October 1, 2006, the BPU approved the CIP to encourage energy savings while
allowing NJNG to recover the necessary costs of operations. The three year
pilot
program eliminates the disincentive to promote conservation and energy
efficiency, since utility gross margin is no longer directly linked to customer
usage. The CIP tariff normalizes NJNG’s utility gross margin recoveries for
variances not only in weather but also other factors affecting usage, including
customer conservation. Recovery of utility gross margin through the CIP is
limited to certain gas supply cost savings achieved.
For
the
three months ended, December 31, 2005, utility gross margin from residential
and
commercial customers was impacted by the WNC, which provided for a revenue
adjustment if the weather varied by more than one-half percent from normal
weather (i.e., 20-year average). The accumulated adjustment from one heating
season (i.e., October through May) was billed or credited to customers in
subsequent periods. This mechanism reduced the variability of both customers’
bills and NJNG’s earnings due to weather fluctuations. The existing WNC has been
suspended as of October 1, 2006 due to the implementation of the CIP pilot
program.
Customers
switching between sales service and transportation service affect the components
of utility gross margin from firm customers. NJNG’s total utility gross margin
is not negatively affected by customers who use its transportation service
and
purchase natural gas from another supplier because its tariff is designed so
that no profit is earned on the commodity portion of sales to firm customers.
All customers who purchase natural gas from another supplier continue to use
NJNG for transportation service.
Total
utility firm gross margin increased $3.9 million, or 6.6 percent, for the three
months ended December 31, 2006, compared with the same period last fiscal year.
The change was due primarily to the net effect of:
· |
An
increase in fixed revenue as a result of customer growth;
and
|
· |
The
effect of the CIP in the current fiscal year, which captures the
impact
from both weather and customer usage, when compared to the same period
in
the prior fiscal year when the WNC, which did not capture the impact
of
lower usage per degree day, was in effect; which more than
offset
|
· |
The
decrease in natural gas used by customers as the result of winter
weather
being 18.2 percent warmer for the three months ended December 31,
2006,
compared with the same period last fiscal year; and
|
· |
A
reduction in customer usage per degree day over the same period last
fiscal year.
|
Utility
gross margin from residential and commercial customers is impacted by the CIP,
which provides for a revenue adjustment if the weather and usage varies from
the
established baseline weather and usage factors. The accumulated adjustment
from
one year is billed or credited to customers in subsequent periods. This
mechanism protects NJNG’s utility gross margin due to weather and customer usage
fluctuations while allowing NJNG to promote conservation. The weather for the
three months ended December 31, 2006 was 18.3 percent warmer than normal which
resulted in an accrual of utility gross margin under the CIP of $8.0 million.
In
addition, customer usage was lower than the established benchmark, which
resulted in an additional accrual of utility gross margin under the CIP of
$3.3
million.
Utility
firm gross margin from transportation service increased $2.1 million, or 32.2
percent, for the three months ended December 31, 2006, compared with the same
period in the prior fiscal year. NJNG transported 2.5 Bcf and 2.6 Bcf for the
three months ended December 31, 2006, and December 31, 2005, respectively.
The
increase in utility firm gross margin was due primarily to an increase in the
number of commercial customers switching from firm to transportation services
combined with the impact of the CIP program.
NJNG
had
8,551 and 9,760 residential customers and 4,319 and 2,718 commercial customers
using its transportation service at December 31, 2006 and 2005, respectively.
The decrease in residential transportation customers was due primarily to a
change in marketing efforts by third-party natural gas service providers in
NJNG’s service territory to focus on the commercial sector and away from the
residential sector.
During
the three months ended December 31, 2006, NJNG added 2,614 new customers, 36
percent of which converted from other fuels. In addition, 69 existing customers
added natural gas heat to their existing service. In fiscal 2007, NJNG currently
expects to add approximately 9,700 new customers and convert an additional
700
existing customers to natural gas heat and other services. Achieving these
expectations would represent an estimated annual customer growth rate of
approximately 2.0 percent.
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. However, future
sales will be affected by the weather, actual energy usage patterns of NJNG’s
customers, economic conditions in NJNG’s service territory, conversion and
conservation activity, the impact of changing from a regulated to a competitive
environment, changes in state regulation and other marketing efforts, as has
been the case in prior years.
Incentive
Programs
To
reduce
the overall cost of its natural gas supply commitments, NJNG has entered into
contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system requirements. These
off-system sales enable NJNG to spread its fixed demand costs, which are charged
by pipelines to access their supplies year round, over a larger and more diverse
customer base. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to hedge NJNG’s
natural gas costs, enabling NJNG customers to retain 80 percent, and NJNG
shareowners to retain 20 percent, of these costs and results.
The
storage incentive program shares gains and losses on an 80 percent to 20 percent
basis between customers and shareowners, respectively. This program measures
the
difference between the actual cost of natural gas in storage and a benchmark
applicable to the April-through-October injection season.
NJNG’s
incentive programs totaled 10.6 Bcf and generated $3.3 million of utility gross
margin for the three months ended December 31, 2006, compared with 10.2 Bcf
and
$3.1 million of utility gross margin, for the same period last fiscal year.
The
increase in utility gross margin was due primarily to the FRM and the storage
incentive programs, which both
benefited from additional price volatility, caused by warmer than normal
weather, in the wholesale natural gas market.
Interruptible
NJNG
serves 48 customers through interruptible sales and/or transportation tariffs.
Sales made under the interruptible sales tariff are priced on market-sensitive
energy parity rates. Although therms sold and transported to interruptible
customers represented approximately 4.0 percent and 5.8 percent of total
throughput for the three months ended December 31, 2006 and 2005, respectively,
they accounted for less than 1 percent of the total utility gross margin in
both
periods due to the sharing formulas that govern these sales. Under these
formulas, NJNG retains 10 percent of the utility gross margin from interruptible
sales and 5 percent of the utility gross margin from transportation sales,
with
90 percent and 95 percent, respectively, credited to firm sales customers
through the BGSS. Interruptible sales remained at 1.0 Bcf for the three months
ended December 31, 2006, and 2005, respectively. In addition, NJNG transported
1.0 Bcf and 1.7 Bcf for the three months ended December 31, 2006 and 2005,
respectively, for its interruptible customers.
Operation
and Maintenance Expense
Operation
and maintenance (O&M) expense increased $388,000, or 2.0 percent, in the
three months ended December 31, 2006, compared with the same period in the
prior
fiscal year. The increase was due primarily to higher labor costs, offset by
lower bad debt expense. Higher labor costs are due to an increase in the number
of employees as well as annual wage increases, while lower bad debt expense
is a
direct result of decreased revenue as noted above.
Operating
Income
Operating
income increased by $3.3 million, or 9.8 percent, in the three months ended
December 31, 2006, compared with the same period last year. The increase was
due
primarily to the implementation of the CIP tariff which became effective
beginning in fiscal year 2007. The implementation of the CIP allowed the
recovery of utility gross margin loss incurred as a result of the decrease
in
natural gas used due to the warmer weather as well as the reduction in customer
usage per degree day, as noted in the discussion above. During the three months
ended December 31, 2005, the WNC did not capture reductions in customer usage,
but only the variability experienced by NJNG’s utility gross margin as a result
of weather fluctuations.
Interest
Charges
Interest
charges increased $1.6 million in the first quarter of fiscal 2007 as compared
to the same period in the prior fiscal year due primarily to an increase in
short-term borrowings and higher interest rates.
Net
Income
Net
income increased $1.2 million, or 6.6 percent, in the three months ended
December 31, 2006, due primarily to higher operating income as described above,
partially offset by higher interest expense.
Energy
Services Operations
NJRES
provides unregulated wholesale energy services, including base load natural
gas,
peaking and balancing services, utilizing physical assets it controls, as well
as providing asset management services to customers in states from the Gulf
Coast and Mid-continent regions to the Appalachian and Northeast regions and
Canada.
NJRES
has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales to
these
customers have allowed NJRES to leverage its transportation and storage capacity
and manage sales to these customers in an aggregate fashion. This strategy
provides customers with better pricing and allows NJRES to extract more value
from its portfolio of storage and transportation capacity. In addition, these
customers have come to rely on NJRES’ reliability, which is, in part, due to the
ability to deliver from a firm supply source.
NJRES
also focuses on creating value from underutilized natural gas assets, which
are
typically amassed through contractual rights to natural gas transportation
and
storage capacity. NJRES has developed a portfolio of storage and transportation
capacity in states in the Northeast, Gulf Coast, Mid-continent and Appalachian
regions and eastern Canada. These assets become more valuable when prices change
between these areas and across time periods. NJRES seeks to optimize this
process on a daily basis as market conditions change by evaluating all the
natural gas supplies, transportation and opportunities to which it has access,
to find the most profitable alternative to serve its various commitments. This
enables NJRES to capture geographic pricing differences across these various
regions as delivered natural gas prices change. NJRES’ gross margin is defined
as natural gas revenues and management fees less natural gas costs and fixed
demand costs.
In
a
similar manner, NJRES participates in natural gas storage transactions where
it
seeks to identify pricing differences that occur over time, as prices for future
delivery periods at many locations are readily available. NJRES generates gross
margin by locking in the differential between purchasing natural gas at the
lowest current or future price and, in a related transaction, selling that
natural gas at the highest current or future price, all within the constraints
of its contracts credit policies. Through the use of transportation and storage
services, NJRES is able to generate gross margin through pricing differences
that occur over the duration of time the assets are held.
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions. Revenue is
customarily derived by a combination of a base service fee and incentive-based
arrangements.
NJRES’
financial results are summarized as follows:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
Operating
revenues
|
$
|
495,787
|
$
|
763,195
|
Gas
purchases
|
|
477,692
|
|
733,343
|
Gross
margin
|
|
18,095
|
|
29,852
|
Operation
and maintenance expense
|
|
3,003
|
|
2,518
|
Depreciation
and amortization
|
|
54
|
|
52
|
Other
taxes
|
|
192
|
|
181
|
Operating
income
|
$
|
14,846
|
$
|
27,101
|
Net
income
|
$
|
7,819
|
$
|
14,897
|
NJRES’
gross margin decreased by $11.8 million, in the three months ended December
31,
2006, compared with the same period last fiscal year due primarily to extreme
weather related conditions in the southeast and gulf coast regions of the United
States in the previous year, which triggered the disruption of the natural
gas
production in the gulf coast region and created market volatility along with
a
significant increase in wholesale natural gas prices. This resulted in greater
margins in its storage and pipeline trading positions during the first quarter
of fiscal 2006, which did not recur in the current fiscal year. Additionally
NJRES’ gross margin for the three months ended December 31, 2005 included the
benefits from certain natural gas basis swaps that were deemed ineffective
cash
flow hedges upon adoption of SFAS 133, which were concluded and settled in
October 2006.
Operation
and maintenance expense increased by $485,000, or 19.2 percent, during the
three
months ended December 31, 2006, compared with the same period last year, due
primarily to higher labor and fringe benefits costs as a result of the
operational growth of NJRES.
Operating
income decreased by $12.3 million and net income decreased by $7.1 million
for
the three months ended December 31, 2006, compared with the same period in
the
prior fiscal year due primarily to the additional income generated in the prior
fiscal year from the locational pricing related to extreme weather conditions
and the beneficial impact of SFAS 133, both as noted above, which significantly
contributed to higher earnings.
Future
results are subject to NJRES’ ability to maintain and expand its wholesale
marketing activities and are contingent upon many other factors, including
an
adequate number of appropriate counterparties, sufficient liquidity in the
energy trading market and continued access to the capital markets. In addition,
NJRES’ gross margin from its portfolio of capacity assets is generally greater
in the winter months, while the fixed costs of these
assets are spread throughout the year. Accordingly, the results for the three
months ended December 31, 2006 are not expected to be an indication of the
results for the fiscal year.
Retail
and Other Operations
The
financial results of Retail and Other consists primarily of NJRHS, which
provides service, sales and installation of appliances to over 141,000
customers; CR&R, which holds and develops commercial real estate and NJR
Energy, an investor in energy-related ventures through its operating subsidiary,
NJNR Pipeline, which consists primarily of its equity investment in Iroquois;
and NJR Investment, which makes certain energy-related equity
investments.
The
Consolidated financial results of Retail and Other are summarized as
follows:
|
Three
Months Ended
|
|
December
31,
|
(Thousands)
|
2006
|
2005
|
Operating
revenues
|
$
|
6,340
|
$
|
7,103
|
Other
income
|
$
|
807
|
$
|
654
|
Net
income
|
$
|
397
|
$
|
684
|
Retail
and Other Operating revenue decreased by $763,000, for the three months ended
December 31, 2006, compared with the same period last year, due primarily
to:
· |
A
gain of $168,000 in the first quarter of 2006 on the completion of
a land
and building sales contract by CR&R that did not recur in fiscal
2007;
|
· |
A
reduction in installations of heating systems during the three months
ended December 31, 2006 compared to same period last year due to
warmer
weather in fiscal 2007 resulting in a decrease of $445,000 in NJRHS
operating revenues.
|
The
increase in Other income is attributed to improved earnings from NJNR Pipeline’s
equity investment in Iroquois.
Liquidity
and Capital Resources
Consolidated
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and provides adequate
financial flexibility for accessing capital markets as required.
NJR’s
consolidated capital structure was as follows:
|
December
31,
|
September
30,
|
|
2006
|
2006
|
Common
stock equity
|
51%
|
|
50%
|
Long-term
debt
|
27
|
|
27
|
Short-term
debt
|
22
|
|
23
|
Total
|
100%
|
|
100%
|
NJR
did
not repurchase any shares of its common stock during the three month period
ending December 31, 2006.
NJR
and
its unregulated subsidiaries rely on utilizing committed credit facilities
to
provide liquidity to meet working capital and external debt-financing
requirements.
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its
own
financial profile. NJNG does not guarantee or otherwise directly support the
debt of NJR. The seasonal nature of NJNG’s operations creates large short-term
cash requirements, primarily to finance natural gas purchases and customer
accounts receivable. NJNG obtains working capital for these requirements, and
for the temporary financing of construction and MGP remediation expenditures
and
energy tax payments, through the issuance of commercial paper and short-term
bank loans.
As
of
December 31, 2006 NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $319 million available under these facilities (see
Note
6. Debt).
NJR,
NJNG
and NJRES currently anticipate that their financing requirements in fiscal
2007
will be met through internally generated cash, the issuance of short-term debt
and proceeds from the Company's Automatic Dividend Reinvestment Plan.
The
following table is a summary of NJR’s, NJNG’s and NJRES’s contractual cash
obligations and their applicable payment due dates:
|
|
Up to
|
2-3
|
4-5
|
After
|
(Thousands)
|
Total
|
1 Year
|
Years
|
Years
|
5 Years
|
Long-term
debt *
|
$
|
455,814
|
$
|
13,011
|
$
|
23,163
|
$
|
73,666
|
$
|
345,974
|
Capital
lease obligations *
|
|
90,128
|
|
7,994
|
|
15,988
|
|
19,578
|
|
46,568
|
Operating
leases *
|
|
8,990
|
|
2,939
|
|
3,843
|
|
1,555
|
|
653
|
Short-term
debt
|
|
285,600
|
|
285,600
|
|
—
|
|
—
|
|
—
|
Clean
energy program *
|
|
18,540
|
|
8,638
|
|
9,902
|
|
—
|
|
—
|
Construction
obligations
|
|
5,054
|
|
5,054
|
|
—
|
|
—
|
|
—
|
Natural
gas supply purchase obligations - NJNG
|
|
606,790
|
|
180,334
|
|
193,429
|
|
136,916
|
|
96,111
|
Natural
gas supply purchase obligations - NJRES
|
|
1,094,780
|
|
453,395
|
|
532,972
|
|
94,537
|
|
13,876
|
Total
NJR and NJNG contractual cash
Obligations
|
$
|
2,565,696
|
$
|
956,965
|
$
|
779,297
|
$
|
326,252
|
$
|
503,182
|
*These
obligations include an interest component.
As
of
December 31, 2006, there were NJR guarantees covering approximately $248 million
of natural gas purchases, demand fee commitments and swap agreements of NJRES,
NJNG and NJR Energy, not yet reflected in Accounts payable on the Condensed
Consolidated Balance Sheet. These NJR guarantees are related to transactions
with various expiration dates through October 2010. NJR would have to provide
for payment in the event of default by NJRES, NJNG or NJR Energy.
The
Company is not currently required to make minimum pension funding contributions
during fiscal 2007. The Company’s funding level to its OPEB plans is expected to
be approximately $600,000 annually over the next five years.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet financing arrangements.
Cash
Flows
Operating
Activities
As
presented in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $12.4 million for the three months ended
December 31, 2006, compared with $168.3 million used in operating activities
in
the same period last fiscal year. The increase in operating cash flow during
the
first quarter of fiscal 2007 primarily reflects the following changes in the
components of working capital, as well as lower MGP expenditures, partially
offset by lower net income:
· |
A
decrease in the change in accounts receivable of $104 million as
a result
of a $51.5 million credit issued to retail customers and warmer weather
with reduced customer usage at NJNG. The refund also resulted in
an
increase in underrecovered gas costs as of December 31, 2006. The
change
was partially offset by increased receivables as a result of settled
wholesale natural gas and storage commodity contracts at
NJRES.
|
· |
A
decrease in gas inventory at NJNG due to lower volumes held in inventory,
as well as lower wholesale natural gas
prices.
|
· |
An
increase in gas purchases payable primarily at NJRES as a result
of
greater natural gas storage assets and other natural gas inventory
transactions.
|
NJNG’s
MGP expenditures, exclusive of insurance recoveries, are currently expected
to
total $30.4 million in fiscal 2007 (see Note
11. Commitments and Contingent Liabilities).
Financing
Activities
Cash
flow
from financing activities totaled $5.3 million for the three months ended
December 31, 2006, compared with $176.5 million in the same period last year.
The change was due primarily to a decrease in short-and long-term borrowings,
compared with the same period last year, as a result of lower wholesale
commodity costs in the first quarter of fiscal 2007 and reduced cash
requirements associated with NJRES margin calls that were the result of the
volatility in wholesale natural gas prices during the first quarter of fiscal
2006, which did not recur in the first quarter of fiscal 2007.
NJRES’
use of high-injection, high-withdrawal storage facilities and anticipated
pipeline park-and-loan arrangements, combined with related hedging activities
in
the volatile wholesale natural gas market, create significant short-term cash
requirements, which are funded by NJR or its committed credit facility
guaranteed by NJR.
In
October 2005, under the New Jersey Economic Development Authority (EDA) act,
NJNG used proceeds from EDA Series 2005A and 2005B bonds to refinance NJNG’s
$10.3 million, 5.38 percent Series W First Mortgage Bonds and its $10.5
million, 6.25 percent Series Y First Mortgage Bonds. Also in October 2005,
the EDA issued its 4.9 percent (Series 2005C) Natural Gas Facilities Revenue
Bonds. The net proceeds from the 2005C bonds were deposited into a construction
fund. NJNG immediately drew down $2.5 million from the construction fund and
issued its $15 million, 4.9 percent Series KK bonds to the EDA with a maturity
date of October 1, 2040. NJNG drew down an additional $4 million from the
construction fund in the fourth quarter of fiscal 2006.
In
December 2006 and 2005, NJNG received $5.5 million and $4.1 million in
connection with the sale-leaseback of its vintage 2006 and 2005 meters,
respectively. NJNG plans to continue the sale-leaseback meter program on an
annual basis.
Investing
Activities
Cash
flow
used in investing activities totaled $12.5 million for the three months ended
December 31, 2006, compared with $25 million for the same period last fiscal
year. The decrease in cash used during the first quarter of fiscal 2007, as
compared with the same period in the prior fiscal year, was due primarily to
cash received from the sale of land at CR&R, along with the absence of the
net $12.5 million deposit into a construction fund created under the EDA
financing arrangement described above, partially offset by increased capital
expenditures for utility plant additions.
NJNG’s
capital expenditures result primarily from the need for services, mains and
meters to support its continued customer growth, pipeline safety rulemaking
and
general system improvements. NJNG’s capital expenditures are expected to
increase in fiscal 2007 and 2008, compared with fiscal 2006, as a result of
increased system integrity projects and expected replacement required under
pipeline safety rulemaking.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2007 and 2008.
Retail
and Other capital expenditures each year are primarily made in connection with
investments made to preserve the value of real estate holdings.
Credit
Ratings
The
table
below summarizes NJNG’s credit ratings issued by two rating entities, Standard
and Poor’s (S&P), and Moody’s Investors Service, Inc.
(Moody’s).
|
Standard &
Poor’s
|
Moody’s
|
Corporate
Rating
|
A+
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
AA-
|
Aa3
|
Ratings
Outlook
|
Negative
|
Stable
|
NJNG’s
S&P and Moody’s Senior Secured ratings are investment grade ratings and
represent the sixth highest rating within the investment grade category. Moody’s
and S&P give NJNG’s commercial paper the highest rating within the
Commercial Paper investment grade category. Investment grade ratings are
generally divided into three groups: high, upper medium and medium. NJNG’s
senior secured ratings and the commercial paper ratings fall into the high
group. NJR is not a rated entity.
NJNG
is
not party to any lending agreements that would accelerate the maturity date
of
any obligation caused by a failure to maintain any specific credit rating.
A
rating set forth above is not a recommendation to buy, sell or hold the
Company’s or NJNG’s securities and may be subject to revision or withdrawal at
any time. Each rating set forth above should be evaluated independently of
any
other rating.
The
timing and mix of any external financings will target a common equity ratio
that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets.
The prices on the NYMEX and over-the-counter markets generally reflect the
notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To hedge against such fluctuations, the Company and its
subsidiaries have entered into futures contracts, options agreements and swap
agreements. To manage these instruments, the Company has well-defined risk
management policies and procedures that include daily monitoring of volumetric
limits and monetary guidelines. The Company’s natural gas businesses are
conducted through three of its operating subsidiaries. First, NJNG is a
regulated utility that uses futures, options and swaps to hedge against price
fluctuations and its recovery of natural gas costs is governed by the BPU.
Second, NJRES uses futures, options and swaps to hedge purchases and sales
of
natural gas. Finally, NJR Energy has entered into two swap transactions to
hedge
an 18-year fixed-price contract to sell remaining volumes of approximately
9.1
Bcf of natural gas (Gas Sales Contract) to an energy marketing company which
expire on October 31, 2010. NJR Energy has hedged both the price and
physical delivery risks associated with the Gas Sales Contract.
The
following table reflects the changes in the fair market value of commodity
derivatives from September 30, 2006, to December 31, 2006:
|
Balance
|
Increase
|
|
Balance
|
|
|
September 30,
|
(Decrease) in Fair
|
Amounts
|
December 31,
|
|
(Thousands)
|
2006
|
Market Value
|
Settled
|
2006
|
|
NJNG
|
$
|
(82,451
|
)
$
|
(2,618
|
)
$
|
3,033
|
$
|
(88,102
|
)
|
NJRES
|
|
116,547
|
|
32,439
|
|
23,933
|
|
125,053
|
|
NJR
Energy
|
|
35,423
|
|
(3,697
|
) |
337
|
|
31,389
|
|
Total
|
$
|
69,519
|
$
|
26,124
|
$
|
27,303
|
$
|
68,340
|
|
There
were no changes in methods of valuations during the three months ended December
31, 2006.
The
following is a summary of fair market value of commodity derivatives at December
31, 2006, by method of valuation and by maturity for each fiscal year
period:
|
|
|
|
|
Total
|
|
Remaining
|
|
|
After
|
Fair
|
(Thousands)
|
2007
|
2008
|
2009
- 2011
|
2011
|
Value
|
Price
based on NYMEX
|
$
|
49,038
|
$
|
1,705
|
$
|
4,640
|
$
|
—
|
$
|
55,383
|
Price
based on over-the-counter
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Published
quotations
|
|
8,217
|
|
4,688
|
|
52
|
|
—
|
|
12,957
|
Total
|
$
|
57,255
|
$
|
6,393
|
$
|
4,692
|
$
|
—
|
$
|
68,340
|
The
following is a summary of commodity derivatives by type as of December 31,
2006:
|
|
|
Amounts
Included
|
|
Volume
|
Price per
|
in Derivatives
|
|
(Bcf)
|
Mmbtu
|
(Thousands)
|
NJNG
|
|
|
|
Futures
|
(0.4)
|
|
$6.05
- $9.39
|
$
|
(17,731
|
)
|
Options
|
(10.1)
|
|
$6.50
- $12.00
|
|
764
|
|
Swaps
|
5.0
|
|
$3.99
- $8.74
|
|
(71,135
|
)
|
NJRES
|
|
|
|
|
|
|
Futures
|
(6.0)
|
|
$6.13
- $12.04
|
|
10,354
|
|
Options
|
(2.0)
|
|
$5.25
- $12.00
|
|
254
|
|
Swaps
|
(77.1)
|
|
$4.70
- $11.52
|
|
114,445
|
|
NJRE
|
|
|
|
|
|
|
Swaps
|
9.8
|
|
$3.07
- $4.41
|
|
31,389
|
|
Total
|
|
|
|
$
|
68,340
|
|
The
Company uses a value-at-risk (VaR) model to assess the market risk of its net
futures, swaps and options positions. The VaR at December 31, 2006, using the
variance-covariance method with a 95 percent confidence level and a 1-day
holding period, was $4.3 million. The VaR with a 99 percent confidence level
and
a 10-day holding period was $19.1 million. The calculated VaR represents an
estimate of the potential change in the value of the net positions. These
estimates may not be indicative of actual results because actual market
fluctuations may differ from forecasted fluctuations.
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors
and
manages the credit risk of its wholesale marketing operations through credit
policies and procedures that management believes reduce overall credit risk.
These policies include a review and evaluation of prospective counterparties’
financial statements and/or credit ratings, daily monitoring of counterparties’
credit limits, daily communication with traders regarding credit status and
the
use of credit mitigation measures, such as minimum margin requirements,
collateral requirements and netting agreements. Examples of collateral include
letters of credit and cash received for either prepayment or margin
deposit.
The
Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit
risk management policies and procedures. The RMC is a group of senior officers
from NJR-affiliated companies that meets twice a month and, among other things,
evaluates the effectiveness of existing credit policies and procedures, reviews
material transactions and discusses emerging issues.
Following
is a summary of gross and net credit exposures, grouped by investment and
noninvestment grade counterparties, as of December 31, 2006. Gross credit
exposure is defined as the unrealized fair value of derivative and energy
trading contracts plus any outstanding receivable for the value of natural
gas
delivered for which payment has not yet been received. Net credit exposure
is
defined as gross credit exposure reduced by collateral received from
counterparties and/or payables, where netting agreements exist. The amounts
presented below exclude accounts receivable for retail natural gas sales and
services.
Unregulated
counterparty credit exposure as of December 31, 2006, is as
follows:
(Thousands)
|
Gross
Credit Exposure
|
Net
Credit
Exposure
|
Investment
grade
|
$
|
302,418
|
$
|
258,571
|
Noninvestment
grade
|
|
1,304
|
|
765
|
Internally
rated investment grade
|
|
22,100
|
|
15,011
|
Internally
rated noninvestment grade
|
|
10,937
|
|
—
|
Total
|
$
|
336,759
|
$
|
274,347
|
NJNG’s
counterparty credit exposure as of December 31, 2006, is as
follows:
(Thousands)
|
Gross
Credit Exposure
|
Net
Credit
Exposure
|
Investment
grade
|
$
|
30,825
|
$
|
22,660
|
Noninvestment
grade
|
|
194
|
|
—
|
Internally
rated investment grade
|
|
369
|
|
327
|
Internally
rated noninvestment grade
|
|
604
|
|
—
|
Total
|
$
|
31,992
|
$
|
22,987
|
Due
to
the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided
by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then
the
Company could sustain a loss. This loss would comprise the loss on natural
gas
delivered but not paid for and/or the cost of replacing natural gas not
delivered at a price higher than the price in the original contract. Any such
loss could have a material impact on the Company’s financial condition, results
of operations or cash flows.
Interest
Rate Risk-Long-Term Debt
At
December 31, 2006, the Company (excluding NJNG) had no variable-rate long-term
debt.
At
December 31, 2006, NJNG had total variable-rate, tax-exempt long-term debt
of
$97 million, which is hedged by interest rate caps expiring in July 2009
that limit NJNG’s variable-rate debt exposure from the tax-exempt EDA bonds at
4.5 percent.
ITEM
4. CONTROLS
AND PROCEDURES
As
of the
end of the period reported on in this report, NJR has undertaken an evaluation
under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
design and operation of its disclosure controls and procedures, pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that NJR’s disclosure controls and procedures were effective with regard to the
recording, processing, summarizing and reporting, within the time periods
specified in the SEC’s rules and forms, of information required to be
disclosed by NJR in the reports that it files or submits under the
Exchange Act.
ITEM
1. LEGAL
PROCEEDINGS
Information
required by this Item is set forth in Part I, Item 1, Note 11. Commitment and
Contingent Liabilities - Legal Proceedings and is incorporated
herein.
There
have been no material changes to the factors disclosed in ITEM 1A “RISK FACTORS”
in the 2006 Annual Report on Form 10-K.
ITEM
2. UNREGISTERED
SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
In
1996,
the NJR Board of Directors authorized the repurchase of up to 1 million of
the
Company’s common shares. Since 1996, the repurchase plan has been expanded
several times, most recently in January, 2006, to permit the repurchase of
up to
3.5 million shares. As of December 31, 2006, the Company has repurchased 3.15
million shares of its common stock.
The
following table sets forth NJR’s repurchase activity for the three months ended
December 31, 2006:
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid per Share (or Unit)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units)
That May
Yet Be Purchased Under the Plans
or
Programs
|
10/1/06
- 10/31/06
|
-
|
-
|
-
|
348,147
|
11/1/06
- 11/30/06
|
-
|
-
|
-
|
348,147
|
12/1/06
- 12/31/06
|
-
|
-
|
-
|
348,147
|
Total
|
-
|
-
|
-
|
348,147
|
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)
An
annual meeting of a shareholders was held on January 24, 2007
(b) The
shareholders voted upon the following matters at the January 24, 2007
annual shareholders meeting:
(i) The
election of five directors to the Board of Directors, four were elected for
terms expiring in 2010 and one was elected for a term expiring in 2008. The
results of the voting were follows:
Directors
until 2010
|
For
|
Withheld
|
Lawrence
R. Codey
|
23,055,983
|
289,874
|
Laurence
M. Downes
|
22,705,713
|
640,144
|
Alfred
C. Koeppe
|
22,902,957
|
442,900
|
William
H. Turner
|
22,778,461
|
567,396
|
|
|
|
|
|
|
Directors
until 2008
|
For
|
Withheld
|
Jane
M. Kenny
|
23,014,338
|
331,519
|
|
|
|
In
addition to the directors elected at the annual meeting, the terms of the
following members of NJR’s Board of Directors continued after the meeting: Nina
Aversano, David A. Trice, M. William Howard, Jr., J. Terry Strange, Gary W.
Wolf
and George R. Zoffinger.
(ii)
Approval
of the 2007 Stock Award and Incentive Plan. The results of the voting were
as
follows:
For
|
Against
|
Abstain
|
No
Vote
|
15,325,349
|
2,652,380
|
333,840
|
5,034,289
|
(iii)
Approval
of the action of the Audit Committee in retaining Deloitte & Touche LLP as
our independent registered public accounting firm. The results of the voting
were as follows:
For
|
Against
|
Abstain
|
23,112,032
|
129,778
|
104,046
|
10-1 Settlement
Agreement and Mutual Release dated January 24, 2007 by and between New Jersey
Natural Gas Company and Lumbermens Mutual Casualty Company and its subsidiaries
and affiliates, including but not limited to, American Motorists Insurance
Company, American Manufacturers Mutual Company and Kemper Indemnity Insurance
Company.
31-1 Certification
of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
Act
31-2 Certification
of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
Act
32-1 Certification
of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley
Act*
32-2
Certification
of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley
Act*
*This
certificate accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes
of
Section 18 or any other provision of the Securities Exchange Act of 1934, as
amended.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW
JERSEY RESOURCES
Date:
February 7, 2007
/s/Glenn
C. Lockwood
Glenn
C.
Lockwood
Senior
Vice President
and
Chief
Financial Officer