SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2008
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM
TO
Commission
file number 1-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
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22-2376465
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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1415
Wyckoff Road, Wall, New Jersey 07719
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732-938-1480
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(Address
of principal
executive
offices)
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(Registrant’s
telephone number,
including
area code)
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Securities
registered pursuant to Section 12 (b) of the
Act:
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Common
Stock - $2.50 Par Value
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New
York Stock Exchange
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(Title
of each class)
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(Name
of each exchange on which registered)
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Securities
registered pursuant to Section 12 (g) of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes: x No: o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes: o No: x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: x No: o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant’s knowledge, in
definitive proxy information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer: x Accelerated
filer: o Non-accelerated
filer: o Smaller
reporting company: o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes: o No: x
The
aggregate market value of the Registrant’s Common Stock held by nonaffiliates
was $1,287,148,097 based on the closing price of $31.05 per share on
March 31, 2008.
The
number of shares outstanding of $2.50 par value Common Stock as of November 20,
2008 was 42,120,169.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Shareowners (Proxy Statement) to be held January 21, 2009, to be filed on or
about December 12, 2008, are incorporated by reference into Part I and
Part III of this report.
New
Jersey Resources Corporation
Page
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1
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PART I
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2
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18
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19
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19
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PART II
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22
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23
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25
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55
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58
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59
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101
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101
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102
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PART III*
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103
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103
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103
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103
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103
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PART IV
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104
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105
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108
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Exhibit Index
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109
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* Portions of Item 10
and Items 11-14 are Incorporated by Reference from the Proxy Statement
New
Jersey Resources Corporation
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
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Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Item 1.—Business, under
the captions “Natural Gas Distribution—General;—Throughput;—Seasonality of Gas
Revenues;—Gas Supply;—Regulation and Rates;—Competition”; “Energy Services”;
“Retail and Other”; “Environment,” and Item 3.—“Legal Proceedings,” and in Part
II including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7, and “Quantitative and Qualitative Disclosures
About Market Risk” in Item 7A are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can also be identified by the use of forward-looking terminology such
as “may,” “intend,” “expect,” “believe” or “continue” or comparable terminology
and are made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market risk
and other matters for fiscal 2008 and thereafter include many factors that are
beyond the Company’s ability to control or estimate precisely, such as estimates
of future market conditions, the behavior of other market participants and
changes in the debt and equity capital markets. The factors that could cause
actual results to differ materially from NJR’s expectations include, but are not
limited to, those discussed in Risk Factors in Item 1A, as well as the
following:
·
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weather
and economic conditions;
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·
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demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
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·
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the
rate of NJNG customer growth;
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·
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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;
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·
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changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the
Company;
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·
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continued
volatility or seizure of the credit markets that would result in the
decreased availability and access to credit at NJR to fund and support
physical gas inventory purchases at NJRES, as well as negatively affect
access to the commercial paper market and other short-term financing
markets at NJNG to allow it to fund its commodity purchases and meet its
short-term obligations as they come
due;
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·
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the
impact to the asset values and funding obligations of NJR’s pension and
postemployment benefit plans as a result of a continuing downturn in the
financial markets;
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·
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increases
in borrowing costs associated with variable-rate
debt;
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·
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commercial
and wholesale credit risks, including creditworthiness of customers and
counterparties;
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·
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the
ability to obtain governmental approvals and/or financing for the
construction, development and operation of certain non-regulated energy
investments;
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·
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risks
associated with the management of the Company’s joint ventures and
partnerships;
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·
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the
impact of governmental regulation (including the regulation of
rates);
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·
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fluctuations
in energy-related commodity prices;
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·
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conversion
activity and other marketing
efforts;
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·
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actual
energy usage of NJNG’s customers;
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·
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the
pace of deregulation of retail gas
markets;
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access
to adequate supplies of natural
gas;
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the
regulatory and pricing policies of federal and state regulatory
agencies;
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·
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the
ultimate outcome of pending regulatory
proceedings;
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·
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changes
due to legislation at the federal and state
level;
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·
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the
availability of an adequate number of appropriate credit worthy
counterparties in the wholesale energy trading
market;
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sufficient
liquidity in the wholesale energy trading market and continued access to
the capital markets;
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the
disallowance of recovery of environmental-related expenditures and other
regulatory changes;
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environmental-related
and other litigation and other
uncertainties;
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·
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the
effects and impacts of inflation on NJR and its subsidiaries’
operations;
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·
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change
in accounting pronouncements issued by the appropriate standard setting
bodies; and
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·
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terrorist
attacks or threatened attacks on energy facilities or unrelated energy
companies.
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While
the Company periodically reassesses material trends and uncertainties affecting
the Company’s results of operations and financial condition in connection with
its preparation of management’s discussion and analysis of results of operations
and financial condition contained in its Quarterly and Annual Reports, the
Company does not, by including this statement, assume any obligation to review
or revise any particular forward-looking statement referenced herein in light of
future events.
New
Jersey Resources Corporation
Part
I
New
Jersey Resources Corporation (NJR or the Company) is a New Jersey corporation
formed in 1981 pursuant to a corporate reorganization. The Company is an energy
services holding company providing retail and wholesale energy services to
customers in states from the Gulf Coast to the New England regions, including
the Mid-Continent region, and Canada. The Company is an exempt holding company
under section 1263 of the Energy Policy Act of 2005. NJR’s subsidiaries and
businesses include:
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New
Jersey Natural Gas (NJNG), a local natural gas distribution company that
provides regulated retail natural gas service to approximately 484,000
residential and commercial customers in central and northern New Jersey
and participates in the off-system sales and capacity release markets.
NJNG is regulated by the New Jersey Board of Public Utilities (BPU) and
comprises the Company’s Natural Gas Distribution
segment.
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NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary.
It maintains and transacts around a portfolio of physical assets
consisting of natural gas storage and transportation contracts. Also,
NJRES provides wholesale energy management services to other energy
companies. NJRES comprises the Company’s Energy Services
segment.
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NJR
also has retail and other operations (Retail and Other) , which includes
the following companies:
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Ÿ
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NJR
Energy Investments (NJREI), an unregulated affiliate that consolidates the
Company’s unregulated energy-related investments . NJREI includes the
following wholly owned subsidiaries:
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¡
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NJR
Energy Holdings, including NJR Energy, which invests primarily in
energy-related ventures through its subsidiary, NJNR Pipeline (Pipeline),
which holds the Company’s 5.53 percent interest in Iroquois Gas and
Transmission System, LP (Iroquois); and including NJR Storage Holdings
Company, which owns NJR Steckman Ridge Storage Company, which holds the
Company’s 50 percent combined interest in Steckman Ridge GP, LLC and
Steckman Ridge, LP (collectively, Steckman Ridge), a natural gas storage
facility that is being developed with a partner in western
Pennsylvania.
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¡
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NJR
Investment, a company that makes and holds certain energy-related
investments, primarily through equity instruments of public
companies.
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Ÿ
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NJR
Retail Holdings (Retail Holdings), an unregulated affiliate that
consolidates the Company’s unregulated retail operations. Retail Holdings
consists of the following wholly owned subsidiaries:
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¡
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NJR
Home Services (NJRHS), a company that provides heating, ventilation and
cooling (HVAC) service repair and contract services.
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¡
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Commercial
Realty & Resources (CR&R), a company that holds and develops
commercial real estate.
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Ÿ
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NJR
Service (NJR Service), an unregulated company that provides shared
administrative services, including corporate communications, financial and
planning, internal audit, legal, human resources and information
technology for NJR and all
subsidiaries.
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The
Company operates within two reportable business segments: Natural Gas
Distribution and Energy Services.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations and the Energy Services segment
consists of unregulated wholesale energy operations.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
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NJNG
provides natural gas service to approximately 484,000 customers. Its service
territory encompasses 1,436 square miles, covering 104 municipalities with an
estimated population of 1.4 million people.
NJNG’s
service territory is in New Jersey’s Monmouth and Ocean counties and parts of
Morris and Middlesex counties. It is primarily suburban, with a wide range of
cultural and recreational activities and highlighted by approximately 100 miles
of New Jersey coastline. It is in close proximity to New York City, Philadelphia
and the metropolitan areas of northern New Jersey and is accessible through a
network of major roadways and mass transportation. NJNG added 7,175 and 8,421
new customers and added natural gas heat and other services to another 728 and
770 existing customers in fiscal 2008 and 2007, respectively. NJNG’s current
annual growth rate of approximately 1.5 percent is expected to continue with
projected additions in the range of approximately 14,000 to 16,000 new customers
over the next two years. This anticipated customer growth represents
approximately $4.0 to $4.2 million in expected new annual utility gross margin
as calculated under NJNG’s Conservation Incentive Program (CIP)
tariff.
In
assessing the potential for future growth in its service area, NJNG uses
information derived from county and municipal planning boards that describes
housing developments in various stages of approval. Furthermore, builders in
NJNG’s service area are surveyed to determine their development plans for future
time periods. NJNG has also periodically engaged outside consultants to assist
in its customer growth projections. In addition to customer growth through new
construction, NJNG’s business strategy includes aggressively pursuing
conversions from other fuels, such as electricity and oil. It is estimated that,
during fiscal 2009, approximately 50 percent of NJNG’s projected customer growth
will consist of conversions. NJNG will also continue to pursue off-system sales
and nonpeak sales as part of its overall growth strategy.
For the
fiscal year ended September 30, 2008, operating revenues and throughput by
customer class were as follows:
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Operating Revenues
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Throughput
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(Thousands)
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(Bcf)
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Residential
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$594,147
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55
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%
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40.8
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41
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%
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Commercial
and other
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149,177
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14
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9.0
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9
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Firm
transportation
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28,634
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3
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8.9
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9
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Total
residential and commercial
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771,958
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72
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58.7
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59
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Interruptible
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11,840
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1
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6.4
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6
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Total
system
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783,798
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73
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65.1
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65
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Incentive
programs
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295,026
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27
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34.5
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35
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Total
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$1,078,824
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100
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%
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99.6
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100
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%
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In fiscal
2008, no single customer represented more than 10 percent of total NJNG
operating revenue.
As a
result of the heat-sensitive nature of NJNG’s residential customer base, therm
sales are significantly affected by weather conditions. Specifically, customer
demand substantially increases during the winter months when natural gas is used
for heating purposes. Weather conditions directly influence the volume of
natural gas delivered. The relative measurement of the impact of weather is in
degree-days. Degree-day data is used to estimate amounts of energy required to
maintain comfortable indoor temperature levels based on each day’s average
temperature. A degree-day is the measure of the variation in the weather based
on the extent to which the average daily temperature falls below 65 degrees
Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is counted as
one heating degree-day. Normal heating degree-days are based on a 20-year
average, calculated based upon three reference areas representative of NJNG’s
service territory.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
For
reporting periods through September 30, 2006, the impact of weather on the level
and timing of NJNG’s revenues, gross margin and cash flows had been mitigated by
a weather-normalization clause (WNC), which provided for a revenue adjustment if
the weather varied by more than one-half of 1 percent from normal. However, the
WNC did not capture declines in customer usage related to customer conservation
measures.
Effective
October 1, 2006, the New Jersey Board of Public Utilities (BPU) authorized a
three-year CIP pilot program, which decoupled the link between customer usage
and NJNG’s utility gross margin, allowing NJNG to promote energy conservation
measures. During the term of the pilot, the WNC was suspended and replaced with
the CIP tracking mechanism, which addresses utility gross margin variations
related to both weather and customer usage. Recovery of such utility gross
margin is subject to additional conditions including an earnings test and an
evaluation of Basic Gas Supply Service-related savings achieved. It is
anticipated that NJNG will file a petition in the spring of 2009 to extend its
CIP or implement a similar mechanism on a permanent basis, seeking to be
effective October 1, 2009.
As a
result of increases in NJNG’s operation, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for delivery
service. This request is consistent with NJNG’s objectives of providing safe and
reliable service to its customers and earning a market-based return on its
regulated investments. On October 3, 2008, the BPU approved an increase in
NJNG’s base rates of $32.5 million as well as certain changes in the design of
its rates (the Board Order).
For
additional information regarding the CIP and the Board Order, see Management’s Discussion and
Analysis—Natural Gas Distribution Operations and Note2. Regulation in the
accompanying Consolidated Financial Statements.
Firm Natural Gas
Supplies
NJNG’s
gas supply portfolio consists of long-term (over seven months), winter-term (for
the five winter months of November through March) and short-term contracts. In
fiscal 2008, NJNG purchased gas from 90 suppliers under contracts ranging from
one day to four years. In fiscal 2008, NJNG purchased approximately 12.9 percent
of its natural gas from Southwestern Energy Services Company. No other supplier
provided more than 10 percent of NJNG’s natural gas supplies. NJNG believes the
loss of any one or all of these suppliers would not have a material adverse
impact on its results of operations, financial position or cash flows. NJNG
believes that its supply strategy should adequately meet its expected firm load
over the next several years.
Firm Transportation and
Storage Capacity
In order
to take delivery of firm natural gas supplies, which ensures the ability to
reliably service its customers, NJNG maintains agreements for firm
transportation and storage capacity with several interstate pipeline companies.
NJNG receives natural gas at eight city gate stations located in Middlesex,
Morris and Passaic counties in New Jersey.
The
pipeline companies that provide firm transportation service to NJNG’s city gate
stations, the maximum daily deliverability of that capacity in dekatherms (dths)
and the contract expiration dates are as follows:
Pipeline
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Maximum daily
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Expiration
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deliverability
(dths)
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Texas
Eastern Transmission, L.P.
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470,738
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Various
dates between 2014 and 2023
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Tennessee
Gas Pipeline Co.
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35,894
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Various
dates between 2011 and 2013
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Transcontinental
Gas Pipe Line Corp.
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22,531
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Various
dates between 2009 and 2014
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Columbia
Gas Transmission Corp.
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10,000
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2009
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539,163
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New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
The
pipeline companies that provide firm contract transportation service for NJNG
and supply the above pipelines are ANR Pipeline Company, Iroquois Gas
Transmission System, Tennessee Gas Pipeline, Dominion Transmission Corporation
and Columbia Gulf Transmission Company.
In
addition, NJNG has storage and related transportation contracts that provide
additional maximum daily deliverability to NJNG’s city gate stations of 102,941
dths from storage fields in its Northeast market area. The storage suppliers,
the maximum daily deliverability of that storage capacity and the contract
expiration dates are as follows:
Pipeline
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Maximum daily
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Expiration
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deliverability
(dths)
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Texas
Eastern Transmission, L.P.
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94,557
|
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2014
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Transcontinental
Gas Pipe Line Corp.
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8,384
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2010
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102,941
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NJNG also
has upstream storage contracts, maximum daily deliverability and contract
expiration dates as follows:
Company
|
Maximum daily
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Expiration
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deliverability
(dths)
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ANR
Pipeline Company
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39,811
|
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2010
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Dominion
Transmission Corporation
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103,714
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Various
dates between 2011 and 2012
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Central
NY Oil & Gas (Stagecoach)
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47,065
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2011
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190,590
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NJNG
utilizes its transportation contracts to transport gas from the ANR, Dominion
and Stagecoach storage fields to NJNG’s city gates.
Peaking
Supply
To manage
its winter peak day demand NJNG maintains two liquefied natural gas (LNG)
facilities with a combined deliverability of approximately 170,000 dths per day,
which represents approximately 21 percent of its estimated peak day sendout. See
Item 2. Properties–NJNG
for additional information regarding the LNG storage facilities.
Basic Gas Supply
Service
Wholesale
natural gas prices are, by their very nature, volatile. NJNG has mitigated the
impact of volatile price changes on customers through the use of financial
derivative instruments, which are part of its financial risk management program,
its storage incentive program and its Basic Gas Supply Service (BGSS) clause.
BGSS is a BPU-approved clause designed to allow for the recovery of natural gas
commodity costs. The clause also requires all New Jersey natural gas utilities
to make an annual filing by each June 1 for review of BGSS rates and to request
a potential rate change to be effective the following October 1. The BGSS also
is designed to allow each natural gas utility to provisionally increase
residential and small commercial customer BGSS rates up to 5 percent on December
1 and February 1 on a self-implementing basis, after proper notice and BPU
action on the June filing. Such increases are subject to subsequent BPU review
and final approval. Decreases in the BGSS rate can be implemented upon five
days’ notice to the BPU.
In March
2008, NJNG, the BPU Staff and the New Jersey Department of the Public Advocate,
Division of Rate Counsel (Rate Counsel) entered into a stipulation to resolve
certain matters related to NJNG’s fiscal year 2007 BGSS filing. This stipulation
was approved by the BPU on May 9, 2008, and resulted in NJNG recording a
non-recurring settlement charge to its BGSS costs of $300,000.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
On May
30, 2008, NJNG filed for an increase to the periodic BGSS factor to be effective
October 1, 2008 that would increase an average residential heating customer’s
bill by approximately 18.0 percent due to an increase in the price of wholesale
natural gas. Subsequent to the filing, wholesale natural gas prices moderated
and on September 22, 2008, NJNG, the Staff of the BPU, and Rate Counsel signed
an agreement for an increase to the periodic BGSS factor that would increase an
average residential heating customer’s bill by approximately 8.9 percent. On
October 3, 2008, the BPU approved the BGSS increase on a provisional basis,
effective the date of the Board Order.
These
rate changes, as well as other regulatory actions, are discussed further in
Note 2. Regulation in
the accompanying Consolidated Financial Statements.
Future Natural Gas
Supplies
NJNG
expects to meet the natural gas requirements for existing and projected firm
customers into the foreseeable future. If NJNG’s long-term natural gas
requirements change, NJNG would renegotiate and restructure its contract
portfolio components to better match the changing needs of its
customers.
State
NJNG is
subject to the jurisdiction of the BPU with respect to a wide range of matters
such as rates, the issuance of securities, the adequacy of service, the manner
of keeping its accounts and records, the sufficiency of natural gas supply,
pipeline safety, compliance with affiliate standards and the sale or encumbrance
of its properties.
See Note 2. Regulation in the
accompanying Consolidated Financial Statements for additional information
regarding NJNG’s rate proceedings.
Federal
The
Federal Energy Regulatory Commission (FERC) regulates rates charged by
interstate pipeline companies for the transportation and storage of natural gas.
This affects NJNG’s agreements for the purchase of such services with several
interstate pipeline companies. Any costs associated with these services are
recoverable through the BGSS.
Although
its franchises are nonexclusive, NJNG is not currently subject to competition
from other natural gas distribution utilities with regard to the transportation
of natural gas in its service territory. Due to significant distances between
NJNG’s current large industrial customers and the nearest interstate natural gas
pipelines, as well as the availability of its transportation tariff, NJNG
currently does not believe it has significant exposure to the risk that its
distribution system will be bypassed. Competition does exist from suppliers of
oil, coal, electricity and propane. At the present time, however, natural gas is
used in favor of alternate fuels in over 95 percent of new construction due to
its efficiency and reliability. Natural gas prices are a function of market
supply and demand, although NJNG believes natural gas will remain competitive
with alternate fuels, no assurance can be given in this regard.
The BPU,
within the framework of the Electric Discount and Energy Competition Act
(EDECA), approved a stipulation among various parties to fully open NJNG’s
residential markets to competition, restructure its rates to segregate its BGSS
and delivery (i.e., transportation) prices and expand an incentive for
residential and small commercial customers to switch to transportation service.
In the absence of any third party supplier, BGSS must be provided by the state’s
natural gas utilities. On September 30, 2008, NJNG had 11,542 residential and
5,288 commercial
and industrial customers utilizing the transportation service. Based on its
current and projected level of transportation customers, NJNG expects to use its
existing firm transportation and storage capacity to fully meet its firm sales
contract obligations.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
NJRES
provides unregulated wholesale energy services, including base load natural gas,
peaking and balancing services, utilizing physical assets it controls through
natural gas pipeline transportation and storage contracts. They also provide
asset management services to customers in states from the Gulf Coast and
Mid-continent regions to the Appalachian and Northeast regions of the United
States and Canada.
NJRES
views “financial margin” as its key financial measurement metric. NJRES’
financial margin, which is a non-GAAP financial measure, represents revenues
earned from the sale of natural gas less costs of natural gas sold,
transportation and storage. Financial margin excludes any accounting impact from
the change in fair value of derivative instruments designed to hedge the
economic impact of transactions that have not been settled. The changes in
fair value of these derivative instruments represent unrealized gains and
losses, and realized gains and losses associated with financial instruments
economically hedging natural gas in storage and not yet sold.
NJRES
incorporates the following elements to provide for growth, while focusing on
maintaining a low-risk operating and counterparty credit profile:
Ÿ
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Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
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Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers. This is accomplished by identifying the lowest cost
alternative with the natural gas supply, transportation availability and
markets which NJRES is able to access through its business footprint and
contractual asset portfolio;
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Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate financial margin; and
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Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
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NJRES has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales to these
customers have allowed NJRES to leverage its transportation and storage capacity
and manage sales to these customers in an aggregate fashion. This strategy
allows NJRES to extract more value from its portfolio of natural gas storage and
pipeline transportation capacity through the arbitrage of pricing differences as
a result of locational differences or over different periods of
time.
NJRES
also focuses on creating value from underutilized natural gas assets, which are
typically amassed through contractual rights to natural gas transportation and
storage capacity. NJRES has developed a portfolio of natural gas storage and
transportation capacity in the Northeast, Gulf Coast, Mid-continent and
Appalachian regions of the United States and eastern Canada. These assets become
more valuable when prices change between these areas and across time periods. In
order to find the most profitable alternative to serve its various commitments,
NJRES seeks to optimize this process on a daily basis as market conditions
change by evaluating all the natural gas supplies, transportation and storage
opportunities to which it has access. This enables NJRES to capture geographic
pricing differences across these various regions as delivered natural gas prices
change as a result of market conditions. NJRES focuses on earning a financial
margin on a single original transaction and then capitalizes on changes in
prices across the regions or across time periods as the basis to further improve
the initial result.
In a
similar manner, NJRES participates in natural gas storage transactions where it
seeks to identify pricing differences that occur over time, as prices for future
delivery periods at many different delivery points are readily available. For
example, NJRES generates financial margin by locking in the differential between
purchasing natural gas at a low current or future price and, in a related
transaction, selling that natural gas at a higher future price, all within the
constraints of its credit and contracts policies. By using transportation and
storage services, NJRES is able to generate financial margin through pricing
differences that occur over the duration of time the assets are
held.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions.
NJRES
also participates in park-and-loan transactions with pipeline counterparties,
where NJRES will borrow natural gas when there is an opportunity to capture
arbitrage value. In these cases, NJRES evaluates the economics of the
transaction to determine if it can capture pricing differentials in the
marketplace in order to be able to generate financial margin. In evaluating
these transactions NJRES will compare the fixed fee it will pay and the
resulting spread it can generate when considering the amount it will receive to
sell the borrowed gas to another counterparty in relation to the cost it will
incur to purchase the natural gas at a later date to return to the pipeline.
When the transaction allows NJRES to generate a financial margin, NJRES will fix
the financial margin by economically hedging the transaction with natural gas
futures.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
In fiscal
2008, NJRES had one customer, Hess Corporation, who represented more than 10
percent of its total revenue. Management believes that the loss of this customer
would not have a material effect on its financial position, results of
operations or cash flows as an adequate number of alternative counterparties
exist.
OTHER BUSINESS OPERATIONS
Retail
and Other operations consist primarily of the following unregulated
affiliates:
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NJRHS,
which provides service, sales and installation of
appliances;
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NJR
Energy, an investor in energy-related ventures through its subsidiary,
Pipeline, which consists primarily of its 5.53 percent equity investment
in Iroquois, which is a 412-mile natural gas pipeline from the New
York-Canadian border to Long Island, New York; NJR Investment, which makes
certain energy-related equity investments;
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NJR
Steckman Ridge Storage Company, which holds the Company’s 50 percent
equity investment in Steckman Ridge. Steckman Ridge is a partnership,
jointly owned and controlled by subsidiaries of the Company and
subsidiaries of Spectra Energy Corporation, that will build, own and
operate an anticipated 17.7 Bcf natural gas storage facility in western
Pennsylvania.
On
June 5, 2008, the Federal Energy Regulatory Commission (FERC) issued
Steckman Ridge a certificate of public convenience and necessity
authorizing the ownership, construction and operation of its natural gas
storage facility and associated facilities. NJR anticipates that Steckman
Ridge will be placed in service during the summer of 2009. As of September
30, 2008, NJR has invested $78.7 million in Steckman Ridge. This amount
excludes capitalized interest and other direct costs. Total project costs
related to the development of the storage facility are currently estimated
at approximately $265 million, of which NJR is obligated to fund 50
percent, or approximately $132.5 million. NJR anticipates that Steckman
Ridge will seek non-recourse financing upon completion of the construction
and development of its facilities, thereby potentially reducing the final
expected recourse obligation of NJR. There can be no assurances that such
non-recourse project financing will be secured or available for Steckman
Ridge.
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New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
Ÿ
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CR&R,
which holds and develops commercial real estate. In November 2006,
CR&R sold approximately 15 acres of land for approximately $1.8
million, which resulted in a pre-tax gain on sale of $300,000. As the sale
included a lease-back provision with NJRHS of certain portions of
buildings to be constructed on the acreage, CR&R is recognizing the
pre-tax gain over the 10-year term of the lease, which began in fiscal
2008.
As
of September 30, 2008, CR&R’s real estate portfolio consisted of 31
acres of undeveloped land in Monmouth County, 52 acres of undeveloped land
in Atlantic County and a 56,400-square-foot office building on 5 acres of
land in Monmouth County with a total net book value of $17.5
million.
The
52 acres of land in Atlantic County with a net book value of $2.1 million
is under contract for sale and will be sold as undeveloped land after all
approvals have been granted. Of the 31 acres of undeveloped land in
Monmouth County, 5 acres with a net book value of $1.6 million are also
under contract for sale and such sale is estimated to close by September
2009. The remaining 26 acres of undeveloped land in Monmouth County with a
net book value of $4.5 million will be developed based on market
conditions. The specific time frame for development is currently unknown;
and
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NJR
Service, which provides shared administrative services to the Company and
all its subsidiaries.
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The
Company and its subsidiaries are subject to legislation and regulation by
federal, state and local authorities with respect to environmental matters. The
Company believes that it is in compliance in all material respects with all
applicable environmental laws and regulations.
NJNG is
responsible for the environmental remediation of three manufactured gas plant
(MGP) sites, which contain contaminated residues from former gas manufacturing
operations that ceased at these sites by the mid-1950s and, in some cases, had
been discontinued many years earlier. In September 2008, NJNG updated an
environmental review of the MGP sites, including a review of potential liability
related to the investigation and remedial action on these sites. Based on this
review, NJNG estimated that the total future expenditures to remediate and
monitor the three MGP sites for which it is responsible will range from $120.7
million to $177.2 million.
NJNG’s
estimate of these liabilities is based upon known facts, existing technology and
enacted laws and regulations in place when the review was completed. Where
available information is sufficient to estimate the amount of the liability, it
is NJNG’s policy to accrue the full amount of such estimate. Where the
information is sufficient only to establish a range of possible liability, and
no point within the range is more likely than the other, it is NJNG’s policy to
accrue the lower end of the range. As a result, NJNG has recorded an MGP
remediation liability and a corresponding Regulatory asset of $120.7 million on
the Consolidated Balance Sheet; however, actual costs may differ from these
estimates. NJNG will continue to seek recovery of these costs through its
remediation rider. See Item 3.
Legal Proceedings and Note 12. Commitments and Contingent
Liabilities in the accompanying Consolidated Financial Statements for
information with respect to environmental matters and material expenditures for
the remediation of the MGP sites.
CR&R
is the owner of certain undeveloped land in Monmouth and Atlantic counties, New
Jersey, with a net book value at September 30, 2008, of $8.2 million. These
lands are regulated by the provisions of the Freshwater Wetlands Protection Act
(Wetlands Act), which restricts building in areas defined as “freshwater
wetlands” and their transition areas. Based upon a third-party environmental
engineer’s delineation of the wetlands and transition areas in accordance with
the provisions of the Wetlands Act, CR&R will file for a Letter of
Interpretation from the New Jersey Department of Environmental Protection
(NJDEP) as parcels of land are selected for development. If the NJDEP reduces
the amount of developable yield from CR&R’s current estimates, a write-down
of the carrying value of the undeveloped land may be required.
Taking
into consideration the environmental engineer’s revised estimated developable
yield for undeveloped acreage, the Company does not believe that a write-down of
the carrying value of the Monmouth and Atlantic counties land was necessary as
of September 30, 2008.
New
Jersey Resources Corporation
Part
I
ITEM
1. BUSINESS
(Continued)
|
Although
the Company cannot estimate with certainty future costs of environmental
compliance, which, among other factors, are subject to changes in technology and
governmental regulations, the Company does not presently anticipate any
additional significant future expenditure for compliance with existing
environmental laws and regulations, other than for the remediation of the MGP
sites discussed in Note 12.
Commitments and Contingent Liabilities in the accompanying Consolidated
Financial Statements, which would have a material effect upon the capital
expenditures, results of operations or competitive position of the Company or
its subsidiaries.
As of
September 30, 2008, the Company and its subsidiaries employed 854 employees
compared with 808 employees in fiscal year 2007. Of the total number of
employees, NJNG and NJRHS had 399 and 388 and 94 and 90 union employees in 2008
and 2007, respectively. NJNG and NJHRS have collective bargaining agreements
with local 1820 of the International Brotherhood of Electrical Workers (IBEW),
AFL-CIO expiring in December 2011 and the April 2010 respectively. The labor
agreements cover wage increases and other benefits during the term of the
agreements. The Company considers its relationship with employees, including
those covered by collective bargaining agreements, to be good.
AVAILABLE
INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS
The
following items are available free of charge on our website at http://njr360.client.shareholder.com/sec.cfm
as soon as reasonably possible after filing or furnishing them with the
Securities and Exchange Commission:
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Annual
reports on Form 10-K;
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Quarterly
reports on Form 10-Q;
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Current
reports on Form 8-K; and
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amendments
to those reports
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In
addition, the following documents are also available free of charge on our
website at http://njr360.client.shareholder.com/governance.cfm
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Corporate
governance guidelines;
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Principal
Executive Officer and Senior Financial Officers Code of
Ethics;
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NJR
Code of Conduct; and
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the
charters of the following Board Committees: Audit, Leadership Development
and Compensation and Nominating/Corporate
Governance.
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A printed
copy of each is available free of charge to any shareholder who requests it by
contacting the Corporate Secretary at New Jersey Resources Corporation, 1415
Wyckoff Road, Wall, NJ 07719.
When
considering any investment in NJR’s securities, investors should consider the
following information, as well as the information contained under the caption
“Forward Looking Statements,” in analyzing the Company’s present and future
business performance. While this list is not exhaustive, NJR’s management also
places no priority or likelihood based on their descriptions or orders of
presentation.
New
Jersey Resources Corporation
Part
I
ITEM 1A. RISK FACTORS
(Continued)
|
Financial
Risks
Inability
of NJR and/or NJNG to access the financial markets and current conditions in the
credit markets could affect management’s ability to execute their respective
business plans.
NJR
relies on access to both short-term and long-term credit as significant sources
of liquidity for capital requirements not satisfied by its cash flow from
operations. Any deterioration in NJR’s financial condition could hamper its
ability to access the credit markets or otherwise obtain debt financing. Because
certain state regulatory approvals may be necessary in order for NJNG to incur
debt, NJNG may not be able to access credit markets on a timely
basis.
External
events could also increase the cost of borrowing or adversely affect the ability
to access the financial markets. Such external events could include the
following:
Ÿ
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economic
weakness in the United States or in the regions where NJR
operates;
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financial
difficulties of unrelated energy companies;
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capital
market conditions generally;
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market
prices for natural gas;
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the
overall health of the natural gas utility industry; and
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fluctuations
in interest rates.
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NJR and
its subsidiaries’ ability to secure short-term financing is subject to
conditions in the credit markets. The recent collapse of the U.S. credit markets
and the continuing flight of banks to preserve capital have led to a slowdown of
lending between banks, which has trickled downstream to other businesses. A
prolonged constriction of credit availability could affect management’s ability
to execute NJR’s, NJRES’ and NJNG’s business plan. An inability to access
capital may limitthe ability to pursue improvements or acquisitions that NJR, or
its subsidiaries, may otherwise rely on for both current operations and future
growth.
In
addition, the credit market crisis has spread to global markets, which has led
to higher London
Interbank Offered Rate (LIBOR) rates, which may increase NJNG’s borrowing
costs under certain variable rate debt, which has interest rates determined
according to a LIBOR-based formula.
The
financial services industry has been most affected by the credit market crisis.
That industry’s exposure to sub-prime mortgages has resulted in the inability of
some financial institutions to continue operations. Although NJRES and NJNG have
strict credit risk management policies and procedures, they execute derivative
transactions with financial institutions as a part of their economic hedging
strategy and could incur losses associated with the inability of a financial
counterparty to meet or perform under its obligations as a result of further
tightening in the credit markets or their ability to access capital or post
collateral.
Credit
rating downgrades could increase financing costs, limit access to the financial
markets and negatively affect NJR and its subsidiaries
The debt
of NJNG is currently rated by the rating agencies Moody’s Investor Services,
Inc. and Standard & Poor’s as investment grade. If such ratings are
downgraded below investment grade, borrowing costs could increase, as will the
costs of maintaining certain contractual relationships and of future financing.
Even if ratings are downgraded without falling below investment grade, NJR and
NJNG can still face increased borrowing costs under their credit
facilities.
Additionally,
lower credit ratings could adversely affect relationships with NJNG’s state
regulators, who may be unwilling to allow NJNG to pass along increased costs to
its natural gas customers.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK
FACTORS (Continued)
|
NJRES’
ability to conduct its business is dependent upon the creditworthiness of
NJR
If the
ability of NJR to issue parental guarantees, or if NJR suffers a reduction in
its credit and borrowing capacity, the business prospects of NJRES, which rely
on the creditworthiness of NJR, would be adversely affected. NJRES would
possibly be required to comply with various margin or other credit enhancement
obligations under its trading and marketing contracts, and it may be unable to
continue to trade or be able to do so only on less favorable terms with certain
counterparties.
Debt
covenants may impact NJR’s financial condition if triggered
NJR and
NJNG’s long-term debt obligations contain financial covenants related to
debt-to-capital ratios and interest coverage ratios. The failure to comply with
any of these covenants could result in an event of default, which, if not cured
or waived, could result in the acceleration of outstanding debt obligations or
the inability to borrow under certain credit agreements. Any such acceleration
would cause a material adverse change in NJR or NJNG’s financial
condition.
Continued
failures in the market for auction rate securities could have a negative impact
on NJNG’s financial condition
NJNG is
obligated with respect to a total of six series of auction rate bonds totaling
approximately $97 million (collectively, auction-rate securities
or “ARS”). All of the ARS are investment grade rated by Moody’s Investor
Services and Standard & Poor’s, respectively. NJNG has recently experienced
several ARS failed auctions, which occur when there are not enough orders to
purchase all the securities being sold at the auction. Prior to the
collapse of the ARS market, Broker-dealers would bid for securities which helped
prevent failed auctions. In 2008, bank liquidity tightened and banks withdrew
from the auction process causing the market to fail. The result of a failed
auction, which does not signify a default by NJNG, is that the ARS continue to
pay interest in accordance with their terms until there is a successful auction
or until such time as other markets for these securities develop. However, upon
an auction failure, the interest rates do not reset at a market rate established
at an auction, but instead reset based upon a formula contained within the ARS,
otherwise known as a “maximum auction rate,” which may be materially higher than
the previous auction rate. The “maximum auction rate” for the ARS is the lesser
of (i) 175 percent of one-month LIBOR or (ii) either 10 percent or 12 percent
per annum, as applicable to such series of the ARS. Should future auctions fail
and interest rates on the ARS continue to be established at the maximum auction
rate, NJNG’s average cost of borrowing could rise above historic levels, which
could materially and adversely affect both NJNG’s and NJR’s cash flows, results
of operations and financial condition. Although NJR is reviewing alternative
methods for refinancing the ARS at NJNG on a continuing basis, NJR cannot assure
that alternative sources of financing can be implemented in a timely
manner.
Current
market returns have had a negative impact on the return on plan assets for NJR’s
pension and post-employment plans, which may require significant
funding
As widely reported, financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in recent months. As a
result of this disruption in the domestic and international equity and
bond markets, each of NJR’s pension and
other post-employment plans had a decrease in asset values of approximately 19
percent during fiscal year 2008. This downward trend has continued during the
first month of fiscal 2009. NJR is unable
to predict the severity or the duration of the current
disruptions in the financial markets and the adverse economic conditions in the
United States, Europe and Asia. NJR currently does not have an obligation
to fund these plans. Nevertheless, the funded
status of these plans, and the related cost reflected in NJR’s financial
statements, are affected by various factors that are subject to an inherent
degree of uncertainty, particularly in the current economic environment.
Under the Pension Protection Act of 2006, continued losses of asset
values may necessitate increased
funding of the plans in the future
to meet minimum federal government requirements. The continued downward pressure
on the asset values of these plans may require NJR to fund obligations earlier
than it had originally planned, which would have a negative impact on cash flows
from operations, decrease NJR’s borrowing capacity and increase its interest
expense as a result of having to fund these obligations.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK
FACTORS (Continued)
|
An
effective system of internal control is not maintained, leading to a material
weakness in internal control over financial reporting, which may result in
unreliable financial statements
Section
404 of the Sarbanes-Oxley Act of 2002 requires NJR’s management to make an
assessment of the design and effectiveness of internal controls. It also
requires NJR’s independent registered public accounting firm to audit
the design and effectiveness of these controls and to form an opinion on both
management’s assessment and the effectiveness of these controls. Management’s
ongoing assessment of these controls may identify areas of weakness in control
design or effectiveness, which may lead to the conclusion that a material
weakness in internal control exists. NJR’s independent public registered
accounting firm may also identify control deficiencies which may lead to
identification of a material weakness in internal control. As of September 30,
2008, management concluded that NJR had a material weakness in internal control
over financial reporting and that, as a result, its internal control over
financial reporting was not effective.
Because
NJR concluded that its internal control over financial reporting is not
effective and to the extent NJR identifies future weaknesses or
deficiencies, NJR may not be able to produce reliable financial statements,
which could result in a loss of investor confidence and a decline in its stock
value. In addition, should NJR not be able to produce reliable financial
statements, it could limit NJR’s and NJNG’s ability to access the capital
markets.
As
described in Item 9A of this report, NJR is committed to the remediation of
the material weakness referred to above as well as the continued improvement
of its overall system of internal control over financial reporting.
Management is in the process of actively addressing and remediating this
material weakness in internal control over financial reporting, but there can be
no assurance that its corrections will be sufficient or fully effective, or
that it will not discover additional material weaknesses in its
internal controls and procedures in the future. While NJR’s system of internal
controls is reviewed periodically, there exist inherent limitations to control
effectiveness.
Economic
hedging activities of NJR designed to protect against commodity and financial
market risks may cause fluctuations in reported financial results, and NJR’s
stock price could be adversely affected as a result
Although
NJR uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks, the timing of the recognition of gains or
losses on these economic hedges in accordance with generally accepted accounting
principles used in the United States of America (GAAP) does not always coincide
with the gains or losses on the items being hedged. The difference in accounting
can result in volatility in reported results, even though the expected profit
margin is essentially unchanged from the dates the transactions were
consummated.
Operational
Risks
NJNG’s
operations are subject to certain operating risks
NJNG’s
operations are subject to all operating hazards and risks incidental to
handling, storing, transporting and providing customers with natural gas. These
risks include explosions, pollution, release of toxic substances, fires, storms
and other adverse weather conditions and hazards, each of which could result in
damage to or destruction of facilities or damage to persons and property. If any
of these events were to occur, NJR could suffer substantial losses. Moreover, as
a result, NJR has been, and likely will be, a defendant in legal proceedings and
litigation arising in the ordinary course of business. Although NJR maintains
insurance coverage, insurance may not be sufficient to cover all material
expenses related to these risks.
Major
changes in the supply and price of natural gas may affect financial
results
While
NJNG expects to provide for the demand of its customers for the foreseeable
future, factors impacting suppliers and other third parties, including increased
competition, further deregulation, transportation costs, transportation
availability and drilling for new natural gas resources, may impact the supply
and price of natural gas. NJNG actively hedges against the fluctuation in the
price of natural gas by entering into forward and financial contracts with third
parties. Should
these third parties fail to perform, it may result in a loss that could have a
material impact on the financial position, cash flows and statement of
operations of NJR.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS
(Continued)
|
NJNG
and NJRES rely on third parties to supply natural gas
NJNG’s
ability to provide natural gas for its present and projected sales will depend
upon its suppliers’ ability to obtain and deliver additional supplies of natural
gas, as well as NJNG’s ability to acquire supplies directly from new sources.
Factors beyond the control of NJNG, its suppliers and the independent suppliers
who have obligations to provide natural gas to certain NJNG customers, may
affect NJNG’s ability to deliver such supplies. These factors include other
parties’ control over the drilling of new wells and the facilities to transport
natural gas to NJNG’s city gate stations, competition for the acquisition of
natural gas, priority allocations, impact of severe weather disruptions to
natural gas supplies, the regulatory and pricing policies of federal and state
regulatory agencies, as well as the availability of Canadian reserves for export
to the United States. Energy deregulation legislation may increase competition
among natural gas utilities and impact the quantities of natural gas
requirements needed for sales service.
NJRES
also relies on a firm supply source to meet its energy management obligations
for its customers. Should NJRES’ suppliers fail to deliver supplies of natural
gas, there could be a material impact on its cash flows and statement of
operations.
The
use of derivative contracts in the normal course of NJRES’ business could result
in financial losses that negatively impact results of operations
NJRES
uses derivatives, including futures, forwards, options and swaps, to manage
commodity and financial market risks. NJRES could recognize financial losses on
these contracts as a result of volatility in the market values of the underlying
commodities or if a counterparty fails to perform under a contract. In the
absence of actively quoted market prices and pricing information from external
sources, the valuation of these financial instruments can involve management’s
judgment or use of estimates. As a result, changes in the underlying assumptions
or use of alternative valuation methods could adversely affect the value of the
reported fair value of these contracts.
Inflation
and increased natural gas costs could adversely impact NJNG’s customer base and
customer collections and increase its level of indebtedness
Inflation
has caused increases in certain operating and capital costs. NJR has a process
in place to continually review the adequacy of NJNG’s rates in relation to the
increasing cost of providing service and the inherent regulatory lag in
adjusting those rates. The ability to control expenses is an important factor
that will influence future results.
Rapid
increases in the price of purchased gas may cause NJNG to experience a
significant increase in short-term debt because it must pay suppliers for gas
when it is purchased, which can be significantly in advance of when these costs
may be recovered through the collection of monthly customer bills for gas
delivered. Increases in purchased gas costs also slow collection efforts as
customers are more likely to delay the payment of their gas bills, leading to
higher-than-normal accounts receivable. This situation also results in higher
short-term debt levels and increased bad debt expense.
Changes
in weather conditions may affect earnings and cash flows
Weather
conditions and other natural phenomena can have an adverse impact on earnings
and cash flows. Severe weather conditions can impact suppliers and the pipelines
that deliver gas to NJNG’s distribution system. Extended mild weather, during
either the winter period or summer period, can have a significant impact on
demand for and the cost of natural gas. While NJR believes the CIP will mitigate
the impact of weather on its gross margin, unusual weather conditions may still
have an impact on its earnings. The CIP will not mitigate the impact of unusual
weather conditions on its cash flows.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK
FACTORS (Continued)
|
Termination
of NJNG’s CIP may lead to a decrease in earnings and cash flows
Customer
conservation efforts have been increasing and as a result NJNG has seen a
decrease in volumes of natural gas delivered to its customers. NJNG’s CIP has a
usage component that is intended to mitigate the impact to earnings as a result
of reductions in customer usage. The CIP is expected to expire on October 1,
2009 and if it is not renewed or replaced with a similar mechanism to decouple
the link between customer usage and NJNG’s utility gross margin, NJNG’s results
from operations and cash flows, and NJR’s results from operations and cash
flows, could be adversely affected.
Changes
in customer growth may affect earnings and cash flows
NJNG’s
ability to increase its utility firm gross margin is dependent upon the new
construction housing market, as well as the additional conversion of customers
to natural gas from other fuel sources. Should there be continued weakness in
the housing market or a slowdown in the conversion market, there could be an
adverse impact on NJNG’s utility firm gross margin, earnings and cash
flows.
The
cost of providing pension and postemployment health care benefits to eligible
former employees is subject to changes in pension fund values and changing
demographics and may have a material adverse effect on NJR’s financial
results
NJR has
two defined benefit pension plans and two postemployment health care plans
(OPEB) for the benefit of substantially all full-time employees and qualified
retirees. The cost of providing these benefits to eligible current and former
employees is subject to changes in the market value of the pension and OPEB fund
assets and changing demographics, including longer life expectancy of
beneficiaries, an expected increase in the number of eligible former employees
over the next five years and increases in health care costs.
Any
sustained declines in equity markets and reductions in bond yields may have a
material adverse effect on the value of NJR’s pension and OPEB funds. In these
circumstances, NJR may be required to recognize an increased pension and OPEB
expense or a charge to the statement of operations to the extent that the
pension and OPEB fund values are less than the total anticipated liability under
the plans.
NJRES’
earnings and cash flows are dependent upon an asset optimization strategy of its
physical assets using financial transactions
NJRES’
earnings and cash flows are based, in part, on its ability to optimize its
portfolio of contractual-based natural gas storage and pipeline assets. The
optimization strategy involves utilizing its physical assets to take advantage
of differences in natural gas prices between geographic locations and/or time
periods. Any change among various pricing points could affect these
differentials, which in turn could affect NJRES’ earnings and cash flows. NJRES
incurs fixed demand fees to acquire its contractual rights to storage and
transportation assets. Should commodity prices change in such a way that
NJRES is not able to recover these costs from its customers, the cash flows and
earnings at NJRES, and ultimately NJR, could be adversely impacted.
NJRES
is exposed to market risk and may incur losses in wholesale
services
The
commodity, storage and transportation portfolios at NJRES consist of contracts
to buy and sell natural gas commodities, which are settled by physical
delivery.
If the
values of these contracts change in a direction or manner that NJRES does not
anticipate, the value of NJRES’ portfolio could be negatively impacted. NJRES
employs a value at risk (VaR) model over these portfolios. VaR is defined as the
largest likely potential loss in portfolio value and is usually measured in
terms of time to unwind or settle contractual positions. NJRES’ portfolio of
positions as of September 30, 2008, had a VaR of $0.7 million based on a 95
percent confidence interval and employing a 1-day holding period, and $3.3
million based on a 99 percent confidence interval and employing a 10-day holding
period.
Certain
of these storage and transportation contracts have expired during fiscal 2008,
or will be expiring in 2009, and will be renewed or replaced. To the extent that
these contracts are renewed or replaced at less favorable terms, the result is
likely to be a diminution of earnings contributions from NJRES in fiscal years
2009 and 2010, relative to its contributions in fiscal 2008. These
contract expirations could have a negative impact on NJR’s results of operations
and cash flows.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK
FACTORS (Continued)
|
Accounting
results may not be indicative of the risks NJRES is taking or the expected
economic results due to uncontemplated changes in related natural gas financial
and physical instruments
Although
NJRES enters into various contracts to economically hedge the value of its
energy assets and operations, there can be no assurance that the hedge is
operating effectively as intended and will continue to do so. Any uncontemplated
change in the underlying item being hedged to that of a different or
unforecasted position could result in a substantial negative impact to NJRES’
and NJR’s financial condition, statement of operations or statement of cash
flows.
NJNG
and NJRES rely on storage and transportation assets that they do not own or
control to deliver natural gas
NJNG and
NJRES depend on natural gas pipelines and other storage and transportation
facilities owned and operated by third parties to deliver natural gas to
wholesale markets and to provide retail energy services to customers. If
transportation is disrupted, or if storage capacity is inadequate, including for
reasons of force majeure, the ability of NJNG and NJRES to sell and deliver
their products and services may be hindered. As a result, they may be
responsible for damages incurred by their customers, such as the additional cost
of acquiring alternative supply at then-current market rates.
Investing
through partnerships or joint ventures decreases NJR’s ability to manage
risk
NJR and
its subsidiaries have utilized joint ventures for certain non-regulated energy
investments, including Steckman Ridge and Iroquois, and although they currently
have no specific plans to do so, NJR and its subsidiaries may acquire interests
in other joint ventures in the future. In these joint ventures, NJR and its
subsidiaries may not have the right or power to direct the management and
policies of the joint ventures, and other participants may take action contrary
to their instructions or requests and against their policies and objectives. In
addition, the other participants may become bankrupt or have economic or other
business interests or goals that are inconsistent with those of NJR and its
subsidiaries. If a joint venture participant acts contrary to the interests of
NJR or its subsidiaries, it could harm NJR’s financial condition, results of
operations or cash flows.
Regulatory
and Legal Risks
NJR
is subject to governmental regulation. Compliance with current and future
regulatory requirements and procurement of necessary approvals, permits and
certificates may result in substantial costs to NJR
NJR and
its subsidiaries are subject to substantial regulation from federal, state and
local regulatory authorities. They are required to comply with numerous laws and
regulations and to obtain numerous authorizations, permits, approvals and
certificates from governmental agencies. These agencies regulate various aspects
of their business, including customer rates, services and natural gas pipeline
operations.
NJR and
its subsidiaries cannot predict the impact of any future revisions or changes in
interpretations of existing regulations or the adoption of new laws and
regulations applicable to them. Changes in regulations or the imposition of
additional regulations could influence their operating environment and may
result in substantial costs to them.
Risks
related to the regulation of NJNG could affect the rates it is able to charge,
its costs and its profitability
NJNG is
subject to regulation by federal, state and local authorities. These authorities
regulate many aspects of NJNG’s distribution operations, including construction
and maintenance of facilities, operations, safety, rates that NJNG can charge
customers, rates of return, the authorized cost of capital, recovery of pipeline
replacement and environmental remediation costs and relationships with its
affiliates. NJNG’s ability to obtain rate increases, including base rate
increases, extend its incentive programs and maintain its current rates of
return depends on regulatory discretion. There can be no assurance that NJNG
will be able to obtain rate increases, continue its incentive programs or
continue receiving its currently authorized rates of return.
New
Jersey Resources Corporation
Part
I
ITEM
1A. RISK FACTORS
(Continued)
|
Significant
regulatory assets recorded by NJNG could be disallowed for recovery from
customers in the future
NJNG
records regulatory assets on its financial statements to reflect the ratemaking
and regulatory decision-making authority of the BPU as allowed by current GAAP.
The creation of a regulatory asset allows for the deferral of costs which,
absent a recovery mechanism to charge its customers in rates approved by the
BPU, NJNG would normally charge to expense on its income statement. Primary
regulatory assets that are subject to BPU approval include the underrecovery of
BGSS and Universal Service Fund (USF) costs, remediation costs associated with
its MGP sites, the CIP, WNC, the New Jersey Clean Energy program and pension and
other postemployment plans. If there were to be a change in regulatory position
surrounding the collection of these deferred costs there could be a material
impact on NJNG’s financial position, operations and cash flows.
NJR’s
charter and bylaws may delay or prevent a transaction that stockholders would
view as favorable
The
certificate of incorporation and bylaws of NJR, as well as New Jersey law,
contain provisions that could have the effect of delaying, deferring or
preventing an unsolicited change in control of NJR, which may negatively affect
the market price of the common stock or the ability of stockholders to
participate in a transaction in which they might otherwise receive a premium for
their shares over the then current market price. These provisions also may have
the effect of preventing changes in management. In addition, the board of
directors is authorized to issue preferred stock without stockholder approval on
such terms as the board of directors may determine. The common stockholders will
be subject to, and may be negatively affected by, the rights of any preferred
stock that may be issued in the future. In addition, NJR is subject to the New
Jersey Shareholders’ Protection Act, which could have the effect of delaying or
preventing a change of control of NJR.
NJR
and its subsidiaries may be unable to obtain governmental approvals, property
rights and/or financing for the construction, development and operation of its
non-regulated energy investments
Construction,
development and operation of energy investments, such as natural gas storage
facilities and pipeline transportation systems, are subject to federal and state
regulatory oversight and require certain property rights and approvals,
including permits and licenses for such facilities and systems. NJR, its
subsidiaries, or its joint venture partnerships may be unable to obtain, in a
cost-efficient or timely manner, all such needed property rights, permits and
licenses in order to successfully construct and develop its non-regulated energy
facilities and systems. Successful financing of NJR’s energy investments will
require participation by willing financial institutions and lenders, as well as
acquisition of capital at favorable interest rates. If NJR and its subsidiaries
do not obtain the necessary regulatory approvals and financing, their equity
investments could become impaired, and such impairment could have a materially
adverse effect on NJR’s financial condition, results of operations or cash
flows.
Environmental
Risks
NJR
costs of compliance with present and future environmental laws are significant
and could adversely affect its cash flows and profitability
NJR’s
operations are subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and site remediation. Compliance with these laws
and regulations may require NJR to expend significant financial resources to,
among other things, conduct site remediation and perform environmental
monitoring. If NJR fails to comply with applicable environmental laws and
regulations, even if it is unable to do so due to factors beyond its control, it
may be subject to civil liabilities or criminal penalties and may be required to
incur significant expenditures to come into compliance. Additionally, any
alleged violations of environmental laws and regulations may require NJR to
expend significant resources in its defense against alleged
violations.
New
Jersey Resources Corporation
Part
I
ITEM 1B. UNRESOLVED STAFF
COMMENTS
|
None
NJNG (All properties are
located in New Jersey)
NJNG owns
approximately 6,660 miles of distribution main, 6,600 miles of service main, 210
miles of transmission main and approximately 497,000 meters. Mains are primarily
located under public roads. Where mains are located under private property, NJNG
has obtained easements from the owners of record.
Additionally,
NJNG owns and operates two LNG storage plants in Stafford Township, Ocean
County, and Howell Township, Monmouth County. The two LNG plants have an
aggregate estimated maximum capacity of approximately 170,000 dths per day.
These facilities are used for peaking natural gas supply and
emergencies.
NJNG owns
four service centers located in Rockaway Township, Morris County; Atlantic
Highlands and Wall Township, Monmouth County; and Lakewood, Ocean County. These
service centers house storerooms, garages and gas distribution and
administrative offices. NJNG leases its headquarters and customer service
facilities in Wall Township, customer service offices in Asbury Park, Monmouth
County, and a service center in Manahawkin, Ocean County. These customer service
offices support customer contact, marketing, economic development and other
functions.
Substantially
all of NJNG’s properties, not expressly excepted or duly released, are subject
to the lien of an Indenture of Mortgage and Deed of Trust to BNY Midwest Trust
Company, Chicago, Illinois, dated April 1, 1952, as amended by 32 supplemental
indentures (Indenture), as security for NJNG’s bonded debt, which totaled
approximately $320 million at September 30, 2008. In addition, under the terms
of the Indenture, NJNG could have issued up to approximately $409 million of
additional first mortgage bonds as of September 30, 2008.
All
Other Business Operations
At
September 30, 2008, CR&R owned 83 acres of undeveloped land of which 57
acres are under contract for sale and a 56,400-square-foot office building on 5
acres.
There are
52 acres of land in Atlantic County with a net book value of $2.1 million that
is under contract for sale and will be sold as undeveloped land after all
approvals have been granted. The other 5 acres of undeveloped land under
contract for sale is in Monmouth County, with a net book value of $1.6 million
and such sale is estimated to close by September 2009. The remaining 26 acres of
undeveloped land in Monmouth County with a net book value of $4.5 million will
be developed based on market conditions. The specific time frame for development
is currently unknown.
As of
September 30, 2008, NJRES currently leases office space in Wall Township, New
Jersey and in Houston, Texas for its business activities
As of
September 30, 2008, the Steckman Ridge partnership owns land and leases
approximately 8,300 acres in Bedford County, Pennsylvania, where it is
developing a 17.7
billion cubic foot (Bcf) natural gas
storage facility with up to 12 Bcf
of working gas capacity for an estimated
project cost of approximately $265 million. NJR is responsible for 50 percent of
the total cost. Some of the equipment to be installed on the property will
include a compressor station, gathering pipelines and pipeline interconnections.
Steckman Ridge is expected to be placed in service during the summer of
2009.
NJRHS
leases service centers in Town of Dover, Morris County, and Farmingdale,
Monmouth County, New Jersey.
Capital
Expenditure Program
See Item 7. Management Discussion and
Analysis–Cash Flows for a discussion of anticipated fiscal 2009 and 2010
capital expenditures as applicable to NJR’s business segments and business
operations.
New
Jersey Resources Corporation
Part
I
ITEM 3. LEGAL PROCEEDINGS
|
Manufactured
Gas Plant Remediation
NJNG is
responsible for the remedial cleanup of three Manufactured Gas Plant (MGP)
sites, dating back to gas operations in the late 1800s and early 1900s, which
contain contaminated residues from former gas manufacturing operations. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP), as well as participating in various studies
and investigations by outside consultants to determine the nature and extent of
any such contaminated residues and to develop appropriate programs of remedial
action, where warranted, under Administrative Consent Orders or Memoranda of
Agreement with the NJDEP.
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a remediation adjustment
clause (RAC) approved by the BPU. In October 2007, the BPU approved $14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through June 30, 2006.
As of
September 30, 2008, $92.2 million of previously incurred remediation costs, net
of recoveries from customers and insurance proceeds, are included in Regulatory
assets on the Consolidated Balance Sheet.
In
September 2008, NJNG updated an environmental review of the MGP sites, including
a review of potential liability for investigation and remedial action. NJNG
estimated at the time of the review that total future expenditures to remediate
and monitor the three MGP sites for which it is responsible will range from
approximately $120.7 million to $177.2 million. NJNG’s estimate of these
liabilities is based upon known facts, existing technology and enacted laws and
regulations in place when the review was completed. However, NJNG expects actual
costs to differ from these estimates. Where it is probable that costs will be
incurred, but the information is sufficient only to establish a range of
possible liability, and no point within the range is more likely than any other,
it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG
has recorded an MGP remediation liability and a corresponding Regulatory asset
of $120.7 million on the Consolidated Balance Sheet. The actual costs to be
incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the three MGP sites.
NJDEP has not made any specific demands for compensation for alleged injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify the amount
of compensation, if any, that NJDEP might seek to recover. NJNG anticipates any
costs associated with this matter would be recoverable through the
RAC.
NJNG will
continue to seek recovery of MGP-related costs through the RAC. If any future
regulatory position indicates that the recovery of such costs is not probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there can be
no assurance as to the ultimate recovery through the RAC or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed in this Item 3, the ultimate disposition of these matters will not
have a material adverse effect on its financial condition, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
|
None
New
Jersey Resources Corporation
Part
I
ITEM 4A. EXECUTIVE OFFICERS OF THE
COMPANY
|
The
Company’s Executive Officers and their business experience, age, and office are
set forth below.
Office
|
Name
|
Age
|
Officer
Since
|
Chairman
of the Board, President and Chief Executive Officer
|
Laurence
M. Downes
|
51
|
1986
|
Executive
Vice President and Chief Operating Officer, NJNG and Senior Vice
President, Corporate Affairs and Marketing
|
Kathleen
T. Ellis
|
55
|
2004
|
Executive
Vice President and Chief Operating Officer, NJRES and Senior Vice
President, Energy Services, NJNG
|
Joseph
P. Shields
|
51
|
1996
|
Senior
Vice President and Chief Financial Officer
|
Glenn
C. Lockwood
|
47
|
1990
|
Senior
Vice President and General Counsel
|
Mariellen
Dugan
|
42
|
2005
|
Vice
President, Corporate Services, NJR Service
|
Deborah
G. Zilai
|
55
|
1996
|
Laurence
M. Downes, Chairman of the Board, President and Chief Executive
Officer
Mr.
Downes has held the position of Chairman of the Board since September 1996. He
has held the position of President and Chief Executive Officer since July 1995.
From January 1990 to July 1995, he held the position of Senior Vice President
and Chief Financial Officer.
Kathleen
T. Ellis, Executive Vice President, Chief Operating Officer, NJNG and Senior
Vice President, Corporate Affairs and Marketing
Ms. Ellis
has held the position of Senior Vice President, Corporate Affairs since December
2004 and the position of Executive Vice President and Chief Operating Officer of
NJNG since February 2008. She also held the position of Senior Vice President,
Corporate Affairs and Marketing of NJNG from July 2007 to February 2008. From
December 2002 to November 2004, she held the position of Director of
Communications for the Governor of the State of New Jersey, and from August 1998
to December 2002, she held the position of Manager of Communications and
Director, State Governmental Affairs for Public Service Electric and Gas Company
(PSE&G), a combined gas and electric utility company based in Newark,
NJ.
Joseph
P. Shields, Executive Vice President and Chief Operating Officer, NJRES and
Senior Vice President, Energy Services, NJNG
Mr.
Shields joined NJNG in 1983 and has been Senior Vice President, Energy Services,
NJNG since January 1996. He has been Executive Vice President and Chief
Operating Officer of NJRES since February 2008 and held the position of Senior
Vice President at NJRES from January 1996 to February 2008. As head of the
energy services business unit, he is responsible for natural gas supply
acquisitions, negotiating transportation agreements and monitoring natural gas
control activities as well as regulated wholesale marketing activity for
NJNG.
Glenn
C. Lockwood, Senior Vice President and Chief Financial Officer
Mr.
Lockwood has held the position of Chief Financial Officer since September 1995
and the added position of Senior Vice President since January 1996. From January
1994 to September 1995, he held the position of Vice President, Controller and
Chief Accounting Officer. From January 1990 to January 1994, he held the
position of Assistant Vice President, Controller and Chief Accounting
Officer.
New
Jersey Resources Corporation
Part
I
ITEM
4A. EXECUTIVE
OFFICERS OF THE COMPANY (Continued)
|
Mariellen
Dugan, Senior Vice President and General Counsel
Ms. Dugan
has held the position of Senior Vice President and General Counsel since
February 2008. She previously held the position of Vice President and General
Counsel from December 2005 to February 2008. Prior to joining NJR, from February
2004 to November 2005, she held the position of First Assistant Attorney General
for the State of New Jersey, and from February 2003 to February 2004, she held
the position of Chief of Staff, Executive Assistant Attorney General of the
State of New Jersey. From July 1999 to January 2003, Ms. Dugan was Of Counsel to
the law firm of Kevin H. Marino P.C. in Newark, NJ.
Deborah
G. Zilai, Vice President, Corporate Services, NJR Service
Mrs.
Zilai has held the position of Vice President, Corporate Services, NJR Service
since June 2005. She joined New Jersey Resources in June 1996 after a
twenty-year career at International Business Machines Corporation, where she
held various management positions. Her current responsibilities include
technology, human resources and supply chain management. From June 1996 to May
2005, she served as Vice President, Information Systems and
Services.
New
Jersey Resources Corporation
Part
II
ITEM 5. MARKET FOR
THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
NJR’s
Common Stock is traded on the New York Stock Exchange under the ticker symbol
NJR. As of September 30, 2008, NJR had 39,611 holders of record of its common
stock.
On
January 23, 2008, NJR’s Board of Directors approved a 3 for 2 stock split of the
Company’s common stock in the form of a dividend for the Company’s common stock
shareholders of record on February 8, 2008. The additional shares were issued on
March 3, 2008, resulting in an increase in average shares outstanding from
approximately 28 million to approximately 42 million. All share-related
information for prior periods has been adjusted throughout this report on a
retroactive basis to reflect the effects of the stock split.
NJR’s
common stock high and low sales prices and dividends paid per share were as
follows:
|
2008
|
2007
|
Dividends
Paid
|
|
High
|
Low
|
High
|
Low
|
2008
|
2007
|
Fiscal
Quarter
|
|
|
|
|
|
|
First
|
$34.71
|
$31.00
|
$35.44
|
$32.31
|
$0.25
|
$0.24
|
Second
|
$33.50
|
$29.22
|
$34.07
|
$30.87
|
$0.27
|
$0.25
|
Third
|
$34.63
|
$30.95
|
$37.63
|
$33.20
|
$0.28
|
$0.25
|
Fourth
|
$41.13
|
$31.68
|
$35.13
|
$30.33
|
$0.28
|
$0.25
|
The
following table sets forth NJR’s repurchase activity for the quarter ended
September 30, 2008:
Period
|
|
Total
Number of Shares (or Units) Purchased
|
|
Average
Price Paid per Share (or Unit)
|
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be
Purchased Under the Plans or Programs
|
07/01/08
– 07/31/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
08/01/08
– 08/31/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
09/01/08
– 09/30/08
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
Total
|
|
—
|
|
—
|
|
—
|
|
1,409,171
|
The Chief
Executive Officer’s annual certification regarding the Company’s compliance with
the NYSE’s corporate governance listing standards was submitted to the NYSE in
fiscal 2008.
New
Jersey Resources Corporation
Part
II
ITEM 6. SELECTED FINANCIAL
DATA
|
CONSOLIDATED
FINANCIAL STATISTICS
(Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
$3,816,210
|
|
$3,021,765
|
|
$3,271,229
|
|
$3,184,582
|
|
$2,545,908
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Gas
purchases
|
3,322,644
|
|
2,621,575
|
|
2,639,489
|
|
2,914,387
|
|
2,236,501
|
Operation
and maintenance
|
148,384
|
|
136,601
|
|
121,384
|
|
108,441
|
|
101,118
|
Regulatory
rider expenses
|
39,666
|
|
37,605
|
|
28,587
|
|
31,594
|
|
9,540
|
Depreciation
and amortization
|
38,464
|
|
36,235
|
|
34,753
|
|
33,675
|
|
32,449
|
Energy
and other taxes
|
65,602
|
|
62,499
|
|
58,632
|
|
56,211
|
|
49,908
|
Total
Operating Expenses
|
3,614,760
|
|
2,894,515
|
|
2,882,845
|
|
3,144,308
|
|
2,429,516
|
Operating
Income
|
201,450
|
|
127,250
|
|
388,384
|
|
40,274
|
|
116,392
|
Other
income
|
4,368
|
|
4,294
|
|
4,725
|
|
4,814
|
|
3,864
|
Interest
expense, net
|
25,811
|
|
27,613
|
|
25,669
|
|
20,474
|
|
15,395
|
Income
before Income Taxes
|
180,007
|
|
103,931
|
|
367,440
|
|
24,614
|
|
104,861
|
Income
tax provision
|
68,085
|
|
40,312
|
|
147,349
|
|
7,832
|
|
40,663
|
Equity
in earnings, net of tax
|
1,988
|
|
1,662
|
|
1,817
|
|
1,753
|
|
1,101
|
Net
Income
|
$ 113,910
|
|
$ 65,281
|
|
$ 221,908
|
|
$ 18,535
|
|
$ 65,299
|
Total
Assets
|
$2,625,392
|
|
$2,230,745
|
|
$2,398,928
|
|
$2,330,248
|
|
$1,861,979
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
|
|
|
Common
stock equity
|
$ 726,958
|
|
$ 644,797
|
|
$ 621,662
|
|
$ 438,052
|
|
$ 467,917
|
Long-term
debt
|
455,117
|
|
383,184
|
|
332,332
|
|
317,204
|
|
315,887
|
Total
Capitalization
|
$1,182,075
|
|
$1,027,981
|
|
$ 953,994
|
|
$ 755,256
|
|
$ 783,804
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK DATA
|
|
|
|
|
|
|
|
|
|
Earnings
per share–Basic
|
$2.72
|
|
$1.56
|
|
$5.31
|
|
$0.45
|
|
$1.58
|
Earnings
per share–Diluted
|
$2.70
|
|
$1.55
|
|
$5.27
|
|
$0.44
|
|
$1.55
|
Dividends
declared per share
|
$1.11
|
|
$1.01
|
|
$0.96
|
|
$0.91
|
|
$0.87
|
New
Jersey Resources Corporation
Part
II
ITEM
6. SELECTED FINANCIAL DATA (Continued)
|
NJNG
OPERATING STATISTICS
Fiscal
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Operating
Revenues ($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ |
594,147 |
|
|
$ |
584,727 |
|
|
$ |
598,274 |
|
|
$ |
568,324 |
|
|
$ |
496,866 |
|
Commercial
and other
|
|
|
149,177 |
|
|
|
132,113 |
|
|
|
172,465 |
|
|
|
143,211 |
|
|
|
118,326 |
|
Firm
transportation
|
|
|
28,634 |
|
|
|
36,794 |
|
|
|
28,656 |
|
|
|
29,566 |
|
|
|
28,987 |
|
Total
residential and commercial
|
|
|
771,958 |
|
|
|
753,634 |
|
|
|
799,395 |
|
|
|
741,101 |
|
|
|
644,179 |
|
Interruptible
|
|
|
11,840 |
|
|
|
7,141 |
|
|
|
12,134 |
|
|
|
14,377 |
|
|
|
9,575 |
|
Total
system
|
|
|
783,798 |
|
|
|
760,775 |
|
|
|
811,529 |
|
|
|
755,478 |
|
|
|
653,754 |
|
Incentive
programs
|
|
|
295,026 |
|
|
|
244,813 |
|
|
|
327,245 |
|
|
|
382,802 |
|
|
|
275,148 |
|
Total
Operating Revenues
|
|
$ |
1,078,824 |
|
|
$ |
1,005,588 |
|
|
$ |
1,138,774 |
|
|
$ |
1,138,280 |
|
|
$ |
928,902 |
|
Throughput
(Bcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
40.8 |
|
|
|
41.8 |
|
|
|
39.4 |
|
|
|
43.7 |
|
|
|
44.1 |
|
Commercial
and other
|
|
|
9.0 |
|
|
|
9.4 |
|
|
|
10.4 |
|
|
|
11.3 |
|
|
|
10.9 |
|
Firm
transportation
|
|
|
8.9 |
|
|
|
8.6 |
|
|
|
7.4 |
|
|
|
7.6 |
|
|
|
8.4 |
|
Total
residential and commercial
|
|
|
58.7 |
|
|
|
59.8 |
|
|
|
57.2 |
|
|
|
62.6 |
|
|
|
63.4 |
|
Interruptible
|
|
|
6.4 |
|
|
|
6.5 |
|
|
|
7.2 |
|
|
|
9.7 |
|
|
|
8.9 |
|
Total
system
|
|
|
65.1 |
|
|
|
66.3 |
|
|
|
64.4 |
|
|
|
72.3 |
|
|
|
72.3 |
|
Incentive
programs
|
|
|
34.5 |
|
|
|
36.5 |
|
|
|
38.4 |
|
|
|
52.4 |
|
|
|
47.1 |
|
Total
Throughput
|
|
|
99.6 |
|
|
|
102.8 |
|
|
|
102.8 |
|
|
|
124.7 |
|
|
|
119.4 |
|
Customers
at Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
437,655 |
|
|
|
435,169 |
|
|
|
429,834 |
|
|
|
418,646 |
|
|
|
410,005 |
|
Commercial
and other
|
|
|
29,002 |
|
|
|
28,916 |
|
|
|
28,914 |
|
|
|
28,878 |
|
|
|
27,718 |
|
Firm
transportation
|
|
|
16,830 |
|
|
|
14,104 |
|
|
|
12,874 |
|
|
|
15,246 |
|
|
|
16,387 |
|
Total
residential and commercial
|
|
|
483,487 |
|
|
|
478,189 |
|
|
|
471,622 |
|
|
|
462,770 |
|
|
|
454,110 |
|
Interruptible
|
|
|
46 |
|
|
|
45 |
|
|
|
48 |
|
|
|
47 |
|
|
|
63 |
|
Incentive
programs
|
|
|
27 |
|
|
|
26 |
|
|
|
35 |
|
|
|
39 |
|
|
|
35 |
|
Total
Customers at Year-End
|
|
|
483,560 |
|
|
|
478,260 |
|
|
|
471,705 |
|
|
|
462,856 |
|
|
|
454,208 |
|
Interest
Coverage Ratio (1)
|
|
|
6.08 |
|
|
|
6.03 |
|
|
|
7.63 |
|
|
|
6.38 |
|
|
|
7.38 |
|
Average
Therm Use per Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
931 |
|
|
|
960 |
|
|
|
920 |
|
|
|
1,045 |
|
|
|
1,079 |
|
Commercial
and other
|
|
|
5,303 |
|
|
|
5,710 |
|
|
|
5,084 |
|
|
|
5,443 |
|
|
|
5,646 |
|
Degree
Days
|
|
|
4,399 |
|
|
|
4,481 |
|
|
|
4,367 |
|
|
|
4,927 |
|
|
|
4,810 |
|
Weather
as a Percent of Normal
|
|
|
91
|
% |
|
|
94
|
% |
|
|
90
|
% |
|
|
102
|
% |
|
|
99
|
% |
Number
of Employees
|
|
|
572 |
|
|
|
548 |
|
|
|
516 |
|
|
|
518 |
|
|
|
539 |
|
(1)
|
NJNG’s
Income from Operations divided by interest
expense.
|
New
Jersey Resources Corporation
Part
II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Forward-looking
and Cautionary Statements
From time
to time, we may make statements that may constitute “forward-looking statements”
within the meaning of the “safe-harbor” provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on the Company’s then
current expectations and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those addressed in the
forward-looking statements. Information concerning forward-looking statements is
set forth on page 1 of this annual report and is incorporated herein, and the
risk factors that may cause such differences are summarized in Item 1A beginning
on page 10 and are incorporated herein.
Management’s
Overview
New
Jersey Resources Corporation (NJR or the Company) is an energy services holding
company providing retail natural gas service in New Jersey and wholesale natural
gas and related energy services to customers in states from the Gulf Coast and
Mid-Continent regions to the New England region and Canada through its two
principal subsidiaries, New Jersey Natural Gas (NJNG) and NJR Energy Services
(NJRES).
Comprising
the Natural Gas Distribution segment, NJNG is a natural gas utility that
provides regulated retail natural gas service in central and northern New Jersey
and also participates in the off-system sales and capacity release markets. NJNG
is regulated by the New Jersey Board of Public Utilities (BPU).
NJRES
comprises the Energy Services segment. NJRES maintains and transacts around a
portfolio of physical assets consisting of natural gas storage and
transportation contracts. In addition, NJRES provides wholesale energy services
to non-affiliated utility and energy companies.
The
retail and other business operations (Retail and Other) includes NJR Energy
(NJRE), an investor in energy-related ventures, most significantly through NJNR
Pipeline, which holds the Company’s 5.53 percent interest in Iroquois Gas and
Transmission System, LP (Iroquois), a 412-mile natural gas pipeline from the New
York-Canadian border to Long Island, New York, and NJR Steckman Ridge Storage
Company, which has a 50 percent equity ownership interest in Steckman Ridge GP,
LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a planned 17.7
billion cubic foot (Bcf) natural gas storage facility, with up to 12 Bcf working
capacity, which is being jointly developed and constructed with a partner in
western Pennsylvania; NJR Investment, which makes energy-related equity
investments; NJR Home Services (NJRHS), which provides service, sales and
installation of appliances; Commercial Realty and Resources (CR&R), which
holds and develops commercial real estate; and NJR Service Corporation (NJR
Service), which provides support services to the various NJR
businesses.
Net
income and assets by business segment and business operations are as
follows:
($
in Thousands)
|
2008
|
2007
|
2006
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$
42,479
|
|
37%
|
$44,480
|
|
68%
|
$ 46,870
|
|
21%
|
Energy
Services
|
71,908
|
|
63
|
21,298
|
|
33
|
188,372
|
|
85
|
Retail
and Other
|
(477
|
)
|
—
|
(497
|
)
|
(1)
|
(13,334
|
)
|
(6)
|
Total
|
$113,910
|
|
100%
|
$65,281
|
|
100%
|
$221,908
|
|
100%
|
($ in thousands)
|
2008
|
2007
|
2006
|
Assets
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$1,761,964
|
|
66%
|
$1,565,566
|
|
70%
|
$1,586,934
|
|
66%
|
Energy
Services
|
689,992
|
|
25
|
487,482
|
|
22
|
714,867
|
|
30
|
Retail
and Other
|
231,551
|
|
9
|
194,644
|
|
8
|
107,213
|
|
4
|
Total
|
$2,683,507
|
|
100%
|
$2,247,692
|
|
100%
|
$2,409,014
|
|
100%
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJRES and
NJR Energy account for certain of their derivative instruments (financial
futures, swaps and options) used to economically hedge the forecasted purchase,
sale and transportation of natural gas at fair value, as required under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended and interpreted, SFAS
133). In addition, for contracts executed on or after October 1, 2007, NJRES is
no longer electing the “normal purchase normal sale” (NPNS) scope exception of
SFAS 133 for contracts that result in the physical purchase or sale of natural
gas at NJRES. As such, any new contracts to purchase or sell the natural gas
commodity are accounted for as derivatives, at fair value, at NJRES and are
reflected in current period results.
The
change in fair value of these derivative instruments at NJRES and NJR Energy
over periods of time, referred to as unrealized gains or losses, can result in
substantial volatility in reported net income under generally accepted
accounting principles of the United States of America (GAAP). When a financial
instrument settles, the result is the realization of these gains or losses.
NJRES utilizes certain financial instruments to economically hedge natural gas
inventory placed into storage that will be sold at a later date, all of which
were contemplated as part of an entire forecasted transaction. GAAP requires
that when a financial instrument that is economically hedging natural gas that
has been placed into inventory, but not yet sold, has been settled, the realized
gain or loss associated with that settlement must be reflected currently in the
income statement. While NJRES will recognize the same economic impact from the
entire planned transaction, this also leads to additional volatility in NJRES’
reported earnings.
Unrealized
gains and losses at NJRES and NJR Energy are the result of changes in the fair
value of, financial derivative instruments as applicable, used to economically
hedge future natural gas sales, purchases and transportation. Additionally NJRES
records unrealized gains and losses on physical natural gas commodity contracts
entered into after September 30, 2007, which are not designated as NPNS.
Realized gains and losses at NJRES include the settlement of these financial
derivative instruments used to economically hedge natural gas purchases in
inventory that have not yet been sold as part of a planned
transaction.
Included
in Net income are unrealized gains (losses) in Energy Services of $1.1 million,
$(17.1) million and $159.8 million, after taxes, for the fiscal years ended
September 30, 2008, 2007 and 2006, respectively. Also included in Net income are
realized gains (losses) of $23.8 million, $(1.8) million and $0.4 million, after
taxes, for the fiscal years ended September 30, 2008, 2007 and 2006,
respectively, which are related to derivative instruments that have settled and
are designed to economically hedge natural gas that is still in storage
inventory.
NJR
Energy records unrealized losses and gains with respect to the change in fair
value of the long-term financial natural gas swaps that are used to economically
hedge a long-term natural gas sale contact.
Included
in Net income above are unrealized (losses) in Retail and Other of $(4.8)
million, $(4.2) million and $(16.9) million, after taxes, for the fiscal years
ended September 30, 2008, 2007 and 2006, respectively.
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably through several key initiatives including:
Ÿ
|
Assessing
the market and timing with respect to filing for a base rate increase,
which takes into account many factors including, but not limited to,
earning a reasonable rate of return on the investments in its natural gas
distribution system, as well as recovery of all prudently incurred costs
in order to provide safe and reliable service throughout NJNG’s service
territory.
Based
upon increases in NJNG’s operation, maintenance and capital costs, NJNG
petitioned the BPU, on November 20, 2007, to increase base rates for its
natural gas delivery service. This base rate case filing was consistent
with NJNG’s objectives of providing safe and reliable service to its
customers and earning a market-based
return.
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
|
On
July 30, 2008, NJNG and the Department of Public Advocate, Division of
Rate Counsel (Rate Counsel) signed an agreement that stipulated the
principal financial terms of a settlement of its petitioned rate increase
(Revenue Requirement stipulation). As a result, NJNG would receive a
revenue increase to its base rates of $32.5 million, which is inclusive of
an approximate $13 million impact of a change to the Conservation
Incentive Program (CIP) baseline usage rate, receive an allowed return on
equity component of 10.3 percent, reduce its depreciation expense
component from 3.0 percent to 2.34 percent and reduce its depreciation
expense by $1.6 million annually as a result of the amortization of
previously recovered asset retirement obligations. On August 14, 2008,
NJNG, Rate Counsel and the Staff of the BPU signed an agreement that
stipulated to changes in NJNG’s gas tariff and allocated the approximately
$32.5 million revenue requirement increase amongst NJNG’s classes of
services.
|
|
|
|
On
October 3, 2008, the BPU unanimously approved and made effective the
provisions outlined in NJNG’s Revenue Requirement stipulation in their
entirety (the Rate Order).
As
a result of the signed Revenue Requirement stipulation, NJNG recorded an
aggregate after-tax charge in the third quarter of fiscal 2008 of
approximately $1.5 million, as it determined that certain regulatory
assets were no longer recoverable in future rates from customers
(approximately $769,000) and changed its computation for its allowance for
funds used during construction (approximately
$744,000).
|
|
|
Ÿ
|
Working
with the BPU and Rate Counsel, for the development of the decoupling of
the impact of customer usage on utility gross margin, which has allowed
for the implementation of the CIP. The CIP allows NJNG to promote
conservation programs to its customers while maintaining protection of its
utility gross margin associated with reduced customer usage. CIP usage
differences are calculated annually and are recovered one year following
the end of the CIP usage year;
|
|
|
Ÿ
|
Managing
its new customer growth rate, which is expected to be approximately 1.5
percent over the next two years;
|
|
|
Ÿ
|
Generating
earnings from various BPU-authorized gross margin-sharing incentive
programs; and
|
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging program
designed to keep customers’ Basic Gas Supply Service (BGSS) rates as
stable as possible.
|
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
In order
to encourage conservation, while at the same time providing relief for its
utility gross margin, the BPU approved NJNG’s use of the CIP as of October 1,
2006. The CIP is a three-year pilot program, which allows NJNG to recover
utility gross margin variations related to both weather and customer usage.
Recovery of such margin variations is subject to additional conditions including
an earnings test, which has a return on equity component of 10.3 percent, and an
evaluation of BGSS-related savings achieved. An annual review of the CIP must be
filed in June of each year, coincident with NJNG’s annual BGSS
filing.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of September 30, 2008 and September 30, 2007,
the obligation to fund these conservation programs was recorded at its present
value of $864,000 and $1.4 million, respectively, on the Consolidated Balance
Sheets.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Prior to
fiscal 2007, the impact of weather was mitigated by a Weather Normalization
Clause (WNC), which was suspended with the commencement of the CIP. In October
2007, the BPU approved the full recovery of $8.1 million
of previously deferred amounts related to the WNC. Through September
30, 2008, NJNG has recovered $7.2 million of these previously deferred
amounts.
As a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding their
ultimate recovery from customers. The most significant costs incurred that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs. Actual remediation costs may
vary from management’s estimates due to the developing nature of remediation
requirements, regulatory decisions by the New Jersey Department of Environmental
Protection (NJDEP) and related litigation. If there are changes in the
regulatory position on the recovery of these costs, such costs would be charged
to income in the period of such determination.
Due to
the capital-intensive nature of NJNG’s operations and the seasonal nature of its
working capital requirements, significant changes in interest rates can also
impact NJNG’s results.
Energy
Services Segment
NJRES
provides unregulated wholesale energy services, including base load natural gas,
peaking and balancing services, utilizing physical assets it controls through
natural gas pipeline transportation and storage contracts, as well as providing
asset management services to customers in states from the Gulf Coast and
Mid-continent regions to the Appalachian and Northeast regions of the United
States and Canada.
NJRES
views “financial margin” as its key financial measurement metric. NJRES’
financial margin, which is a non-GAAP financial measure, represents revenues
earned from the sale of natural gas less costs of natural gas sold,
transportation and storage, and excludes any accounting impact from the change
in fair value of derivative instruments designed to hedge the economic impact of
its transactions that have not been settled, which represent unrealized gains
and losses, and realized gains and losses associated with financial instruments
economically hedging natural gas in storage and not yet sold as part of a
planned transaction. NJRES uses financial margin to gauge operating results
against established benchmarks and earnings targets as it eliminates the impact
of volatility in GAAP earnings that can occur prior to settlement of the
physical commodity portion of the transactions and therefore is more
representative of the overall expected economic result.
NJRES
incorporates the following elements to provide for growth, while focusing on
maintaining a low-risk operating and counterparty credit profile:
Ÿ
|
Providing
natural gas portfolio management services to nonaffiliated utilities and
electric generation facilities;
|
|
|
Ÿ
|
Leveraging
transactions for the delivery of natural gas to customers by aggregating
the natural gas commodity costs and transportation costs in order to
minimize the total cost required to provide and deliver natural gas to
NJRES’ customers. This is done by identifying the lowest cost alternative
with the natural gas supply, transportation availability and markets to
which NJRES is able to access through its business footprint and
contractual asset portfolio;
|
|
|
Ÿ
|
Identifying
and benefiting from variations in pricing of natural gas transportation
and storage assets due to location or timing differences of natural gas
prices to generate financial margin; and
|
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
NJRES has
built a portfolio of customers including local distribution companies,
industrial companies, electric generators and retail aggregators. Sales to these
customers have allowed NJRES to leverage its transportation and storage capacity
and manage sales to these customers in an aggregate fashion. This strategy
allows NJRES to extract more
value from its portfolio of natural gas storage and pipeline transportation
capacity through the arbitrage of pricing differences as a result of locational
differences or over different periods of time.
NJRES
also focuses on creating value from underutilized natural gas assets, which are
typically amassed through contractual rights to natural gas transportation and
storage capacity. NJRES has developed a portfolio of natural gas storage and
transportation capacity in states in the Northeast, Gulf Coast, Mid-continent
and Appalachian regions and eastern Canada. These assets become more valuable
when prices change between these areas and across time periods. NJRES seeks to
optimize this process on a daily basis as market conditions change by evaluating
all the natural gas supplies, transportation and opportunities to which it has
access in order to find the most profitable alternative to serve its various
commitments. This enables NJRES to capture geographic pricing differences across
these various regions as delivered natural gas prices change as a result of
market conditions. NJRES focuses on earning a financial margin on a single
original transaction and then utilizing that transaction and the changes in
prices across the regions or across time periods as the basis to further improve
the initial result.
In a
similar manner, NJRES participates in natural gas storage transactions where it
seeks to identify pricing differences that occur over time, as prices for future
delivery periods at many different delivery points are readily available. For
example, NJRES generates financial margin by locking in the differential between
purchasing natural gas at a low current or future price and, in a related
transaction, selling that natural gas at a higher current or future price, all
within the constraints of its credit and contracts policies. Through the use of
transportation and storage services, NJRES is able to generate financial margin
through pricing differences that occur over the duration of time the assets are
held. These storage and transportation contracts have various expiration dates,
and the decision to renew any of these contracts will be based on NJRES’ overall
portfolio and market conditions at that time. Certain of these contracts have
expired during fiscal 2008, or will be expiring in 2009, and will be renewed or
replaced. To the extent that these contracts are renewed or replaced at less
favorable terms, the result is likely to be a diminution of earnings
contributions from NJRES in fiscal years 2009 and 2010, relative to its
contributions in fiscal 2008.
NJRES’
portfolio management customers include nonaffiliated utilities and electric
generation plants. Services provided by NJRES include optimization of
underutilized natural gas assets and basic gas supply functions.
NJRES
also participates in park-and-loan transactions with pipeline counterparties
where NJRES will borrow natural gas when there is an opportunity to capture
arbitrage value. In these cases, NJRES evaluates the economics of the
transaction to determine if it can capture pricing differentials in the
marketplace in order to be able to generate financial margin. In evaluating
these transactions NJRES will compare the fixed fee it will pay and the
resulting spread it can generate when considering the amount it will receive to
sell the borrowed gas to another counterparty in relation to the cost it will
incur to purchase the natural gas at a later date to return to the pipeline.
When the transaction allows NJRES to generate a financial margin, NJRES will fix
the financial margin by economically hedging the transaction with natural gas
futures.
In
conducting its business, NJRES mitigates risk by following formal risk
management guidelines, including transaction limits, approval processes,
segregation of duties, and formal contract and credit review and approval
procedures. NJRES continuously monitors and seeks to reduce the risk associated
with its credit exposures with its various counterparties. The Risk Management
Committee (RMC) of NJR oversees compliance with these established
guidelines.
Retail
and Other Business Operations
As part
of the Retail and Other business operations NJR utilizes a subsidiary, NJR
Energy Holdings, to develop its investments in natural gas “mid-stream” assets.
Mid-stream assets are natural gas transportation and storage facilities. NJR
believes that acquiring, owning and developing these mid-stream assets, which
operate under a tariff structure that has either a regulated or market-based
rate, can provide a significant growth opportunity for the Company. To that end,
NJR has acquired an interest in Iroquois (regulated rate) and Steckman Ridge
(anticipated market-based rate), which is currently under development, and is
actively pursuing other potential opportunities that meet its investment and
development criteria. Other businesses included as part of Retail and
Other include NJRHS, which provides service, sales and
installation of appliances to over 149,000 customers and is focused on growing
its installation business and expanding its service contract customer base, and
CR&R, which seeks additional opportunities to enhance the value of its
undeveloped land.
The
financial results of Retail and Other consist primarily of the operating results
of NJRHS and equity in earnings attributable to the Company’s equity investment
in Iroquois, as well as to investments made by NJR Energy, an investor in other
energy-related ventures through its operating subsidiaries.
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. NJR anticipates that Steckman Ridge will be placed in service during
the summer of 2009. As of September 30, 2008, NJR has invested $78.7 million in
Steckman Ridge. This amount excludes capitalized interest and other direct
costs. Total project costs related to the development of the storage facility
are currently estimated at approximately $265 million, of which NJR is obligated
to fund 50 percent or approximately $132.5 million. NJR anticipates that
Steckman Ridge will seek non-recourse financing upon completion of the
construction and development of its facilities, thereby potentially reducing the
final expected recourse obligation of NJR. There can be no assurances that such
non-recourse project financing will be secured or available for Steckman
Ridge.
Critical
Accounting Policies
The
Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Application of these accounting principles requires the use of estimates and
assumptions that affect the reported amounts of liabilities, revenues and
expenses, and related disclosures of contingencies during the reporting period.
The Company regularly evaluates its estimates, including those related to the
calculation of the fair value of derivative instruments, unbilled revenues,
provisions for depreciation and amortization, regulatory assets, income taxes,
pension and postemployment benefits other than pensions and contingencies
related to environmental matters and litigation. NJR bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. In the normal course of business, estimated
amounts are subsequently adjusted to actual results that may differ from
estimates.
Regulatory
Accounting
NJNG
maintains its accounts in accordance with the FERC Uniform System of Accounts as
prescribed by the BPU. As a result of the ratemaking process, NJNG is required
to follow Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of
Certain Types of Regulation (SFAS 71), and consequently, the accounting
principles applied by NJNG differ in certain respects from those applied by
unregulated businesses. NJNG is required under SFAS 71 to recognize the impact
of regulatory decisions on its financial statements. NJNG’s BGSS requires NJNG
to project its natural gas costs and provides the ability, subject to BPU
approval, to recover or refund the difference, if any, of such actual costs as
compared with the projected costs included in prices through a BGSS charge to
customers. Any underrecovery or overrecovery is recorded as a Regulatory asset
or liability on the Consolidated Balance Sheets and reflected in the BGSS charge
to customers in subsequent years. NJNG also enters into derivatives that are
used to hedge natural gas purchases, and the offset to the resulting fair value
of derivative assets or liabilities is recorded as a Regulatory asset or
liability on the Consolidated Balance Sheets.
Derivative
Instruments
Derivative
activities are recorded in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted, (SFAS
133) under which NJR records the fair value of derivatives held as assets and
liabilities. NJR’s unregulated subsidiaries record changes in the fair value of
its derivative instruments in Gas purchases or Operating revenues, as
appropriate, on the Consolidated Statements of Income.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJNG’s
derivatives that are used to manage price risk of its natural gas purchasing
activities are recoverable through its BGSS, subject to BPU approval.
Accordingly, the offset to the change in fair value of these derivatives is
recorded as a Regulatory asset or liability on the Consolidated Balance
Sheets.
NJR has
not designated any derivatives as fair value hedges as of September 30, 2008 and
2007.
In
providing its unregulated wholesale energy services, NJRES enters into physical
contracts to buy and sell natural gas. For contracts entered into prior to
October 1, 2007, NJRES elected to use the “normal purchase normal sale” scope
exception (NPNS or normal) under SFAS 133 since the contracts provided for the
purchase or sale of natural gas with the intention of delivering the natural gas
in quantities expected to be used or sold by NJRES over a reasonable period of
time in the normal course of its business. The Company continues to believe that
the conditions that originally qualified these contracts as normal continue to
exist, and, accordingly, NJRES will record the related liabilities incurred and
assets acquired under these remaining contracts when title to the underlying
natural gas commodity passes under settlement accounting.
Effective
October 1, 2007, the Company decided to discontinue using the NPNS exception for
any new physical commodity contracts entered into by NJRES. The criteria for
designating contracts as normal includes an assessment of the probability of
delivery at inception and throughout the term of the contract while considering
certain factors such as expected future demand. NJRES will continue to enter
into these contracts with the intention of physically delivering the natural
gas; however, NJRES has determined that the probability of net settling these
contracts for cash may be greater than had previously been experienced. As a
result, commencing with contracts entered into subsequent to September 30, 2007,
NJRES will treat these contracts as derivatives and record them at fair value in
the Consolidated Balance Sheet, with changes in fair value being recorded as a
component of Gas purchases in the Consolidated Statements of
Income.
The fair
value of derivative instruments is determined by reference to quoted market
prices of listed contracts, published quotations or quotations from independent
parties. NJRES’ portfolio is valued using a combination of proprietary modeling
methods and the most currently available market pricing and data. Broker quotes
are used in cases where there is not a visible liquid market for NJRES’ physical
commodity transactions. As of September 30, 2008, fair values based on NJRES’
proprietary models and broker quotes represented approximately six percent of
total fair value of its derivative assets and liabilities reported in the
Consolidated Balance Sheets. Should there be a significant change in model
assumptions, or in the underlying market prices or data, or should certain
contracts fail to meet the normal purchase normal sale scope exception of SFAS
133, NJRES may experience a significant impact on its financial position,
results of operations and cash flows. The valuation methods remained consistent
for fiscal years 2008, 2007 and 2006. NJR applies a discount to its derivative
assets to factor in an adjustment associated with the credit risk of its
counterparties. NJR determined this amount by using historical default
probabilities corresponding to Standard and Poor’s issuer ratings. During the
fourth quarter of fiscal 2008, NJR further adjusted its derivative assets,
based on the change in a market index that tracks the credit default swaps of
investment grade companies, to take into consideration the continuing
deterioration in the credit markets. This resulted in an
additional immaterial credit risk adjustment.
Capitalized
Financing Costs
NJNG
capitalizes an allowance for funds used during construction (AFUDC) as a
component of Utility plant in the Consolidated Balance Sheets. AFUDC is recorded
as a reduction to Interest expense in the Consolidated Statements of Income.
Under regulatory rate practices and in accordance with SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation, NJNG fully recovers AFUDC through base
rates. Effective with the Rate Order, commencing in fiscal 2009, NJNG will be
allowed to recover a cost of equity component of approximately 10.3 percent as
part of its AFUDC calculation. This will result in a non-cash income statement
benefit that will also be capitalized as a component of Utility plant. If there
is any change in this recovery amount, NJNG would record a charge for the
unrecovered portion in the Consolidated Statements of Income.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Environmental
Costs
At the
end of each fiscal year, NJNG updates the environmental review of its MGP sites,
including a review of its potential liability for investigation and remedial
action, based on assistance from an outside consulting firm. From this review,
NJNG estimates expenditures that will be necessary to remediate and monitor
these MGP sites. NJNG’s estimate of these liabilities is developed from then
currently available facts, existing technology and presently enacted laws and
regulations.
Where it
is probable that the cost will be incurred, but the information is sufficient to
establish only a range of possible liability, and no point within the range is
more likely than any other, it is NJNG’s policy to accrue the lower end of the
range. Since management believes that recovery of these expenditures, as well as
related litigation costs, is possible through the regulatory process, in
accordance with SFAS 71, it has recorded a regulatory asset corresponding to the
related accrued liability. Accordingly, NJNG has recorded an MGP remediation
liability and a corresponding Regulatory asset of $120.7 million on the
Consolidated Balance Sheets.
The
actual costs to be incurred by NJNG are dependent upon several factors,
including final determination of remedial action, changing technologies and
governmental regulations, the ultimate ability of other responsible parties to
pay, as well as the potential impact of any litigation and any insurance
recoveries. If there are changes in future regulatory positions that indicate
the recovery of all or a portion of such regulatory asset is not probable, the
related cost and carrying costs would be charged to income in the period of such
determination. As of September 30, 2008 and 2007, $92.2 million and $85.1
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds received, are included in Regulatory assets on
the Consolidated Balance Sheet, respectively.
If there
are changes in the regulatory position surrounding these costs, or should actual
expenditures vary significantly from estimates in that these costs are
disallowed for recovery by the BPU, such costs would be charged to income in the
period of such determination.
Postemployment
Employee Benefits
NJR’s
costs of providing postemployment employee benefits are dependent upon numerous
factors including actual plan experience and assumptions of future experience.
Postemployment employee benefit costs, for example, are impacted by actual
employee demographics including age, compensation levels and employment periods,
the level of contributions made to the plans and the return on plan assets.
Changes made to the provisions of the plans may also impact current and future
postemployment employee benefit costs. Postemployment employee benefit costs may
also be significantly affected by changes in key actuarial assumptions,
including anticipated rates of return on plan assets, health care cost trends
and discount rates used in determining the projected benefit obligations (PBO).
In determining the PBO and cost amounts, assumptions can change from period to
period and could result in material changes to net postemployment employee
benefit periodic costs and the related liability recognized by NJR.
NJR’s
postemployment employee benefit plan assets consist primarily of U.S. equity
securities, international equity securities and fixed-income investments, with a
targeted allocation of 53 percent, 17 percent and 30 percent, respectively.
Fluctuations in actual market returns, as well as changes in interest rates, may
result in increased or decreased postemployment employee benefit costs in future
periods. Postemployment employee benefit expenses are included in
Operations and maintenance expense on the Consolidated Statements of
Income.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
The
following is a summary of a sensitivity analysis for each actuarial
assumption:
Pension
Plans
|
|
|
Estimated
|
Estimated
|
|
|
|
Increase/(Decrease)
|
Increase/(Decrease)
|
|
Increase/
|
on PBO
|
to Expense
|
Actuarial Assumptions
|
(Decrease)
|
(Thousands)
|
(Thousands)
|
Discount
rate
|
1.00
|
%
|
$(11,739
|
)
|
$(1,504
|
)
|
Discount
rate
|
(1.00
|
)%
|
$14,423
|
|
$
1,521
|
|
Rate
of return on plan assets
|
1.00
|
%
|
n/a
|
|
$ (971
|
)
|
Rate
of return on plan assets
|
(1.00
|
)%
|
n/a
|
|
$
1,004
|
|
Other Postemployment Benefits
Actuarial Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on
PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to
Expense
(Thousands)
|
Discount
rate
|
1.00
|
%
|
$(6,797)
|
$(692)
|
Discount
rate
|
(1.00)
|
%
|
$8,464
|
$
840
|
Rate
of return on plan assets
|
1.00
|
%
|
n/a
|
$(290)
|
Rate
of return on plan assets
|
(1.00)
|
%
|
n/a
|
$
290
|
Actuarial Assumptions
|
Increase/
(Decrease)
|
Estimated
Increase/(Decrease)
on PBO
(Thousands)
|
Estimated
Increase/(Decrease)
to Expense
(Thousands)
|
Heath
care cost trend rate
|
1.00
|
%
|
$
8,052
|
$
1,430
|
Health
care cost trend rate
|
(1.00)
|
%
|
$(6,571)
|
$(1,144)
|
Recently
Issued Accounting Standards
For a
detailed description of Recently Issued Accounting Standards see Note 1. Summary of Significant
Accounting Policies in the accompanying Consolidated Financial
Statements.
Results
of Operations
Consolidated
Net
income increased 74.5 percent to $113.9 million in fiscal 2008 from $65.3
million in fiscal 2007 and decreased 70.6 percent in fiscal 2007 from $221.9
million in fiscal 2006. The fiscal 2008 results were $2.72 per basic share and
$2.70 per diluted share, compared with the fiscal 2007 results of $1.56 per
basic share and $1.55 per diluted share and fiscal 2006 results of $5.31 per
basic share and $5.27 per diluted share. Changes in Net income were primarily
driven by unrealized gains and (losses) at NJRES and NJR Energy. Combined
unrealized gains and (losses), as well as certain realized gains and (losses)
associated with inventory amounts still in storage, which were primarily due to
the change in the fair market value of financial derivative instruments as a
result of market conditions for the purchase and sale of natural gas, were $20.1
million, $(23.1) million, and $143.4 million, after taxes, for the years ended
September 30, 2008, 2007 and 2006, respectively.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Prior
year basic and diluted earnings per share noted above have been retroactively
adjusted to reflect NJR’s 3 for 2 common stock split on March 3,
2008.
The
Company’s Operating revenues and Gas purchases for the fiscal years ended
September 30, are as follows:
($
in Thousands)
|
2008
|
2007
|
2006
|
Operating
revenues
|
$3,816,210
|
$3,021,765
|
$3,271,229
|
Gas
purchases
|
$3,322,644
|
$2,621,575
|
$2,639,489
|
Operating
revenues increased $794.4 million during the fiscal year ended September 30,
2008, compared with the prior fiscal year due primarily to an increase in
transaction volume and prices at NJRES, as well as moderate increases in
customer growth and greater off-system sales, partially offset by reduced
customer usage at NJNG. NJRES transaction volumes increased 12 percent in fiscal
2008 over fiscal 2007 and coupled with an average 21 percent increase in prices
over the corresponding period resulted in an increase in revenues of
approximately $720.0 million.
The
factors that resulted in the increase in revenues described above similarly
affected an increase of $701.1 million in Gas purchases for the fiscal year
ended September 30, 2008, respectively, as compared with the prior fiscal year.
NJRES transaction volumes increased 11 percent in fiscal 2008 over fiscal 2007
and coupled with an average 20 percent increase in prices over the corresponding
period, resulted in an increase in cost of sales of approximately $635.2
million.
Natural
Gas Distribution Segment
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 484,000 residential and commercial customers in
central and northern New Jersey and participates in the off-system sales and
capacity release markets.
NJNG’s
business is seasonal by nature, as weather conditions directly influence the
volume of natural gas delivered. Specifically, customer demand substantially
increases during the winter months when natural gas is used for heating
purposes. As a result, NJNG receives most of its gas distribution revenues
during the first and second fiscal quarters and is subject to variations in
earnings and working capital during the year.
The
Electric Discount and Energy Competition Act (EDECA) provides the framework for
New Jersey’s energy markets, which are open to competition from other energy
suppliers. Currently, NJNG’s residential markets are open to competition, and
its rates are segregated between BGSS (natural gas commodity) and delivery
(i.e., transportation) components. NJNG earns no utility gross margin on the
commodity portion of its natural gas sales. NJNG earns utility gross margin
through the delivery of natural gas to its customers. Under an existing order
from the BPU, BGSS can be provided by suppliers other than the state’s natural
gas utilities.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJNG’s
financial results are as follows:
(Thousands)
|
2008
|
|
2007
|
|
2006
|
|
Utility
Gross Margin
|
|
|
|
|
|
Operating
revenues
|
$1,078,824
|
|
$1,005,588
|
|
$1,138,774
|
Less:
|
|
|
|
|
|
Gas
purchases
|
753,249
|
|
687,201
|
|
847,276
|
Energy
and other taxes
|
58,539
|
|
56,475
|
|
52,908
|
Regulatory
rider expense
|
39,666
|
|
37,605
|
|
28,587
|
Total
Utility Gross Margin
|
$ 227,370
|
|
$ 224,307
|
|
$ 210,003
|
Operation
and maintenance expense
|
98,035
|
|
97,006
|
|
84,907
|
Depreciation
and amortization
|
37,723
|
|
35,648
|
|
34,146
|
Other
taxes not reflected in utility gross margin
|
3,476
|
|
3,125
|
|
2,921
|
Operating
income
|
$ 88,136
|
|
$ 88,528
|
|
$ 88,029
|
Other
income
|
3,460
|
|
3,468
|
|
3,448
|
Interest
expense, net
|
21,277
|
|
21,182
|
|
16,456
|
Income
tax provision
|
27,840
|
|
26,334
|
|
28,151
|
Net
income
|
$ 42,479
|
|
$ 44,480
|
|
$ 46,870
|
The
following table summarizes Utility Gross Margin and Throughput in billion cubic
feet (Bcf) of natural gas by type:
|
2008
|
2007
|
2006
|
($
in thousands)
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Utility
Gross Margin/Throughput
|
|
|
|
|
|
|
Residential
and commercial
|
$199,810
|
49.8
|
$197,547
|
51.2
|
$177,324
|
49.8
|
Transportation
|
19,722
|
8.9
|
17,963
|
8.6
|
24,258
|
7.4
|
Total
Firm
|
219,532
|
58.7
|
215,510
|
59.8
|
201,582
|
57.2
|
Incentive
programs
|
7,656
|
34.5
|
8,125
|
36.5
|
7,403
|
38.4
|
Interruptible
|
482
|
6.4
|
672
|
6.5
|
1,018
|
7.2
|
BPU
settlement
|
(300)
|
—
|
—
|
—
|
—
|
—
|
Total
Utility Gross Margin/Throughput
|
$227,370
|
99.6
|
$224,307
|
102.8
|
$210,003
|
102.8
|
Utility
Gross Margin
NJNG’s
utility gross margin is defined as natural gas revenues less natural gas
purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA) and
regulatory rider expenses, and may not be comparable to the definition of gross
margin used by others in the natural gas distribution business and other
industries. Utility gross margin is comprised of three major categories which
include utility firm gross margin, incentive programs and utility gross margin
from interruptible customers. Management believes that utility gross margin
provides a more meaningful basis than revenue for evaluating utility operations
since natural gas costs, sales tax, TEFA and regulatory rider expenses are
included in operating revenue and passed through to customers and, therefore,
have no effect on utility gross margin.
Natural
gas costs are charged to operating expenses on the basis of therm sales at the
prices in NJNG’s BGSS tariff approved by the BPU. The BGSS tariff rate includes
projected natural gas costs, net of supplier refunds, the impact of hedging
activities and credits from non-firm sales and transportation activities. Any
underrecoveries or overrecoveries from the projected amounts are deferred and
reflected in the BGSS tariff rate in subsequent years.
TEFA,
which is included in Energy and other taxes in the Consolidated Statements of
Income, is calculated on a per-therm basis and excludes sales to cogeneration
facilities, other utilities and off-system sales. TEFA represents a regulatory
allowed assessment imposed on all energy providers in the state of New Jersey,
as TEFA has replaced the previously used utility gross receipts tax
formula.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Regulatory
rider expenses consist of recovery of state-mandated programs and the
remediation adjustment clause costs. These expenses are offset by corresponding
revenues and are calculated on a per-therm basis.
NJNG’s
Operating revenues increased by $73.2 million, or 7.3 percent, and Gas purchases
increased by $66.0 million, or 9.6 percent, respectively, for the fiscal year
ended September 30, 2008, as compared with the fiscal year ended September 30,
2007, primarily as a result of:
Ÿ
|
an
increase in Operating revenue and Gas purchases related to off-system
sales in the amount of $49.2 million and $47.5 million, respectively, due
primarily to the change in the wholesale price of natural gas. During
fiscal 2008, NJNG sold 29.2 Bcf at an average price of $10.13 per Bcf
compared with 32.0 Bcf at an average price of $7.54 per Bcf during fiscal
2007 in the off-system market.
|
|
|
Ÿ
|
a
reduction in BGSS customer refunds provided to residential and small
commercial customers of $44.3 million for Operating revenue, inclusive of
sales tax refunds of $2.9 million, resulting in a reduction of $41.4
million for Gas purchases. In fiscal 2008 BGSS customer refunds were $32.1
million, as compared with $76.4 million in fiscal 2007. These customer
refunds were the result of anticipated reductions in cost to acquire
wholesale natural gas, compared with the established rate included in
NJNG’s BGSS tariff;
|
Ÿ
|
an
increase of $5.6 million in Operating revenue due to an increase of the
amounts accrued through the CIP program as a result of lower customer
usage and warmer weather, as described below;
|
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to interruptible
sales in the amount of $4.7 million and $4.5 million, respectively, due to
an increase in sales to electric co-generation
customers;
|
|
|
Ÿ
|
an
increase in Operating revenue related to storage incentive revenue in the
amount of $1.0 million, as a result of opportunities available in the
wholesale energy market due to changing market conditions relative to
established benchmarks;
|
|
|
Ÿ
|
an
increase in Operating revenue related to natural gas transport in the
amount of $3.2 million due to an increase in sales as a result of an
increase in customers using transportation only
service;
|
|
|
Ÿ
|
an
increase in Gas purchases of $300,000 as a result of a non-recurring
charge to the BGSS associated with a settlement agreement related to a
BGSS filing for fiscal 2007 partially offset by;
|
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases of $34.9 million and $30.2
million, respectively, as a result of a decrease in firm sales due to a
decline in customer usage.
|
|
NJNG’s
Operating revenues decreased by $133.2 million, or 11.7 percent, and Gas
purchases decreased by $160.1 million, or 18.9 percent, respectively, for the
fiscal year ended September 30, 2007, as compared with the fiscal year ended
September 30, 2006, primarily as a result of:
Ÿ
|
a
decrease in Operating revenue due to BGSS customer refunds of $55.1
million and $21.3 million, inclusive of sales tax refunds of $3.6 million
and $1.3 million, in December 2006 and March 2007, respectively, resulting
in a reduction of $51.5 million and $19.9 million in Gas purchases,
respectively, as a result of lower cost of gas purchases achieved through
a successful natural gas commodity purchasing strategy and declining
wholesale market prices of natural gas as compared with amounts allowed to
be recovered in NJNG’s BGSS rates;
|
|
|
Ÿ
|
a
decrease in off-system revenue of $81 million as well as Gas purchases as
a result of a 20 percent decrease in the average off-system price of
natural gas from $9.405 per dth for fiscal 2006 to $7.513 per dth for
fiscal 2007 coupled with a 5 percent decrease in sales volume from 38.4
Bcf in fiscal 2006 to 36.5 Bcf in fiscal 2007;
|
|
|
Ÿ
|
a
23.5 percent decrease in the average price of natural gas to $6.758 per
dth in fiscal 2007 from $8.830 per dth in fiscal 2006 for Gas
purchases;
|
New
Jersey Resources Corporation
Part
II
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Ÿ
|
the
effect of the non-weather portion of CIP accrual totaling $8.3 million, as
a result of lower customer usage per degree-day; and
|
|
|
Ÿ
|
growth
in the number of residential sales customers of 5,335 from fiscal 2006 to
fiscal 2007 along with an increase in the number of commercial and
industrial transport customers of 595 from fiscal 2006 to fiscal
2007.
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Consolidated Statements of Income, totaled $58.5 million, $56.5
million and $52.9 million in fiscal years 2008, 2007 and 2006, respectively. For
the fiscal year ended September 30, 2008, sales tax increased as a result of the
increase in Operating revenue, as compared with the prior fiscal year. This
increase in fiscal 2007 as compared with fiscal 2006 is due primarily to the
change in the sales tax rate from 6 percent to 7 percent, as applied to NJNG’s
operating revenue, and was partially offset by reduced revenues, as a result of
customer refunds.
Regulatory
rider expenses are calculated on a per-therm basis. Regulatory rider expenses
totaled $39.7 million, $37.6 million and $28.6 million in fiscal 2008, 2007, and
2006, respectively. The increase in regulatory rider expenses in fiscal 2008 is
a result of an increase in the rider rate charged offset by a decrease in therms
sold to customers as a result of reduced usage. The increase in regulatory rider
expenses in fiscal 2007 is due primarily to an increase in the Universal Service
Fund (USF) rider rate in November 2006 in conjunction with an increase in firm
throughput sales as a result of customer growth.
Utility
gross margin is comprised of three major categories:
Ÿ
|
Utility
Firm Gross Margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
|
Ÿ
|
Incentive
programs, where revenues generated or savings achieved from BPU-approved
off-system sales, capacity release, Financial Risk Management (defined in
Incentive Programs, below) or storage incentive programs are shared
between customers and NJNG; and
|
|
|
Ÿ
|
Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels and are subject to BPU-approved
incentives.
|
Utility
Firm Gross Margin
Utility
firm gross margin is earned from residential and commercial customers who
receive natural gas service from NJNG through either sales or transportation
tariffs.
Effective
October 1, 2006, the BPU approved the CIP to encourage energy savings while
allowing NJNG to recover the necessary costs of operations. The three-year pilot
program eliminates the disincentive to promote conservation and energy
efficiency, since utility gross margin is no longer directly linked to customer
usage. The CIP tariff normalizes NJNG’s utility gross margin recoveries for
variances not only in weather but also in other factors affecting usage,
including customer conservation. Recovery of utility gross margin for the
non-weather variance through the CIP is limited to the amount of certain gas
supply cost savings achieved and is subject to an earnings test, which contains
a return on equity component of 10.3 percent. Prior to fiscal 2007, the WNC
provided for a revenue adjustment to mitigate the impact of weather to NJNG’s
margin but did not address variations related to reduced customer usage, which
were addressed through the implementation of the CIP.
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.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Total
utility firm gross margin increased $4.0 million, or 1.9 percent, and $14.0
million, or 6.9 percent, in fiscal 2008 and 2007, respectively. The changes in
fiscal 2008 were due primarily to:
Ÿ
|
a
$1.9 million increase in residential sales service due to an increase in
customer growth of 0.6 percent; and
|
|
|
Ÿ
|
a
$1.8 million increase in residential and commercial transport margin due
to an increase in customer growth of 16.2
percent.
|
The
changes in utility firm gross margin for fiscal 2007 were due primarily
to:
Ÿ
|
the
effect of the CIP in the current fiscal year, which captures the impact
from both weather and customer usage, when compared with the same periods
in the prior fiscal year when the WNC, which did not capture the impact of
lower usage per degree-day, was in
effect;
|
Ÿ
|
commercial
transport customer growth of 13.9 percent; and
|
|
|
Ÿ
|
residential,
commercial and industrial sales customer growth of 1.2
percent.
|
NJNG
added 7,175 and 8,421 new customers and added natural gas heat and other
services to another 728 and 770 existing customers in fiscal 2008 and 2007,
respectively. This customer growth represents an estimated annual increase of
approximately 0.95 Bcf in sales to firm
customers, assuming normal weather and usage. The decline in new customer growth
was driven by the reduction in the number of residential new construction
housing starts.
In fiscal
2009 and 2010, NJNG currently expects to add, in total, approximately 14,000 to
16,000 new customers. In addition, NJNG expects to convert an additional 650
existing customers per year to natural gas heat and other services. Achieving
these expectations would represent an estimated annual customer growth rate of
approximately 1.5 percent and result in an estimated sales increase of
approximately 1.07 Bcf to 1.14 Bcf, annually.
The
Company believes that this growth would increase utility gross margin under its
base rates as provided by the Rate Order by approximately $4.0 to $4.2 million
annually, as calculated under NJNG’s CIP tariff.
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.
The
weather for the fiscal year ended September 30, 2008, was 8.7 percent warmer
than normal, which resulted in an accrual of utility gross margin under the
weather component of the CIP of $9.1 million, compared with $8.2 million in the
prior fiscal year. Under the provisions of the CIP, accruals related to the
weather portion are dependent on the occurrence of degree days and the magnitude
of the variance in relation to a normal degree day. The weather in fiscal 2007
was 5.6 percent warmer than normal, which resulted in an accrual of utility
gross margin under the weather component of the CIP of $8.2
million.
Customer
usage was lower than the established benchmark during the fiscal year ended
September 30, 2008, which resulted in an additional accrual of utility gross
margin under the non-weather component of CIP in the amount of $13.0 million
compared with $8.3 million in the prior fiscal year.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
The
following table shows residential and commercial customers using transportation
services as of the fiscal years ended September 30:
|
2008
|
|
2007
|
|
2006
|
Residential
transport
|
11,542
|
|
9,229
|
|
8,594
|
Commercial
transport
|
5,288
|
|
4,875
|
|
4,280
|
Total
transport
|
16,830
|
|
14,104
|
|
12,874
|
Transportation
customers increased 19.3 percent in 2008 and 9.6 percent in 2007 as a result of
an increase in marketing activity by third-party natural gas service providers
in NJNG’s service territory.
Utility
firm gross margin from firm transportation service increased $1.8 million, or
9.8 percent, and decreased $6.3 million, or 26.0 percent, in fiscal 2008 and
2007, respectively. NJNG transported 8.9 Bcf for its firm customers in fiscal
2008, compared with 8.6 Bcf in fiscal 2007 and 7.4 Bcf in fiscal 2006. The
increase in utility firm gross margin in fiscal 2008 was due primarily to an
increase in the number of residential and commercial customers switching from
firm sales service to firm transportation services, combined with the impact of
the CIP program. The decrease in fiscal 2007 is due primarily to the customer
usage being greater than the benchmark set under CIP, offset by an increase in
firm residential and commercial transport services. Fiscal 2006 margin did not
reflect an adjustment for customer usage.
Incentive
Programs
To reduce
the overall cost of its natural gas supply commitments, NJNG has entered into
contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system
requirements.
These
off-system sales enable NJNG to spread its fixed demand costs, which are charged
by pipelines to access their supplies year-round, over a larger and more diverse
customer base. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to economically
hedge NJNG’s natural gas costs. As of November 1, 2007, NJNG retains 15 percent
of the utility gross margin, with 85 percent credited to firm customers through
the BGSS. Previously, NJNG customers were credited 80 percent and NJNG retained
20 percent of the gains and losses.
The
storage incentive program shares gains and losses on an 80 percent and 20
percent basis between customers and NJNG, respectively. This program measures
the difference between the actual cost of natural gas injected into storage and
a benchmark established with the purchase of a portfolio of futures contracts
applicable to the April-through-October natural gas injection season, which is
established by the BPU.
On
October 3, 2008, the BPU approved the Rate Order, which extends the incentive
programs through October 31, 2011, and provides changes to certain volume and
cost limitations surrounding these incentive programs. See Note 2.
Regulation.
NJNG’s
incentive programs totaled 34.5 Bcf and generated $7.7 million of utility gross
margin for the fiscal year ended September 30, 2008, compared with 36.5 Bcf and
$8.1 million for the fiscal year ended September 30, 2007. The decrease in
utility gross margin from the incentive programs was due primarily
to:
Ÿ
|
a
decrease in margin from the storage incentive program as a result of
timing variations of storage incentive transactions; partially offset
by
|
|
|
Ÿ
|
more
favorable market spreads, which resulted in an increase in off-system
sales margin.
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJNG’s
incentive programs totaled 36.5 Bcf and generated $8.1 million of utility gross
margin in fiscal 2007, compared with 38.4 Bcf and $7.4 million of utility gross
margin in fiscal 2006. Utility gross margin from incentive programs comprised 4
percent of total utility gross margin in fiscal 2007 and 2006, respectively. The
increase in utility gross margin for fiscal 2007 was due primarily to higher
margin from the storage incentive and FRM programs which was largely offset by
lower off-system sales margin from lower volumes sold and as driven by market
opportunities.
New York
Mercantile Exchange (NYMEX) settlement prices for natural gas are a general
indication of the monthly market movements. NYMEX prices have increased to an
average of $9.040/dth for the fiscal year ended September 30, 2008, from
$6.758/dth for the fiscal year ended September 30, 2007, which represents a 33.8
percent increase, while the average off-system price was higher by 34.3 percent
at an average of $10.126/dth for the fiscal year ended September 30, 2008, from
an average of $7.513/dth for the fiscal year ended September 30,
2007.
Interruptible
and Tariff Revenues
As of
September 30, 2008, NJNG serves 61 customers through interruptible sales and/or
transportation tariffs. Interruptible customers are those customers whose
service can be temporarily halted as they have the ability to utilize an
alternate fuel source. Although therms sold and transported to interruptible
customers represented 6.4 percent of total
throughput
for the fiscal year ended September 30, 2008, and 6.3 percent of the total
throughput during the prior fiscal year, they accounted for less than 1 percent
of the total utility gross margin in each year as a result of the natural gas
commodity costs being the largest component of the sales price.
Interruptible
sales were 2.0 Bcf and 1.5 Bcf in fiscal 2008 and 2007, respectively. In
addition, NJNG transported 4.4 Bcf and 5.0 Bcf in fiscal 2008 and 2007,
respectively, for its interruptible customers.
An
agreement with the BPU approved on October 3, 2007, included the termination of
the incentive programs related to interruptible sales, on-system interruptible
transportation and sales to certain electric generation facilities effective
November 1, 2007. This has a minimal effect on the related margin. Previously,
NJNG retained 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.
Operation
and Maintenance Expense
Operation
and maintenance expense increased $1.0 million, or 1.1 percent, in fiscal 2008
as compared with fiscal 2007 due primarily to:
Ÿ
|
higher
compensation costs of $5.9 million as a result of an increase in the
number of employees and overtime labor as well as annual wage
increases;
|
|
|
Ÿ
|
an
increase of $1.5 million due primarily to an increase in NJNG’s shared
services expenses, including labor costs and consulting fees related to
various tax positions;
|
|
|
Ÿ
|
an
increase of $1.2 million due primarily to an increase in bad debt expense
as a result of the broad impacts from the U.S. economy on customers in
NJNG’s service territory, based on a greater amount of outstanding
receivables in excess of 150 days due; partially offset
by
|
|
|
Ÿ
|
$4.0
million in settlement charges associated with the Long Branch/Mass Tort
litigation case in fiscal 2007 that did not recur in fiscal
2008;
|
|
|
Ÿ
|
a
$1.4 million credit as a result of adjusting accrued medical premium
expenses to reflect lower costs based on actual claims paid, partially
offset by increased claims; and
|
|
|
Ÿ
|
lower
pipeline integrity costs of $1.4
million.
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Operation
and maintenance expense increased $12.1 million, or 14.2 percent, in fiscal 2007
as compared with fiscal 2006 due primarily to:
Ÿ
|
the
BPU settlement related to the Long Branch Mass Tort Litigation, reflecting
the pre-tax litigation and settlement cost of $4.0 million attributed to
personal injury claims that were previously deferred in Regulatory assets,
but were not approved by the BPU as recoverable costs;
|
|
|
Ÿ
|
higher
compensation costs of $5.9 million primarily due to an increase in the
number of employees as well as annual wage increases;
|
|
|
Ÿ
|
an
increase in contractor’s expense of $1.4 million due primarily to
federally mandated pipeline integrity efforts in working towards
completion of the Transmission Pipeline Integrity requirements;
and
|
|
|
Ÿ
|
higher
marketing incentives of $1.2 million for special promotional rebates
associated with the conversion of additional customers from other
fuels.
|
Depreciation
Expense
Depreciation
expense increased $2.1 million in fiscal year 2008 and $1.5 million in fiscal
year 2007, as compared with the respective previous fiscal years, as a result of
greater utility plant being placed into service.
Operating
Income
Operating
income remained relatively consistent at $88.1 million and $88.5 million,
respectively, for fiscal 2008 as compared with fiscal 2007, due primarily
to:
Ÿ
|
an
increase in Operation and maintenance expenses of $1.0 million, as
discussed above;
|
|
|
Ÿ
|
an
increase in Depreciation expense of $2.1 million, as a result of greater
utility plant being placed into service; partially offset
by
|
|
|
Ÿ
|
an
increase in total Utility gross margin of $3.1 million, as discussed
above.
|
Operating
income increased $500,000, or 0.6 percent, in fiscal 2007 as compared with
fiscal 2006, due primarily to an increase in firm utility gross margin as a
result of implementation of the CIP and firm utility customer growth, offset by
an increase in operation and maintenance expense and depreciation expense as
described above. During fiscal 2006, 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
Expense
Interest
expense for fiscal 2008 remained consistent as compared with fiscal 2007.
Increases in interest expense as a result of the issuance of additional fixed
rate long-term debt and higher rates on variable rate long-term debt offset
lower rates on commercial paper and lower BGSS interest due to the absence of
overrecovered gas costs.
Interest
expense increased $4.7 million in fiscal 2007 to $21.2 million from $16.5
million in fiscal 2006 due primarily to an increase in short-term borrowings and
higher interest rates, as well as interest due to customers on balances
associated with overrecovered gas costs.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Net
Income
Net
income decreased $2.0 million, or 4.5 percent, in fiscal year 2008, as compared
with the prior fiscal year due primarily to lower Operating income as described
above and an increase in income tax expense of approximately $1.5 million due to
a one-time net after tax charge of $1.0 million related to a tax position
surrounding utility property.
Net
income decreased $2.4 million, or 5.1 percent, in fiscal 2007, compared with
fiscal 2006, due primarily to higher Operating and maintenance expense as a
result of the BPU settlement and higher labor expenses described above, as well
as higher interest expense, partially offset by the implementation of the CIP
and a reduction in bad debt expense.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Energy
Services Segment
NJRES is
a non-regulated natural gas marketer and provides for the physical delivery of
natural gas to its customers, while managing its exposure to the price risk
associated with its natural gas commodity supply through the use of financial
derivative contracts. In order to best serve its customers, which include other
natural gas marketers, local distribution companies, industrial companies,
electric generators and retail aggregators, and to manage the continuous changes
in supply and demand that it faces in the market areas in which it participates,
so that it can maximize its margins, NJRES has physical storage and
transportation capacity contracts with natural gas storage facilities and
pipelines. NJRES purchases natural gas predominately in the eastern United
States and Canada, and transports that natural gas, through the use of its
pipeline contracts to which it has reserved capacity through the payment of a
fixed demand charge, to either storage facilities that it has reserved,
primarily in the Appalachian, Mid-Continent and Gulf regions of the United
States and Canada or directly to customers in various market areas including the
Northeastern region of the United States and eastern Canada.
When
NJRES enters into contracts for the future delivery of physical natural gas, it
simultaneously enters into financial derivative contracts at market prices to
establish an initial financial margin for each of its forecasted physical
commodity transactions. The financial derivative contracts also serve to
protect the cash flows of the transaction from volatility in commodity prices as
NJRES locks in pricing and can include futures, options, and swap contracts,
which are all predominantly actively quoted on the NYMEX.
Through
the use of its contracts for natural gas storage and pipeline capacity, NJRES is
able to take advantage of pricing differences between geographic locations,
commonly referred to as “locational spreads,” as well as over different time
periods, for the delivery of natural gas to its customers, thereby improving the
initially established financial margin result. NJRES utilizes financial futures,
forwards and swap contracts to establish economic hedges that fix and protect
the cash flows surrounding these transactions.
Accordingly,
NJRES utilizes these contractual assets to optimize its opportunities to
increase its financial margin by capitalizing on changes or events in the
marketplace that impact natural gas demand levels. NJRES generates financial
margin through three primary channels:
Ÿ
|
Storage: NJRES attempts
to take advantages of differences in market prices occurring over
different time periods (time spreads) as follows:
|
|
|
|
¡
|
NJRES
can purchase gas to inject into storage and concurrently lock in gross
margin with a contract to sell the natural gas at a higher price at a
future date;
|
|
|
|
¡
|
NJRES
can purchase a future contract with an early delivery date at a lower
price and simultaneously sell another future contract with a later
delivery date having a higher price.
|
|
|
Ÿ
|
Transportation
(Basis): Similary, NJRES benefits from pricing differences
between various receipt and delivery points along a natural gas pipeline
as follows:
|
|
|
|
¡
|
NJRES
can utilize its pipeline capacity by purchasing natural gas at a lower
price location and transporting to a higher value location. NJRES can
enter into a basis swap contract, a financial commodity
derivative based on the price of natural gas at two different
locations, when it will lead to positive cash flows and financial margin
for NJRES.
|
|
|
Ÿ
|
Daily Sales
Optimization: This channel optimizes existing transport
positions during short-term market price movements and benefits from
locational spreads on a daily basis.
|
|
|
|
¡
|
Involves
increasing the financial margin on established transportation hedges by
capitalizing on price movements between specific
locations.
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Predominantly
all of NJRES’ purchases and sales of natural gas result in the physical delivery
of natural gas. NJRES has elected the “normal purchase normal sale” scope
exception of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS 133), for all
physical commodity contracts entered into prior to October 1, 2007, under which
related liabilities incurred and assets acquired under these contracts are
recorded when title to the underlying commodity passes. For all physical
commodity contracts entered into subsequent to September 30, 2007, NJRES has
elected not to use the normal purchase normal sale scope exception of SFAS 133,
and records these physical commodity contracts at fair value on the Consolidated
Balance Sheets. All changes in the fair value of physical commodity contracts
entered into subsequent to September 30, 2007 are recorded as part of Gas
purchases in the Consolidated Statements of Income.
The
changes in fair value of NJRES’ financial derivative instruments, which are
financial futures, swaps and option contracts are also recognized in the
Consolidated Statements of Income, as a component of Gas purchases.
NJRES’
financial and physical contracts will result, over time, in earning a gross
margin on the entire transaction. For financial reporting purposes under GAAP,
the change in fair value associated with derivative instruments used to
economically hedge these transactions are recorded as a component of Gas
purchases in the Consolidated Statements of Income during the duration of the
financial instrument or commodity contract. These changes in fair value are
referred to as unrealized gains and losses. In other instances, certain
financial contracts designed to economically fix or hedge the price of natural
gas that is purchased and placed into storage, to be sold at a later date,
settle and result in realized gains, which are also recorded as a component of
Gas purchases in the Consolidated Statements of Income.
These
unrealized gains or losses from the change in fair value of unsettled financial
instruments and physical commodity contracts, or realized gains or losses
related to financial instruments that economically hedge natural gas inventory
that has not been sold as part of a planned transaction, cause large variations
in the reported gross margin and earnings of NJRES. NJRES will continue to earn
the gross margin established at inception of the transaction over the duration
of the forecasted transaction and may be able to capitalize on events in the
marketplace that enable it to increase the initial margin; however, gross margin
or earnings during periods prior to the delivery of the natural gas will not
reflect the underlying economic result.
NJRES
expenses its demand charges, which represent the right to use natural gas
pipeline and storage capacity assets of a third-party for a fixed period of
time. These demand charges are expensed over the term of the related natural gas
pipeline or storage contract. The term of these contracts vary from less than
one year to five years.
NJRES’
financial results are summarized as follows:
(Thousands)
|
2008
|
|
2007
|
|
2006
|
Operating
revenues
|
$2,714,733
|
|
$1,994,682
|
|
$2,133,540
|
Gas
purchases (including fixed demand charges)
|
2,569,555
|
|
1,934,374
|
|
1,792,213
|
Gross
margin
|
145,178
|
|
60,308
|
|
341,327
|
Operation
and maintenance expense
|
27,384
|
|
18,521
|
|
16,415
|
Depreciation
and amortization
|
206
|
|
214
|
|
211
|
Other
taxes
|
1,134
|
|
660
|
|
656
|
Operating
income
|
116,454
|
|
40,913
|
|
324,045
|
Other
income
|
204
|
|
555
|
|
998
|
Interest
expense, net
|
2,574
|
|
4,222
|
|
7,042
|
Income
tax provision
|
42,176
|
|
15,948
|
|
129,629
|
Net
income
|
$ 71,908
|
|
$ 21,298
|
|
$ 188,372
|
NJRES
records its financial derivative instruments using fair market values. The
mark-to-market changes on these financial instruments are reflected as a
component of Gas purchases in the Consolidated Statements of
Income.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
As of
September 30, 2008, NJRES’ portfolio of financial derivative instruments was
comprised of:
Ÿ
|
20.7
Bcf of net short futures contracts and fixed swap positions, with an
average fixed price of $12.04 per dekatherm (dth);
|
|
|
Ÿ
|
46.4
Bcf of net short basis swap
positions.
|
NJRES’
portfolio as of September 30, 2007, was comprised of:
Ÿ
|
28.4
Bcf of net short futures contracts and fixed swap positions, with an
average fixed price of $10.79 per dth;
|
|
|
Ÿ
|
49.9
Bcf of net short basis swap
positions.
|
NJRES had
a gross margin of $145.2 million and $60.3 million for the fiscal year ended
September 30, 2008 and 2007, respectively. The increase in gross margin of
approximately 141 percent is primarily due to larger differentials in the
current fiscal year between fixed prices or NJRES’transaction prices, and
corresponding market prices for future delivery related to NJRES’ financial
futures contracts and fixed swap derivatives. The differentials increased by
approximately $1.74 per dth, from a gain of $2.35 per dth during fiscal 2007, to
a gain of $4.09 per dth in fiscal 2008. The increase in differentials was due
primarily to an increase in the fixed prices for delivery, which rose
approximately 12 percent in fiscal 2008 as compared to fiscal 2007, as compared
to average market price increases of approximately 6 percent that occurred
during fiscal 2008 as compared to fiscal 2007.
Since
NJRES’ portfolio of financial derivative instruments is comprised of net short
positions, the overall higher average fixed prices resulted in unrealized and
realized gains of $1.8 million and $39.3 million, respectively, for the fiscal
year ended September 30, 2008, as compared with unrealized and realized losses
of $(28.0) million and $(2.9) million, respectively, in the prior fiscal period.
The realized gains noted above of $39.3 million in fiscal 2008 and losses of
$(2.9) in fiscal 2007, resulted from the settlement of open derivative
instruments that were economically hedging natural gas still in storage
inventory and not yet sold.
NJRES’
gross margin in fiscal 2008 benefitted from a 46 percent decline in average
market prices during the fourth quarter. Average market prices related to the
financial derivatives in NJRES’ portfolio decreased from $14.64 per dth as of
June 30, 2008 to $7.95 per dth as of September 30, 2008, resulting in unrealized
and realized gains during the fourth quarter of $167.6 million and $13.2
million, respectively.
NJRES had
gross margin of $60.3 million and $341.3 million for the fiscal years ended
September 30, 2007 and 2006, respectively. The decrease in gross margin of
approximately 82 percent is due to larger average price differentials between
fixed prices and market prices that occurred during fiscal 2006 and resulted in
unrealized gains, than during fiscal 2007 where the average pricing differential
narrowed.. NJRES’ portfolio in both fiscal 2007 and 2006 was comprised of net
short positions, which had pricing differentials that resulted in realized and
unrealized losses of $(2.9) million and $(28.0) million, respectively, in fiscal
year 2007, as compared with realized and unrealized gains of $0.7 million and
$269.6 million, respectively, in fiscal year 2006.
The
financial derivatives that comprise NJRES' portfolios are designed to offset the
majority of any commodity price risk associated with natural gas price movements
by providing an economic hedge for forecasted physical natural gas transactions.
NJRES' portfolio mix of net short financial derivatives as of September 30, 2008
and 2007, is subject to unrealized losses during periods of rising market prices
for natural gas and, correspondingly, unrealized gains during periods of lower
market prices for natural gas. Portfolio positions are generally comprised of
liquid trading points that are readily available and easily marked. The NYMEX
price movements can be a general indication of the change in market value of the
overall portfolio; however, the portfolio includes points that differ from the
locations with quoted NYMEX prices and, due to their location, trade either
above or below the NYMEX price. Average NYMEX prices as of September 30, 2008
and 2007, were $8.23 per dth and $8.07 per dth, respectively.
Additionally,
management of the Company uses non-GAAP measures when viewing the results of
NJRES to monitor the operational results without the impact of unsettled and
certain settled derivative instruments. These non-GAAP measures are “financial
margin” and “net financial earnings.”
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
The
following table is a computation of financial margin of NJRES for the fiscal
years ended September 30:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$ |
2,714,733 |
|
|
$ |
1,994,682 |
|
|
$ |
2,133,540 |
|
Gas
purchases
|
|
|
2,569,555 |
|
|
|
1,934,374 |
|
|
|
1,792,213 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments
|
|
|
(1,839
|
) |
|
|
27,988 |
|
|
|
(269,590
|
) |
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
|
|
(39,250
|
) |
|
|
2,903 |
|
|
|
(710
|
) |
Financial
margin
|
|
$ |
104,089 |
|
|
$ |
91,199 |
|
|
$ |
71,027 |
|
A
reconciliation of Operating income, the closest GAAP financial measurement, to
the financial margin of NJRES is as follows for the years ended September
30:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
income
|
|
$ |
116,454 |
|
|
$ |
40,913 |
|
|
$ |
324,045 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
|
|
27,384 |
|
|
|
18,521 |
|
|
|
16,415 |
|
Depreciation
and amortization
|
|
|
206 |
|
|
|
214 |
|
|
|
211 |
|
Other
taxes
|
|
|
1,134 |
|
|
|
660 |
|
|
|
656 |
|
Subtotal
– Gross margin
|
|
|
145,178 |
|
|
|
60,308 |
|
|
|
341,327 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments
|
|
|
(1,839
|
) |
|
|
27,988 |
|
|
|
(269,590
|
) |
Net
realized (gain) loss from derivative instruments related to natural gas
inventory
|
|
|
(39,250
|
) |
|
|
2,903 |
|
|
|
(710
|
) |
Financial
margin
|
|
$ |
104,089 |
|
|
$ |
91,199 |
|
|
$ |
71,027 |
|
A
reconciliation of Net income to net financial earnings is as follows for the
years ended September 30:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
71,908 |
|
|
$ |
21,298 |
|
|
$ |
188,372 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments, net of taxes
|
|
|
(1,127
|
) |
|
|
17,079 |
|
|
|
(159,838
|
) |
Realized
(gain) loss from derivative instruments related to natural gas inventory,
net of taxes
|
|
|
(23,778
|
) |
|
|
1,771 |
|
|
|
(421
|
) |
Net
financial earnings
|
|
$ |
47,003 |
|
|
$ |
40,148 |
|
|
$ |
28,113 |
|
NJRES
generates financial margin by optimizing its portfolio of physical storage and
transport capacity assets. Natural gas storage capacity is leased by NJRES from
third party providers at various points located throughout the eastern United
States and Canada. These storage assets provide NJRES the ability to participate
in market conditions that result in favorable “time spreads,” which consists of
buying or selling between different months in order to generate financial
margin. Natural gas transportation capacity assets are also leased by NJRES from
independent interstate pipeline operators. NJRES’ portfolio of transport
capacity provides arbitrage opportunities that capture locational spreads, in
generating financial margin. The locational spreads are attained when pricing
differences occur between various locations.
Typically,
periods of greater price volatility provide NJRES with additional opportunities
to generate financial margin by optimizing its storage and transport capacity
assets, and capturing their respective time or locational spreads. NJRES also
generates financial margin from its daily sales optimization activities, which
consists of buying/selling flowing gas on a daily basis. The combination of
strategically positioned natural gas storage and transportation capacities
provides NJRES with a significant amount of arbitrage opportunities that are
typically more prevalent during periods of high price
volatility.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJRES'
financial margin in fiscal 2008 increased $12.9 million, as compared with fiscal
2007, due primarily to the acquisition of additional transport contracts for the
Northeast market region during the first quarter of fiscal 2008. The additional
transport contracts enabled NJRES to transact greater volumes in the market
region along with establishing more favorable locational spreads that
contributed to higher margins. The average maximum daily quantity of firm
transportation capacity (excluding asset management contracts) increased to
803,776 dth in fiscal 2008 from 766,403 dth in fiscal 2007.
The
increase in financial margin was also due to additional arbitrage opportunities
for NJRES’ daily sales optimization activities during fiscal 2008. The arbitrage
opportunities were partly attributable to market price volatility that primarily
benefited NJRES’ Northeast market region during the fourth quarter of fiscal
2008. Locational price fluctuations may arise from numerous factors, including
severe weather patterns such as those experienced during the current fiscal year
by hurricanes Ike and Gustav in the Gulf of Mexico. NJRES’ overall sales volumes
increased to 292.5 Bcf during fiscal 2008 from 260.1 Bcf during fiscal
2007.
Partially
offsetting the increase in financial margin from the above described activities
were lower average time spreads on storage positions, which decreased to $0.372
per dth in fiscal 2008 from $0.528 per dth in fiscal year 2007. The decrease in
average time spreads on storage positions is attributable primarily to pricing
conditions that existed during the month of February 2007, primarily as a result
of weather conditions, which enabled NJRES to transact a significant volume of
withdrawals from existing storage positions that generated higher storage
margins in the prior fiscal year. The current fiscal year did not experience a
similar pricing event for time spreads.
NJRES’
financial margin in fiscal 2007 increased $20.2 million, as compared with fiscal
year 2006, due primarily to storage positions designed to capture additional
value from favorable time spreads, coupled with higher sales volumes related to
arbitrage opportunities that also provided additional margins during the winter
season of fiscal 2007, when natural gas market prices experienced higher
volatilities within a short time period in the Appalachian and Northeast regions
of the United States. The volatility in prices, which were primarily due to
below-normal temperatures in those regions, primarily during the second quarter
of fiscal 2007, allowed NJRES to maximize its existing natural gas storage and
basis positions to secure the majority of this increase in financial margin in
fiscal 2007 as compared with fiscal 2006, as it was able to maximize pricing
differences between locations from where it took delivered gas to where it could
best be utilized given the weather conditions.
NJRES’ Operation and
maintenance (O&M) expense increased by $8.9 million and $2.1 million for the
fiscal years ended September 30, 2008 and 2007, respectively. The increases in
fiscal year 2008 were due primarily to an increase of $4.8 million in charitable
contributions, an aggregate increase of $4.1 million for corporate services,
compensation costs (as a result of higher salary and incentive costs based on
performance measures), greater support expenses and increased accounting fees.
In March 2008, NJRES established a physical presence near the Gulf region by
opening a satellite office in Houston, Texas, which also contributed to some of
the increases in compensation and support costs.
The
O&M increase in fiscal year 2007 was due primarily to increased compensation
as a result of operational growth, incentive costs correlated to net financial
earnings performance and increased charitable contributions.
Contributing
to greater net financial earnings in fiscal 2008 is a reduction of $1.8 million
in state income tax expense as a result of a reduction in NJRES’ statutory state
income tax rate. The reduction in the rate is due to a change in the
apportionment of its taxable income for state tax purposes. The new rate also
resulted in a one-time current period benefit of approximately $1.7 million from
the effect of revaluing its deferred tax liabilities at the beginning of the
fiscal year. As a result of this state income tax rate change and the
revaluation of its deferred tax liabilities, the effective tax rate for NJRES is
36.97 percent for the fiscal year ended September 30, 2008, compared with 41.08
percent for the fiscal year ended September 30, 2007. Excluding the $1.7 million
one-time benefit, the effective tax rate was 39.0 percent for the fiscal year
ended September 30, 2008.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Retail
and Other Operations
The
consolidated financial results of Retail and Other are summarized as
follows:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$ |
22,850 |
|
|
$ |
21,776 |
|
|
$ |
(811
|
) |
Operation
and maintenance expense
|
|
$ |
23,162 |
|
|
$ |
21,074 |
|
|
$ |
20,062 |
|
Equity
in earnings, net of tax
|
|
$ |
1,988 |
|
|
$ |
1,662 |
|
|
$ |
1,817 |
|
Net
loss
|
|
$ |
(477
|
) |
|
$ |
(497
|
) |
|
$ |
(13,334
|
) |
NJR
Energy has an economic hedge associated with a long-term fixed price contract to
sell gas to a counterparty. Unrealized losses or gains at NJR Energy are the
result of the change in value associated with financial derivative instruments
(futures contracts) designed to economically hedge the long-term fixed-price
contract.
The
Income statement impact represents unrealized (losses) associated with these
derivative instruments of $(8.2) million, $(7.2) million and $(28.4) for the
fiscal years ended September 30, 2008, 2007 and 2006, respectively, which are
recorded, pre-tax, as a component of Operating revenues. On an after-tax basis,
these unrealized (losses) are $(4.8) million, $(4.2) million and $(16.9) million
for the fiscal years ended September 30, 2008, 2007 and 2006,
respectively.
Operating
revenue in fiscal year ended September 30, 2008, increased $1.4 million compared
with fiscal 2007 due primarily to increased rental income of $1.0 million at
CR&R as a result of an increase during the current period of office space
leased in a building CR&R completed in May 2007, and $1.1 million at NJRHS
due primarily to increased service contract revenue, partially offset by higher
unrealized losses related to NJR Energy’s financial derivative contracts as
noted above. The portfolio of swap contracts is comprised primarily of long
positions, which decrease in value during periods of declining market prices.
Operating revenue in fiscal 2007 increased $22.6 million compared with fiscal
2006 due primarily to lower unrealized losses at NJR Energy as a result of its
economic hedge and greater sales volumes associated with installations of
cooling equipment and a greater volume of service contracts at
NJRHS.
Operation
and maintenance expense increased by $2.1 million and $1.0 million for the
fiscal years ended September 30, 2008 and 2007, respectively, due primarily to
higher compensation costs resulting from annual wage increases and increased
shared services expenses.
Taxes
netted in Equity in earnings from Iroquois are $1.3 million, $1.1 million and
$1.2 million and are included in the Consolidated Statements of Income for the
fiscal years ended September 30, 2008 and 2007, respectively. Equity in earnings
from Iroquois is driven by the underlying performance of natural gas
transportation through its existing pipeline, which is based on FERC-regulated
tariffs.
Net loss
in fiscal 2008 remained constant as compared with fiscal 2007. The increased
operating revenue at NJRHS and CR&R, as previously discussed, and increased
earnings from the investment in Iroquois were offset by the increased Operation
and maintenance expenses and unrealized losses at NJR Energy. Net loss in fiscal
year 2007 decreased $12.8 million compared with fiscal 2006 due primarily to
lower continued unrealized losses at NJR Energy and improved operating results
at NJRHS, offset partially by a reduced gain on the sale of land at
CR&R.
Liquidity
and Capital Resources
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and business operations and
provides adequate financial flexibility for accessing capital markets as
required.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
NJR’s
consolidated capital structure at September 30 was as follows:
|
|
2008
|
|
|
2007
|
|
Common
stock equity
|
|
|
51 |
% |
|
|
50 |
% |
Long-term
debt
|
|
|
32 |
|
|
|
30 |
|
Short-term
debt
|
|
|
17 |
|
|
|
20 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
When
netting NJR’s cash balance of $42.6 million with short-term debt as of September
30, 2008, the resulting capital ratios of common stock equity, long-term debt
and short term debt are 53 percent, 33 percent and 14 percent,
respectively.
Common
stock equity
NJR
satisfies its external common equity requirements, if any, through issuances of
its common stock, including the proceeds from stock issuances under its
Automatic Dividend Reinvestment Plan (DRP) and proceeds from the exercise of
options issued under the Company’s long-term incentive program. The DRP allows
NJR, at its option, to use shares purchased on the open market or newly issued
shares.
On
January 23, 2008, NJR’s Board of Directors approved a 3-for 2-stock split in the
form of a dividend for the Company’s common stock shareholders of record on
February 8, 2008. The additional shares were issued on March 3, 2008, resulting
in an increase in average shares outstanding from approximately 28 million to
approximately 42 million.
The
Company has a share repurchase program that provides for the repurchase of up to
6.8 million shares on a split-adjusted basis. As of September 30, 2008, the
Company repurchased approximately 5.4 million of those shares and has the
ability to repurchase approximately 1.4 million additional shares under the
approved program.
Debt
NJR and
its unregulated subsidiaries rely on cash flows generated from operating
activities and utilization of committed credit facilities to provide liquidity
to meet working capital and external debt-financing requirements.
As of
September 30, 2008, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $408.6 million available under these facilities
(see Note 7. Short-term
debt and credit
facilities).
NJR
believes that as of September 30, 2008, NJR, NJNG and NJRES were, and currently
are, in compliance with all debt covenants.
NJR
believes that its existing borrowing availability and cash flow from operations
will be sufficient to satisfy its and its subsidiaries’ working capital, capital
expenditures and dividend requirements for the foreseeable future. NJR, NJNG and
NJRES currently anticipate that its financing requirements in fiscal 2008 and
2009 will be met through the issuance of short-term and long-term debt and
proceeds and from the Company’s DRP. The recent tightening of the U.S. credit
markets and the continuing flight of banks to preserve capital have led to a
slowdown of lending between banks, which has trickled downstream to businesses.
A prolonged constriction of credit availability could possibly affect
management’s ability to borrow. The credit market crisis has spread to global
markets, which has led to higher London Interbank Offered Rate
(LIBOR) rates, which could also increase borrowing costs associated with
NJR’s and NJNG’s variable rate debt.
NJR
On
September 24, 2007, NJR issued $50 million of Unsecured Senior Notes, which were
used for financing its initial investment in Steckman Ridge and general
corporate purposes, including refinancing short-term debt. These notes have a
10-year maturity and an interest rate of 6.05 percent.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
On
December 13, 2007, NJR refinanced its prior senior credit facility, which was
scheduled to expire on December 16, 2007, into a new $325 million five-year
revolving unsecured credit facility. The new credit facility permits the
borrowing of revolving loans and swing loans, as well as the issuance of letters
of credit. Swing loans are loans made available on a same-day basis for an
aggregate principal amount of up to $50 million and repayable in full within a
maximum of seven days of borrowing. It also permits an increase to the facility,
from time to time, with the existing or new lenders, in a minimum of $5 million
increments up to a maximum $100 million at the lending banks discretion.
Borrowings under the new facility are conditional upon compliance with a maximum
leverage ratio, as defined in the new credit facility, of not more than 0.65 to
1.00 at any time. NJR used the initial borrowings under the new credit facility
to refinance its prior credit facility. In addition, certain of NJR’s
non-regulated subsidiaries have guaranteed to the lenders all of NJR’s
obligations under the new credit facility.
Depending
on borrowing levels and credit ratings, NJR’s interest rate can either be, at
its discretion, the LIBOR or the Federal Funds Open Rate plus an applicable
spread and facility fee. As of September 30, 2008, NJR’s effective rate was 2.46
percent on outstanding borrowings of $32.7 million under this credit
facility.
Financial
covenants contained in NJR’s credit facility include a maximum debt-to-total
capitalization of 65 percent and minimum interest coverage ratio (the multiple
of operating income over total interest cost) of 2.5. At September 30, 2008, the
debt-to-total capitalization was 49 percent after adjustments for the fair value
of derivative assets and liabilities and standby letters of credit, as defined
in NJR’s credit facility. For the year ended September 30, 2008, the interest
coverage ratio, as defined in the credit facility, was 9.77.
NJR’s
short-term borrowings at September 30, 2008, decreased to $32.7 million from
$40.2 million at September 30, 2007.
NJR uses
its short-term borrowings primarily to finance its share repurchases, to satisfy
NJRES’ short-term liquidity needs and to finance, on an initial basis,
unregulated investments. NJRES’ use of high-injection, high-withdrawal storage
facilities and anticipated pipeline park-and-loan arrangements, combined with
related economic hedging activities in the volatile wholesale natural gas
market, create significant short-term cash requirements.
As of
September 30, 2008, NJR had two letters of credit outstanding on behalf of
NJRES, which expire on December 31, 2008. A $17.0 million letter of credit was
related to margin requirements for NJRES’ natural gas transactions, and a
$500,000 letter of credit was for long-term natural gas storage transactions.
NJR also has a $675,000 letter of credit outstanding on behalf of CR&R,
which will expire on December 3, 2009. The letter of credit is in place to
support development activities. These letters of credit reduce the amount
available under NJR’s committed credit facility by the same amount. NJR does not
anticipate that these letters of credit will be drawn upon by the
counterparties, and they will be renewed as necessary.
NJNG
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its own
financial profile. The seasonal nature of NJNG’s operations creates large
short-term cash requirements, primarily to finance natural gas purchases and
customer accounts receivable. NJNG obtains working capital for these
requirements, and for the temporary financing of construction and MGP
remediation expenditures and for energy tax payments, through the issuance of
commercial paper and short-term bank loans.
To
support the issuance of commercial paper, NJNG has a $250 million committed
credit facility with several banks, with a 5-year term expiring in December
2009. NJNG had $145.5 million in commercial paper outstanding as of September
30, 2008, compared with $175.7 million as of September 30, 2007.
In May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018, in
the private placement market pursuant to a note purchase agreement. The notes
are secured until the release date (which is the date at which the security
provided by the pledge under NJNG’s mortgage indenture would no longer be
available to holders of any outstanding series of NJNG’s senior secured notes,
and such indebtedness would become senior unsecured
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
indebtedness)
by an equal amount of NJNG first mortgage bonds (Series LL), and interest is
payable on the Notes semi-annually. The proceeds from the notes were used to
refinance or retire short-term debt and will fund capital expenditure
requirements.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction-rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series,
when an auction is held for the purposes of determining the securities. The
interest rates associated with the NJNG’s variable-rate debt are based on the
rates of the related EDA ARS. As of September 30, 2008, most of the auctions
surrounding the EDA ARS have failed, resulting in those bonds bearing interest
at their maximum rates, as defined in the EDA ARS, as the lesser of (i) 175
percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to
such series of ARS. As of September 30, 2008, the 30-day LIBOR rate was 3.9
percent. While the failure of the ARS auctions does not signify or constitute a
default on NJNG, the EDA ARS does impact NJNG’s borrowing costs of the
variable-rate debt. As such, NJNG has a weighted average interest rate of 4.6
percent as of September 30, 2008, compared with a weighted average interest rate
of 3.9 percent as of September 30, 2007. There can be no assurance that the EDA
ARS will have enough market liquidity to return interest rates below their
maximum rate.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
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. As of September 30, 2008, there were no borrowings under this
facility.
Sale-Leaseback
NJNG has
received approximately $7.5 million, $5.5 million and $4.1 million in fiscal
2008, 2007 and 2006, respectively, related to the sale-leaseback of a portion of
its gas meters. NJNG also plans to continue its meter sale-leaseback program at
approximately $5 million annually.
Contractual
Obligations
The
following table is a summary of NJR, NJNG and NJRES contractual cash obligations
and financial commitments and their applicable payment due dates as of September
30, 2008.
|
|
Up to
|
2-3
|
4-5
|
After
|
(Thousands)
|
Total
|
1 Year
|
Years
|
Years
|
5 Years
|
Long-term
debt (1)
|
$ 715,930
|
$ 76,420
|
$ 60,291
|
$ 38,916
|
$540,303
|
Capital
lease obligations (1)
|
84,077
|
8,813
|
21,810
|
14,065
|
39,389
|
Operating
leases (1)
|
10,628
|
3,085
|
3,903
|
1,707
|
1,933
|
Short-term
debt
|
178,200
|
178,200
|
—
|
—
|
—
|
New
Jersey Clean Energy Program (1)
|
3,056
|
3,056
|
—
|
—
|
—
|
Construction
obligations
|
1,538
|
1,538
|
—
|
—
|
—
|
Obligations
for uncertain tax positions (1)
(2)
|
6,520
|
6,520
|
—
|
—
|
—
|
Remediation
expenditures (3)
|
120,730
|
18,580
|
24,720
|
6,000
|
71,430
|
Natural
gas supply purchase obligations–NJNG
|
128,350
|
108,803
|
19,547
|
—
|
—
|
Demand
fee commitments - NJNG
|
545,750
|
104,394
|
198,507
|
160,693
|
82,156
|
Natural
gas supply purchase obligations–NJRES
|
872,063
|
606,428
|
265,635
|
—
|
—
|
Demand
fee commitments - NJRES
|
142,609
|
61,884
|
56,005
|
18,698
|
6,022
|
Total
contractual cash obligations
|
$2,809,451
|
$1,177,721
|
$650,418
|
$240,079
|
$741,233
|
(1)
|
These
obligations include an interest component, as defined under the related
governing agreements or in accordance with the applicable tax
statute.
|
(2)
|
This
table only includes known obligations for uncertain tax positions. See
Note 11. Income Tax - Adoption of FIN 48, in the Consolidated Financial
Statements, for a description of all uncertain tax positions, of which the
ultimate amount and timing of settlement cannot be reasonably
estimated.
|
(3)
|
Expenditures
are estimated
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
For
fiscal year 2008, the Company had no minimum pension funding requirements. The
Company has funded approximately $1.0 million in fiscal 2008 to its OPEB plan
and expects future funding to range from $1.2 million to $1.4 million annually
over the next five years. Additional contributions may be made based on market
conditions and various assumptions.
As of
September 30, 2008, there were NJR guarantees covering approximately $333
million of natural gas purchases and demand fee commitments of NJRES and NJNG
included in natural gas supply purchase obligations above, not yet reflected in
Accounts payable on the Consolidated Balance Sheet.
The
Company is obligated to fund up to $132.5 million associated with the
construction and development of Steckman Ridge. Currently, NJR anticipates that
Steckman Ridge will secure non-recourse project financing for a portion of the
facility once construction activities are completed, therefore potentially
reducing the aggregate recourse amount funded by NJR. There can be no assurances
that Steckman Ridge will eventually secure such non-recourse project
financing.
The
Company made a discretionary $10 million tax-deductible contribution to its
pension plans in fiscal 2006. The Company was not required to make minimum
pension funding contributions during fiscal 2008 and 2007. If market performance
is less than anticipated, additional funding may be required.
NJNG’s
total capital expenditures are estimated at $77.3 million and $70.9 million in
fiscal 2009 and 2010, respectively, and consist primarily of its construction
program to support customer growth, maintenance of its distribution system and
replacement needed under pipeline safety regulations.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Consolidated Statements of Cash Flows, cash flow generated from
operating activities totaled $132.4 million for the fiscal year ended September
30, 2008, compared with cash flow from operations of $122.4 million for fiscal
year ended September 30, 2007. Net income was higher for the fiscal year ended
September 30, 2008, as compared with the prior fiscal year, primarily driven by
higher net unrealized gains as a result of changes in volumes and prices of
financial derivative instruments. Similarly, NJR was able to improve operating
cash flows during fiscal 2008 through the settlement of NJRES’ financial
derivatives during periods of market price movements that were favorable to the
settled contracts.
Increases
in Operating cash flows are typically affected by variations in working capital,
which are a function of the seasonality of NJR’s business, fluctuations in
wholesale natural gas prices, management of the deferral and recovery of gas
costs, and the timing of storage injections and withdrawals, as well as the
collections of receivables and payments of current liabilities. During fiscal
2008, changes in the following components of working capital contributed to a
decrease of $56 million in operating cash flows:
Ÿ
|
at
NJRES, an increase in natural gas inventory balances during the current
fiscal year to facilitate greater sales volumes, coupled with a 25 percent
rise in the average cost of gas compared with the prior fiscal
year;
|
|
|
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Ÿ
|
an
increase in sales volumes at NJRES of approximately 5.6 Bcf in fiscal 2008
compared with 2.9 Bcf in the prior fiscal year that resulted in an
increase in receivable balances as of September 30, 2008, as compared with
September 30, 2007. NJRES receivable balances, which are normally fully
collected within 30 days and do not have any allowance for doubtful
accounts, were impacted by a 37 percent increase in the average sales
price for the month of September 2008 as compared with September 2007, as
a result of the increase in the wholesale price of natural
gas;
|
|
|
Ÿ
|
an
increase in NJNG broker margin balances which were impacted by adverse
price movements on its natural gas futures contracts;
|
|
|
Ÿ
|
a
change in deferred gas costs of $37.6 million at NJNG as a result of
wholesale natural gas prices that were higher during fiscal 2008 in
comparison to the amounts billed to customers, which included a lower BGSS
rate as a result of lower estimated natural gas costs that were factored
into the BGSS rates during the year; partially offset
by
|
|
|
Ÿ
|
operating
cash flows generated by an increase in gas purchases payables balances at
NJRES as a result of a 15 percent increase in purchase activity during the
month of September 2008 to accommodate higher sales volumes, coupled with
a 50 percent increase in the cost of those purchases, compared with
purchases during the month of September
2007.
|
In
addition to higher net income and lower MGP expenditures, changes to the
following components of working capital contributed to the increase in operating
cash flows during fiscal 2007 as compared with fiscal 2006:
Ÿ
|
at
NJNG, an increase in the change in accounts receivable of $91.5 million, a
decrease in customer credit balances of $71.4 million, and a decrease in
overrecovered gas costs primarily as a result of credits issued to retail
customers due to reductions in the wholesale cost of natural
gas;
|
|
|
Ÿ
|
an
increase in gas inventory values at NJNG largely as a result of higher
delivered average inventory prices;
|
|
|
Ÿ
|
a decrease
in gas inventory values at NJRES is a result of lower volumes of gas in
storage and a reduction in park-and-loan transactions, which represents
natural gas inventory borrowed by NJRES to be ultimately returned at a
later date, which NJRES utilizes to take advantage of pricing
differentials over time; and
|
|
|
Ÿ
|
a decrease
in gas purchases payable mostly as a result of lower NJRES gas purchases
during September 2007 and reduced park-and-loan
activity.
|
NJNG’s
MGP expenditures are currently expected to total $18.58 million in fiscal 2009
(see Note 12. Commitments and
Contingent Liabilities).
Investing
Activities
Cash
flows used in investing activities totaled $103.9 million for the fiscal year
ended September 30, 2008, compared with $118.7 million in the prior fiscal year.
The decrease was due primarily to a reduction in the investments in Steckman
Ridge offset by increases in utility plant expenditures.
Cash
flows used in investing activities totaled $118.7 million in fiscal 2007,
compared with $71.0 million in fiscal 2006. The increase in fiscal 2007, as
compared with fiscal 2006, was due primarily to NJR’s investment of $55.0
million in the Steckman Ridge partnership and increased capital expenditures for
utility plant additions at NJNG, partially offset by the absence of the net $8.5
million deposit into a construction fund created under the EDA financing
arrangement in fiscal 2006, described above.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Financing
Activities
Financing
cash flows generally are seasonal in nature and are impacted by the volatility
in pricing in the natural gas markets. NJNG’s inventory levels are built up
during its natural gas injection season (April through October) and reduced
during withdrawal season (November through March) in response to the supply
requirements of its customers. As well, changes in financing cash flows have
been impacted during the current and prior fiscal years by the growth and
funding demands of NJRES’ gas management and marketing functions.
Cash flow
generated from financing activities totaled $9.1 million for the fiscal year
ended September 30, 2008, compared with $3.5 million used in the prior fiscal
year. The increase was due primarily to an increase in total borrowings compared
with fiscal year ended September 30, 2007, including a long-term fixed rate debt
issuance of $125 million offset by payments of short-term debt of $78.3 million.
In addition, financing cash flows were offset by an increase in common stock
dividend payments and share repurchases.
NJR used
$3.5 million in financing activities during fiscal 2007, compared with cash
flows generated from financing activities of $74.0 million in fiscal 2006.
The decrease in fiscal 2007 was due primarily to a reduction in short-term
borrowings as a result of lower margin requirements and lower volumes held in
gas inventory at NJRES, partially offset by refinancing of short-term borrowings
through a long-term debt issuance of $50 million at NJR, as well as a reduction
in the amount of share repurchases.
The
Company’s capital expenditures for fiscal 2006 through fiscal 2008 and projected
capital requirements for fiscal years 2009 and 2010 are as follows:
(Thousands)
|
2010
|
2009
|
2008
|
2007
|
2006
|
Natural
Gas Distribution
|
$70,904
|
$77,332
|
$80,131
|
$67,937
|
$60,559
|
Energy
Services
|
200
|
200
|
86
|
—
|
244
|
Retail and
Other
|
700
|
700
|
1,031
|
2,777
|
5,490
|
Total
|
$71,804
|
$78,232
|
$81,248
|
$70,714
|
$66,293
|
NJNG’s
capital expenditures result primarily from the need for services, mains and
meters to support its continued customer growth, mandated pipeline safety
rulemaking and general system improvements. NJNG’s capital expenditures are
expected to decrease in fiscal 2009 and 2010 when compared with the capital
spending in fiscal 2008, due primarily to the completion, in fiscal 2008, of a
project to replace certain portions of transmission main in NJNG’s service
territory in conjunction with its pipeline integrity program.
Retail
and Other capital expenditures each year have been made primarily in connection
with investments made to preserve the value of real estate holdings. At
September 30, 2008, CR&R owned 83 acres of undeveloped land and a
56,400-square-foot building on 5 acres of land. In fiscal 2008 and fiscal 2007,
capital expenditures of $0.4 million and $2.8 million, respectively, were
primarily related to CR&R’s construction of the 56,400-square-foot office
building.
NJR’s
investment in Steckman Ridge is a strategic investment to enter the mid-stream
natural gas business. This storage capacity will provide NJR the potential to
diversify is revenue stream through another market-based outlet that has a
consistent demand and a regulated tariff structure. NJR anticipates a portion of
Steckman Ridge to be financed on a non-recourse, or project, basis and for the
majority of its revenue to be secured by long-term contracts once construction
of the facility is complete and it is fully contracted; however, there can be no
assurances that this will occur. NJR is obligated to fund up to its maximum of
$132.5 million for the construction and development of Steckman Ridge regardless
of the ability of Steckman Ridge, NJR or its partner to secure non-recourse
financing. Through September 30, 2008, NJR expended $78.7 million in acquisition
and development costs. NJR anticipates that Steckman Ridge will be placed in
service during the summer of 2009.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2009.
New
Jersey Resources Corporation
Part
II
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
|
|
Credit
Ratings
The table
below summarizes NJNG’s current credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc.
(Moody’s):
|
Standard
and Poor’s
|
Moody’s
|
Corporate Rating
|
A
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
A+
|
Aa3
|
Ratings
Outlook
|
Negative
|
Stable
|
On April
3, 2008, S&P adjusted NJNG’s corporate credit rating from A+ to
A.
NJNG’s
S&P and Moody’s ratings are investment-grade ratings. S&P and Moody’s
give NJNG’s commercial paper the highest rating within the Commercial Paper
investment-grade category. NJR is not a rated entity.
NJNG is
not party to any lending agreements that would accelerate the maturity date of
any obligation caused by a failure to maintain any specific credit rating. If
such ratings are downgraded below investment grade, borrowing costs could
increase, as will the costs of maintaining certain contractual relationships and
for future financing. Even if ratings are downgraded without falling below
investment grade, NJR and NJNG could still face increased borrowing costs under
their credit facilities. A rating set forth above is not a recommendation to
buy, sell or hold the Company’s or NJNG’s securities and may be subject to
revision or withdrawal at any time. Each rating set forth above should be
evaluated independently of any other rating.
The
timing and mix of any external financings will target a common equity ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
|
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets. The
prices on the NYMEX and over-the-counter markets generally reflect the notional
balance of natural gas supply and demand, but are also influenced significantly
from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations in the price of
natural gas. To economically hedge against such fluctuations, the Company and
its subsidiaries have entered into futures contracts, options agreements and
swap agreements. To manage these derivative instruments, the Company has
well-defined risk management policies and procedures that include daily
monitoring of volumetric limits and monetary guidelines. The Company’s natural
gas businesses are conducted through three of its operating subsidiaries. First,
NJNG is a regulated utility that uses futures, options and swaps to economically
hedge against price fluctuations, and its recovery of natural gas costs is
governed by the BPU. Second, NJRES uses futures, options and swaps to
economically hedge purchases and sales of natural gas. Finally, NJR Energy has
entered into two swap transactions related to an 18-year fixed-price contract,
expiring in October 2010, to sell remaining volumes of approximately 4.9 Bcf of
natural gas (Gas Sales Contract) to an energy marketing
company.
New
Jersey Resources Corporation
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK (Continued)
|
|
The
following table reflects the changes in the fair market value of commodity
derivatives from September 30, 2007, to September 30, 2008:
|
Balance
|
Increase
|
Less
|
Balance
|
|
September
30,
|
(Decrease)
in Fair
|
Amounts
|
September
30,
|
(Thousands)
|
2007
|
Market Value
|
Settled
|
2008
|
NJNG
|
$(51,861
|
)
|
$21,424
|
|
$19,173
|
|
$(49,610
|
)
|
NJRES
|
89,446
|
|
42,651
|
|
42,526
|
|
89,571
|
|
NJR
Energy
|
28,353
|
|
(6,975
|
)
|
1,188
|
|
20,190
|
|
Total
|
$
65,938
|
|
$57,100
|
|
$62,887
|
|
$
60,151
|
|
There
were no changes in methods of valuations during the year ended September 30,
2008.
The
following is a summary of fair market value of commodity derivatives at
September 30, 2008, by method of valuation and by maturity for each fiscal year
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2009
|
|
2010
|
|
2011-2013 |
After
2013
|
|
Total
Fair Value
|
|
Price
based on NYMEX
|
|
$ |
58,688 |
|
|
$ |
(3,211
|
) |
|
$ |
(14
|
) |
|
|
— |
|
|
$ |
55,463 |
|
Price
based on other external data
|
|
|
4,242 |
|
|
|
446 |
|
|
|
— |
|
|
|
— |
|
|
|
4,688 |
|
Total
|
|
$ |
62,930 |
|
|
$ |
(2,765
|
) |
|
$ |
(14
|
) |
|
|
— |
|
|
$ |
60,151 |
|
The
following is a summary of commodity derivatives by type as of September 30,
2008:
|
|
Volume
|
Price
per
|
Amounts
included
|
|
|
Bcf
|
Mmbtu
|
in
Derivatives (Thousands)
|
NJNG
|
Futures
|
21.2
|
|
$ 7.16
- $12.85
|
$
(5,024
|
)
|
|
Swaps
|
(2.7
|
)
|
$ 4.19
- $13.99
|
(48,487
|
)
|
|
Options
|
9.2
|
|
$ 8.25
- $11.00
|
3,901
|
|
NJRES
|
Futures
|
(2.2
|
)
|
$ 7.06
- $14.40
|
25,450
|
|
|
Swaps
|
(64.9
|
)
|
$ 4.63
- $14.45
|
62,641
|
|
|
Options
|
—
|
|
$10.25
- $13.25
|
1,480
|
|
NJR
Energy
|
Swaps
|
5.3
|
|
$ 3.38
- $ 4.41
|
20,190
|
|
Total
|
|
|
|
|
$60,151
|
|
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2007 to September 30, 2008:
|
Balance
|
Increase
|
Less
|
Balance
|
|
September
30,
|
(Decrease)
in Fair
|
Amounts
|
September
30,
|
(Thousands)
|
2007
|
Market Value
|
Settled
|
2008
|
NJRES
|
—
|
|
$26,441
|
|
$24,727
|
|
$1,714
|
|
The
Company uses a value-at-risk (VaR) model to assess the market risk of its net
futures, options and swap positions. VaR represents the potential loss in value
of NJRES’ trading portfolio due to adverse market movements over a defined time
horizon (NJRES utilizes holding periods of 1 day and 10 days) with a specified
confidence level (NJRES utilizes either a 95 percent or 99 percent confidence
level). As an example, utilizing a 1 day holding period with a 95 percent
confidence level would indicate that there is a 5 percent chance that the
liquidation value of the NJRES portfolio would fall below the expected trading
value by an amount at least as large as the calculated VaR.
New
Jersey Resources Corporation
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK (Continued)
|
|
The VaR
at September 30, 2008, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $732,000. The VaR with a 99
percent confidence level and a 10-day holding period was $3.3 million. The
calculated VaR represents an estimate of the potential change in the value of
the net positions. These estimates may not be indicative of actual results
because actual market fluctuations may differ from forecasted
fluctuations.
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy engage in wholesale marketing activities. NJR monitors and
manages the credit risk of its wholesale marketing operations through credit
policies and procedures that management believes reduce overall credit risk.
These policies include a review and evaluation of prospective counterparties’
financial statements and/or credit ratings, daily monitoring of counterparties’
credit limits, daily communication with traders regarding credit status and the
use of credit mitigation measures, such as minimum margin requirements,
collateral requirements and netting agreements. Examples of collateral include
letters of credit and cash received for either prepayment or margin
deposit.
The
Company’s Risk Management Committee (RMC) continuously monitors NJR’s credit
risk management policies and procedures. The RMC is comprised of individuals
from NJR-affiliated companies that meet twice a month and, among other things,
evaluates the effectiveness of existing credit policies and procedures, reviews
material transactions and discusses emerging issues.
The
following is a summary of gross and net credit exposures, grouped by investment
and noninvestment grade counterparties, as of September 30, 2008. Gross credit
exposure is defined as the unrealized fair value of derivative and energy
trading contracts plus any outstanding receivable for the value of natural gas
delivered for which payment has not yet been received. Net credit exposure is
defined as gross credit exposure reduced by collateral received from
counterparties and/or payables, where netting agreements exist. The amounts
presented below exclude accounts receivable for retail natural gas sales and
services.
Unregulated
counterparty credit exposure as of September 30, 2008, is as
follows:
|
Gross Credit
|
|
Net Credit
|
(Thousands)
|
Exposure
|
|
Exposure
|
Investment
grade
|
$240,326
|
|
|
$201,040
|
|
Noninvestment
grade
|
4,752
|
|
|
—
|
|
Internally
rated investment grade
|
17,952
|
|
|
5,615
|
|
Internally
rated noninvestment grade
|
3,180
|
|
|
—
|
|
Total
|
$266,210
|
|
|
$206,655
|
|
NJNG’s
counterparty credit exposure as of September 30, 2008, is as
follows:
|
Gross Credit
|
|
Net Credit
|
(Thousands)
|
Exposure
|
|
Exposure
|
Investment
grade
|
$12,903
|
|
|
$11,275
|
|
Noninvestment
grade
|
325
|
|
|
4
|
|
Internally
rated investment grade
|
21
|
|
|
21
|
|
Internally
rated noninvestment grade
|
—
|
|
|
—
|
|
Total
|
$13,249
|
|
|
$11,300
|
|
New
Jersey Resources Corporation
Part
II
ITEM
7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK (Continued)
|
|
Due to
the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then the
Company could sustain a loss. This loss would comprise the loss on natural gas
delivered but not paid for and/or the cost of replacing natural gas not
delivered at a price higher than the price in the original contract. Any such
loss could have a material impact on the Company’s financial condition, results
of operations or cash flows.
Interest
Rate Risk–Long-Term Debt
At
September 30, 2008, the Company (excluding NJNG) had no variable-rate long-term
debt.
As of
September 30, 2008, NJNG is obligated with respect to loan agreements securing
six series of auction-rate bonds totaling approximately $97.0 million of
variable-rate debt backed by securities issued by the Economic Development
Authority (EDA). The EDA bonds are ARS and have an interest rate reset
every 7 or 35 days, depending upon the applicable series, when an auction is
held for the purposes of determining the interest rate pricing of the
securities. The interest rate associated with the NJNG variable-rate debt is
based on the rates the EDA receives from its ARS. As of September 30, 2008, most
of the auctions surrounding the EDA ARS have failed, resulting in the securities
bearing interest at their maximum rates, as defined in the ARS, as the lesser of
(i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as
applicable to such series of ARS. While the failure of the ARS auctions has no
default impact on NJNG’s variable-rate debt, it does impact its borrowing costs
of the variable-rate debt. As such, NJNG currently has a weighted average
interest rate of 4.6 percent as of September 30, 2008. There can be no assurance
that the ARS securities of the EDA will have enough market liquidity to return
interest rates below their maximum rate.
Effects
of Inflation
Although
inflation rates have been relatively low to moderate in recent years, any change
in price levels has an effect on operating results due to the capital-intensive
and regulated nature of the Company’s utility subsidiary. The Company attempts
to minimize the effects of inflation through cost control, productivity
improvements and regulatory actions where appropriate.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
|
Management’s Report on Internal Control over Financial
Reporting
Management
of New Jersey Resources Corporation (NJR or the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13A-15(f) and 15d-15(f) of the Securities and
Exchange Act of 1934, as amended. The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance to the Company’s
Management and Board of Directors regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes policies
and procedures that:
Ÿ
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
Ÿ
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
|
Ÿ
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements, errors or fraud. Also, projections of any
evaluations of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2008. In making this assessment, management used
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in an Internal Control Integrated Framework. Management
believes that it has remediated its previously reported material weakness,
primarily as a result of a current year change whereby the Company no longer
designates its commodity derivatives as hedges such that the controls necessary
to properly apply hedge accounting are no longer required.
During
the fourth quarter of fiscal 2008, the Company identified a material weakness in
internal control over financial reporting and, based on the criteria set forth
by COSO, concluded that the Company’s internal control over financial reporting
was not effective as of and for the fiscal year ended September 30, 2008. In
connection with the preparation of the consolidated financial statements for the
fiscal year ended September 30, 2008, the Company identified an immaterial error
in the recording of certain physical natural gas transactions, which were not
recorded at the appropriate fair value during the interim quarters ended March
31, 2008 and June 30, 2008, as they were valued at an incorrect price. Controls
were not designed properly or operating effectively to prevent or detect these
pricing errors. Natural gas prices are volatile and it is reasonably possible
that the volume of these transactions could have been larger during any interim
period or for the fiscal year ended September 30, 2008. The Company concluded
that it was reasonably possible that this control weakness could have resulted
in a material error in its Consolidated Financial Statements had the volume of
these transactions been larger.
A
“material weakness,” as defined by the Public Company Accounting Oversight Board
(PCAOB) is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis.
The
Company’s independent registered public accounting firm, Deloitte &
Touche LLP, has issued its report on the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2008, which appears
herein.
November
21, 2008
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
New
Jersey Resources Corporation:
We have
audited the accompanying consolidated balance sheets of New Jersey Resources
Corporation and subsidiaries (the “Company”) as of September 30, 2008 and 2007,
and the related consolidated statements of income, capitalization, common stock
equity, comprehensive income, and cash flows for each of the three years in the
period ended September 30, 2008. Our audits also included the financial
statement schedules listed in the Index in Item 15. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 2008 and
2007, and the results of its operations and its cash flows for each of the three
years in the period ended September 30, 2008 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects, the information set forth therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of September 30, 2008, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 21, 2008
expressed an adverse opinion on the Company’s internal control over financial
reporting because of a material weakness.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
November
21, 2008
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of New
Jersey Resources Corporation
We have
audited New Jersey Resources Corporation’s and subsidiaries’ (the “Company’s”)
internal control over financial reporting as of September 30, 2008, based on
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on that risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s
assessment: The Company improperly recorded the fair value of certain physical
natural gas contracts during the quarters ended March 31, 2008 and June 30,
2008. The Company’s controls were not designed properly or operating effectively
to prevent or detect these pricing errors. Natural gas prices are volatile and
it is reasonably possible that the volume of these transactions could have been
larger during any 2008 interim period or for the fiscal year ended September 30,
2008. The Company concluded that it was reasonably possible that this control
weakness could have resulted in a material error in its financial statements had
the volume of these transactions been larger. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the consolidated financial statements and financial statement
schedules as of and for the year ended September 30, 2008, of the Company and
this report does not affect our report on such financial statements and
financial statement schedules.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
In our
opinion, because of the effect of the material weakness identified above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of September
30, 2008, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules as of and for the year ended September 30, 2008 of
the Company and our report dated November 21, 2008 expressed an unqualified
opinion on those financial statements and financial statement
schedules.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
November
21, 2008
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CONSOLIDATED
STATEMENTS OF INCOME
(Thousands)
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
$3,816,210
|
|
$3,021,765
|
|
$3,271,229
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
Gas
purchases
|
3,322,644
|
|
2,621,575
|
|
2,639,489
|
|
Operation
and maintenance
|
148,384
|
|
136,601
|
|
121,384
|
|
Regulatory
rider expenses
|
39,666
|
|
37,605
|
|
28,587
|
|
Depreciation
and amortization
|
38,464
|
|
36,235
|
|
34,753
|
|
Energy
and other taxes
|
65,602
|
|
62,499
|
|
58,632
|
|
Total
operating expenses
|
3,614,760
|
|
2,894,515
|
|
2,882,845
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
201,450
|
|
127,250
|
|
388,384
|
|
|
|
|
|
|
|
|
Other
income
|
4,368
|
|
4,294
|
|
4,725
|
|
Interest
expense, net
|
25,811
|
|
27,613
|
|
25,669
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
180,007
|
|
103,931
|
|
367,440
|
|
|
|
|
|
|
|
|
Income
tax provision
|
68,085
|
|
40,312
|
|
147,349
|
|
Equity
in earnings of affiliates, net of tax
|
1,988
|
|
1,662
|
|
1,817
|
|
|
|
|
|
|
|
|
NET
INCOME
|
$ 113,910
|
|
$ 65,281
|
|
$ 221,908
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE
|
|
|
|
|
|
|
BASIC
|
$2.72
|
|
$1.56
|
|
$5.31
|
|
DILUTED
|
$2.70
|
|
$1.55
|
|
$5.27
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
$1.11
|
|
$1.01
|
|
$0.96
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
BASIC
|
41,878
|
|
41,855
|
|
41,793
|
|
DILUTED
|
42,176
|
|
42,113
|
|
42,122
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Thousands)
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
$113,910
|
|
$ 65,281
|
|
$
221,908
|
|
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
|
|
Unrealized
loss(gain) on derivative instruments, net of tax
|
3,683
|
|
22,910
|
|
(148,324
|
)
|
Depreciation
and amortization
|
39,367
|
|
36,536
|
|
35,054
|
|
Impairment
charge
|
—
|
|
4,000
|
|
—
|
|
Deferred
income taxes
|
17,085
|
|
17,762
|
|
(11,896
|
)
|
Manufactured
gas plant remediation costs
|
(18,958
|
)
|
(20,171
|
)
|
(22,346
|
)
|
Gain
on asset sales
|
—
|
|
—
|
|
(617
|
)
|
Equity
in earnings from investments, net of distributions
|
(52
|
)
|
(556
|
)
|
1,556
|
|
Cost
of removal – asset retirement obligations
|
(969
|
)
|
(880
|
)
|
—
|
|
Contributions
to employee benefit plans
|
(1,014
|
)
|
(685
|
)
|
(13,690
|
)
|
Changes
in:
|
|
|
|
|
|
|
Components
of working capital
|
(56,186
|
)
|
(32,135
|
)
|
(107,204
|
)
|
Other
noncurrent assets
|
(4,591
|
)
|
23,707
|
|
(20,721
|
)
|
Other
noncurrent liabilities
|
40,093
|
|
6,637
|
|
43,287
|
|
Cash
flows from (used in) operating activities
|
132,368
|
|
122,406
|
|
(22,993
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Expenditures
for
|
|
|
|
|
|
|
Utility
plant
|
(72,329
|
)
|
(60,747
|
)
|
(53,060
|
)
|
Real
estate properties and other
|
(1,117
|
)
|
(2,777
|
)
|
(5,734
|
)
|
Cost
of removal
|
(6,833
|
)
|
(6,310
|
)
|
(7,499
|
)
|
Investments
in equity investees
|
(23,662
|
)
|
(54,978
|
)
|
—
|
|
Withdrawal
from (investment in) restricted cash construction fund
|
—
|
|
4,300
|
|
(8,500
|
)
|
Proceeds
from asset sales and available for sale investments
|
—
|
|
1,792
|
|
3,747
|
|
Cash
flows used in investing activities
|
(103,941
|
)
|
(118,720
|
)
|
(71,046
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
16,028
|
|
18,515
|
|
25,346
|
|
Proceeds
from long-term debt
|
125,000
|
|
49,850
|
|
35,800
|
|
Tax
benefit from stock options exercised
|
630
|
|
1,761
|
|
6,791
|
|
Proceeds
from sale-leaseback transaction
|
7,485
|
|
5,482
|
|
4,090
|
|
Payments
of long-term debt
|
(5,565
|
)
|
(4,031
|
)
|
(24,276
|
)
|
Purchases
of treasury stock
|
(11,039
|
)
|
(9,024
|
)
|
(40,883
|
)
|
Payments
of common stock dividends
|
(45,201
|
)
|
(41,869
|
)
|
(39,446
|
)
|
Net
(payments) proceeds from short-term debt
|
(78,279
|
)
|
(24,221
|
)
|
106,600
|
|
Cash
flows from (used in) financing activities
|
9,059
|
|
(3,537
|
)
|
74,022
|
|
Change
in cash and temporary investments
|
37,486
|
|
149
|
|
(20,017
|
)
|
Cash
and temporary investments at beginning of year
|
5,140
|
|
4,991
|
|
25,008
|
|
Cash
and temporary investments at end of year
|
$ 42,626
|
|
$ 5,140
|
|
$ 4,991
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
|
|
Receivables
|
$(93,796
|
)
|
$ 5,306
|
|
$ 96,769
|
|
Inventories
|
(39,458
|
)
|
68,727
|
|
(250,765
|
)
|
Deferred
gas costs
|
(37,577
|
)
|
7,873
|
|
38,759
|
|
Gas
purchases payable
|
97,180
|
|
(79,543
|
)
|
(3,107
|
)
|
Prepaid
and accrued taxes, net
|
767
|
|
(16,160
|
)
|
6,808
|
|
Accounts
payable and other
|
(1,117
|
)
|
9,152
|
|
(3,294
|
)
|
Restricted
broker margin accounts
|
(15,003
|
)
|
19,411
|
|
(18,437
|
)
|
Customers’
credit balances and deposits
|
36,195
|
|
(33,698
|
)
|
37,738
|
|
Other
current assets
|
(3,377
|
)
|
(13,203
|
)
|
(11,675
|
)
|
Total
|
$(56,186
|
)
|
$
(32,135
|
)
|
$(107,204
|
)
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$25,877
|
|
$26,403
|
|
$22,186
|
|
Income
taxes
|
$28,763
|
|
$52,549
|
|
$38,101
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CONSOLIDATED
BALANCE SHEETS
ASSETS
(Thousands)
|
|
|
|
|
|
|
September
30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
Utility
plant, at cost
|
|
$ |
1,366,237 |
|
|
$ |
1,299,445 |
|
Real
estate properties and other, at cost
|
|
|
29,808 |
|
|
|
28,793 |
|
|
|
|
1,396,045 |
|
|
|
1,328,238 |
|
Accumulated
depreciation and amortization
|
|
|
(378,759
|
) |
|
|
(357,367
|
) |
Property,
plant and equipment, net
|
|
|
1,017,286 |
|
|
|
970,871 |
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and temporary investments
|
|
|
42,626 |
|
|
|
5,140 |
|
Customer
accounts receivable
|
|
|
|
|
|
|
|
|
Billed
|
|
|
227,132 |
|
|
|
132,444 |
|
Unbilled
revenues
|
|
|
9,417 |
|
|
|
8,895 |
|
Allowance
for doubtful accounts
|
|
|
(4,580
|
) |
|
|
(3,166
|
) |
Regulatory
assets
|
|
|
51,376 |
|
|
|
24,634 |
|
Gas
in storage, at average cost
|
|
|
478,549 |
|
|
|
439,168 |
|
Materials
and supplies, at average cost
|
|
|
5,110 |
|
|
|
5,033 |
|
Prepaid
state taxes
|
|
|
37,271 |
|
|
|
28,034 |
|
Derivatives,
at fair value
|
|
|
208,703 |
|
|
|
138,986 |
|
Broker
margin account
|
|
|
41,277 |
|
|
|
12,345 |
|
Other
|
|
|
12,785 |
|
|
|
8,353 |
|
Total
current assets
|
|
|
1,109,666 |
|
|
|
799,866 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investments
in equity investees
|
|
|
115,981 |
|
|
|
86,743 |
|
Regulatory
assets
|
|
|
340,670 |
|
|
|
312,369 |
|
Derivatives,
at fair value
|
|
|
24,497 |
|
|
|
44,306 |
|
Restricted
cash construction fund
|
|
|
4,200 |
|
|
|
4,200 |
|
Other
|
|
|
13,092 |
|
|
|
12,390 |
|
Total
noncurrent assets
|
|
|
498,440 |
|
|
|
460,008 |
|
Total
assets
|
|
$ |
2,625,392 |
|
|
$ |
2,230,745 |
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CAPITALIZATION
AND LIABILITIES
(Thousands)
|
|
|
|
|
|
|
September
30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CAPITALIZATION
|
|
|
|
|
|
|
Common
stock equity
|
|
$ |
726,958 |
|
|
$ |
644,797 |
|
Long-term
debt
|
|
|
455,117 |
|
|
|
383,184 |
|
Total
capitalization
|
|
|
1,182,075 |
|
|
|
1,027,981 |
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
60,119 |
|
|
|
4,338 |
|
Short-term
debt
|
|
|
178,200 |
|
|
|
256,479 |
|
Gas
purchases payable
|
|
|
315,516 |
|
|
|
218,336 |
|
Accounts
payable and other
|
|
|
61,735 |
|
|
|
64,386 |
|
Dividends
payable
|
|
|
11,776 |
|
|
|
10,633 |
|
Deferred
and accrued taxes
|
|
|
24,720 |
|
|
|
9,031 |
|
Regulatory
liabilities
|
|
|
— |
|
|
|
9,583 |
|
New
Jersey clean energy program
|
|
|
3,056 |
|
|
|
8,832 |
|
Derivatives,
at fair value
|
|
|
146,320 |
|
|
|
79,243 |
|
Broker
margin account
|
|
|
29,072 |
|
|
|
15,143 |
|
Customers’
credit balances and deposits
|
|
|
63,455 |
|
|
|
27,262 |
|
Total
current liabilities
|
|
|
893,969 |
|
|
|
703,266 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
239,703 |
|
|
|
216,258 |
|
Deferred
investment tax credits
|
|
|
7,192 |
|
|
|
7,513 |
|
Deferred
revenue
|
|
|
9,090 |
|
|
|
9,806 |
|
Derivatives,
at fair value
|
|
|
25,016 |
|
|
|
38,085 |
|
Manufactured
gas plant remediation
|
|
|
120,730 |
|
|
|
105,340 |
|
Postemployment
employee benefit liability
|
|
|
52,272 |
|
|
|
25,743 |
|
Regulatory
liabilities
|
|
|
63,419 |
|
|
|
61,270 |
|
New
Jersey clean energy and conservation incentive programs
|
|
|
864 |
|
|
|
3,992 |
|
Asset
retirement obligation
|
|
|
24,416 |
|
|
|
23,895 |
|
Other
|
|
|
6,646 |
|
|
|
7,596 |
|
Total
noncurrent liabilities
|
|
|
549,348 |
|
|
|
499,498 |
|
Total
capitalization and liabilities
|
|
$ |
2,625,392 |
|
|
$ |
2,230,745 |
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
(Thousands, except share amounts)
|
|
|
|
|
|
September
30,
|
|
|
2008
|
2007
|
|
|
|
|
|
COMMON
STOCK EQUITY
|
|
|
|
|
Common
stock, $2.50 par value; authorized 75,000,000 shares; outstanding
2008–43,439,329; 2007–43,213,180
|
$ 108,599
|
|
$ 73,356
|
|
Premium
on common stock
|
237,001
|
|
261,438
|
|
Accumulated
other comprehensive income (loss), net of tax
|
(2,714
|
)
|
(931
|
)
|
Treasury
stock at cost and other; shares 2008–1,381,735;
2007–1,601,518
|
(65,564
|
)
|
(69,948
|
)
|
Retained
earnings
|
449,636
|
|
380,882
|
|
Total
Common stock equity
|
726,958
|
|
644,797
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
|
|
New
Jersey Natural Gas
|
|
|
|
|
First
mortgage bonds:
|
Maturity
date:
|
|
|
|
|
6.27%
|
Series X
|
November 1,
2008
|
30,000
|
|
30,000
|
|
Variable
|
Series AA
|
August 1,
2030
|
25,000
|
|
25,000
|
|
Variable
|
Series BB
|
August 1,
2030
|
16,000
|
|
16,000
|
|
6.88%
|
Series CC
|
October 1,
2010
|
20,000
|
|
20,000
|
|
Variable
|
Series DD
|
September 1,
2027
|
13,500
|
|
13,500
|
|
Variable
|
Series EE
|
January 1,
2028
|
9,545
|
|
9,545
|
|
Variable
|
Series FF
|
January 1,
2028
|
15,000
|
|
15,000
|
|
Variable
|
Series GG
|
April 1,
2033
|
18,000
|
|
18,000
|
|
5%
|
Series HH
|
December 1,
2038
|
12,000
|
|
12,000
|
|
4.50%
|
Series II
|
August 1,
2023
|
10,300
|
|
10,300
|
|
4.60%
|
Series JJ
|
August 1,
2024
|
10,500
|
|
10,500
|
|
4.90%
|
Series KK
|
October 1,
2040
|
15,000
|
|
15,000
|
|
5.60%
|
Series LL
|
May 15,
2018
|
125,000
|
|
—
|
|
4.77%
Unsecured senior notes
|
March 15,
2014
|
60,000
|
|
60,000
|
|
Capital
lease obligation–Buildings
|
June 1,
2021
|
26,371
|
|
27,063
|
|
Capital
lease obligation–Meters
|
October 1,
2012
|
34,020
|
|
30,614
|
|
Less:
Current maturities of long-term debt
|
|
(35,119
|
)
|
(4,338
|
)
|
Total
New Jersey Natural Gas long-term debt
|
405,117
|
|
308,184
|
|
New
Jersey Resources
|
|
|
|
|
|
3.75%
Unsecured senior notes
|
March 15,
2009
|
25,000
|
|
25,000
|
|
6.05%
Unsecured senior notes
|
September 24,
2017
|
50,000
|
|
50,000
|
|
Less:
Current maturities of long-term debt
|
|
(25,000
|
)
|
—
|
|
Total
New Jersey Resources long-term debt
|
50,000
|
|
75,000
|
|
Total
Long-term debt
|
455,117
|
|
383,184
|
|
Total
Capitalization
|
$1,182,075
|
|
$1,027,981
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
CONSOLIDATED
STATEMENTS OF COMMON STOCK EQUITY
|
|
|
|
|
Premium
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
on
|
Other
|
Treasury
|
|
|
|
|
|
Number
of
|
Common
|
Common
|
Comprehensive
|
Stock
|
Retained
|
|
|
(Thousands)
|
Shares
|
Stock
|
Stock
|
(Loss)
Income
|
and Other
|
Earnings
|
Total
|
Balance
at September 30, 2005
|
41,319
|
|
$105,324
|
|
$188,515
|
|
$(7,222
|
)
|
$(24,840
|
)
|
$176,275
|
|
$438,052
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
221,908
|
|
221,908
|
|
Other
comprehensive income
|
|
|
|
|
|
|
9,964
|
|
|
|
|
|
9,964
|
|
Common
stock issued under stock plans
|
1,611
|
|
2,288
|
|
22,994
|
|
|
|
6,277
|
|
|
|
31,559
|
|
Tax
benefits from stock plans
|
|
|
|
|
6,791
|
|
|
|
|
|
|
|
6,791
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(40,136
|
)
|
(40,136
|
)
|
Treasury
stock and other
|
(1,492
|
)
|
|
|
|
|
|
|
(46,476
|
)
|
|
|
(46,476
|
)
|
Balance
at September 30, 2006
|
41,438
|
|
107,612
|
|
218,300
|
|
2,742
|
|
(65,039
|
)
|
358,047
|
|
621,662
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
65,281
|
|
65,281
|
|
Other
comprehensive income
|
|
|
|
|
|
|
491
|
|
|
|
|
|
491
|
|
Adjustment
to initially adopt SFAS No. 158, net of tax
|
|
|
|
|
|
|
(4,164
|
)
|
|
|
|
|
(4,164
|
)
|
Common
stock issued under stock plans
|
684
|
|
611
|
|
6,510
|
|
|
|
11,408
|
|
|
|
18,529
|
|
Tax
benefits from stock plans
|
|
|
|
|
1,761
|
|
|
|
|
|
|
|
1,761
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(42,446
|
)
|
(42,446
|
)
|
Treasury
stock and other
|
(510
|
)
|
|
|
|
|
|
|
(16,317
|
)
|
|
|
(16,317
|
)
|
Balance
at September 30, 2007
|
41,612
|
|
108,223
|
|
226,571
|
|
(931
|
)
|
(69,948
|
)
|
380,882
|
|
644,797
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
113,910
|
|
113,910
|
|
Other
comprehensive (loss)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
(4
|
)
|
Adjustment
for SFAS No. 158, net of tax
|
|
|
|
|
|
|
(1,779
|
)
|
|
|
|
|
(1,779
|
)
|
Common
stock issued under stock plans
|
555
|
|
376
|
|
9,800
|
|
|
|
6,212
|
|
|
|
16,388
|
|
Tax
benefits from stock plans
|
|
|
|
|
630
|
|
|
|
|
|
|
|
630
|
|
Adjustment
to initially
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adopt
FIN 48
|
|
|
|
|
|
|
|
|
|
|
1,188
|
|
1,188
|
|
Cash
dividend declared
|
|
|
|
|
|
|
|
|
|
|
(46,344
|
)
|
(46,344
|
)
|
Treasury
stock and other
|
(109
|
)
|
|
|
|
|
|
|
(1,828
|
)
|
|
|
(1,828
|
)
|
Balance
at September 30, 2008
|
42,058
|
|
$108,599
|
|
$237,001
|
|
$(2,714
|
)
|
$(65,564
|
)
|
$449,636
|
|
$726,958
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands)
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
113,910 |
|
|
$ |
65,281 |
|
|
$ |
221,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments in equity investees, net of tax of $(82), $(456) and
$(184), respectively
|
|
|
118 |
|
|
|
634 |
|
|
|
267 |
|
Net
unrealized (loss) on derivatives, net of tax of $81, $98 and $341,
respectively
|
|
|
(122
|
) |
|
|
(143
|
) |
|
|
(496
|
) |
Minimum
pension liability adjustment, net of tax of $—, $— and $(7,113),
respectively
|
|
|
— |
|
|
|
— |
|
|
|
10,193 |
|
Other
comprehensive (loss) income
|
|
|
(4
|
) |
|
|
491 |
|
|
|
9,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
113,906 |
|
|
$ |
65,772 |
|
|
$ |
231,872 |
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of the Business
New
Jersey Resources Corporation (NJR or the Company) has two principal subsidiaries
and operates two reportable business segments. New Jersey Natural Gas (NJNG),
the Company’s principal utility subsidiary, is a public utility that provides
natural gas utility service to approximately 484,000 retail customers in central
and northern New Jersey and comprises the Natural Gas Distribution segment. NJNG
is subject to rate regulation by the New Jersey Board of Public Utilities
(BPU).
NJR
Energy Services (NJRES) is the Company’s principal non-utility subsidiary that
maintains and trades a portfolio of natural gas storage and transportation
positions and provides wholesale energy and energy management services to
customers from states in the Gulf Coast and Mid-Continent regions to the New
England region and Canada. NJRES comprises the Energy Services
segment.
Other
subsidiaries of the Company, all of which comprise the Company’s retail and
other operations (Retail and Other), include NJR Energy, which invests primarily
in energy-related ventures through its subsidiary, NJNR Pipeline (Pipeline),
which holds the Company’s 5.53 percent interest in Iroquois Gas and Transmission
System, L.P. (Iroquois), a 412-mile interstate natural gas pipeline which
connects from the northern New York border with Canada to Long Island, NY; NJR
Storage Holdings, which holds the Company’s 50 percent interest in Steckman
Ridge GP, LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a natural
gas storage facility that is being developed with a partner in western
Pennsylvania; NJR Home Services (NJRHS), which provides heating ventilation and
cooling (HVAC) service repair and contract services. Commercial Realty and
Resources (CR&R), which holds and develops commercial real estate; and NJR
Service (Service), which provides shared administrative services.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company and its
subsidiaries that are controlled through a majority voting interest. All
intercompany accounts and transactions have been eliminated.
Other
financial investments or contractual interests that lack the characteristics of
a voting interest entity, which are commonly referred to as variable interest
entities, are evaluated by NJR to determine if it can absorb a majority of
expected losses or returns and if the consolidation guidance in Financial
Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities–an interpretation of ARB No. 51 (FIN 46(R)) applies. NJR does
not have any investments in any variable interest entities.
Entities
that are deemed voting interest entities in which NJR does not have a
controlling financial interest but can exercise significant influence are
accounted for using the equity method of accounting.
Regulatory
Assets & Liabilities
Under
cost-based regulation, regulated utility enterprises generally are permitted to
recover their operating expenses and earn a reasonable return on their utility
investment.
NJNG
maintains its accounts in accordance with the Federal Energy Regulatory
Commission (FERC) Uniform System of Accounts as prescribed by the BPU. In
accordance with the ratemaking process, NJNG is required to follow Statement of
Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of
Certain Types of Regulation (SFAS 71) and, as a result, the accounting
principles applied by NJNG differ in certain respects from those applied by
unregulated businesses.
Gas
in Storage
Gas in
storage is reflected at average cost in the Consolidated Balance Sheets, and
represents natural gas and liquefied natural gas that will be utilized in the
ordinary course of business.
The
following table summarizes Gas in storage by company as of September
30,
|
2008
|
2007
|
($
in thousands)
|
Assets
|
Bcf
|
Assets
|
Bcf
|
NJNG
|
$189,828
|
22.1
|
$191,460
|
23.0
|
NJRES
|
288,721
|
27.6
|
247,708
|
28.9
|
Total
|
$478,549
|
49.7
|
$439,168
|
51.9
|
Demand
Fees
For the
purpose of securing adequate storage and pipeline capacity, NJRES and NJNG enter
into storage and pipeline capacity contracts, which require the payment of
certain demand charges in order to maintain the ability to access such natural
gas storage or pipeline capacity, during a fixed time period, which generally
ranges from one to five years. Demand charges are based on established rates as
regulated by FERC. These demand charges represent commitments to pay storage
providers or pipeline companies for the right to store and transport natural gas
utilizing their respective assets. The following table summarizes the demand
charges paid by company, which are included as a component of Gas purchases in
the Consolidated Statements of Income:
(Millions)
|
2008
|
2007
|
2006
|
NJRES
|
$117.0
|
$132.9
|
$109.8
|
NJNG
|
73.9
|
73.9
|
83.0
|
Total
|
$190.9
|
$206.8
|
$192.8
|
NJNG
recovers its costs associated with demand fees as part of its wholesale gas
commodity component of its Basic Gas Supply Service (BGSS), a component of its
tariff.
Derivative
Instruments
Derivative
instruments associated with natural gas commodity contracts are recorded in
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted (SFAS
133), under which NJR records the fair value of derivatives held as assets and
liabilities. Certain of the Company’s commodity contracts meet the scope
exception of SFAS 133, while its financial contracts, such as futures, options
and swaps, are considered derivative instruments. NJR’s unregulated subsidiaries
record changes in the fair value of its derivatives in Gas purchases or
Operating revenues, as appropriate, on the Consolidated Statements of
Income.
Fair
values of exchange-traded instruments, principally futures, swaps and certain
options, are based on actively quoted market prices. Fair values are subject to
change in the near term and reflect management’s best estimate based on various
factors. In establishing the fair value of commodity contracts that do not have
quoted prices, such as physical contracts, over-the-counter options and swaps,
management uses available market data and pricing models to estimate fair
values. Estimating fair values of instruments that do not have quoted market
prices requires management’s judgment in determining amounts which could
reasonably be expected to be received from, or paid to, a third party in
settlement of the instruments. These amounts could be materially different from
amounts that might be realized in an actual sale transaction.
See Note 3. Derivative
Instruments for additional details regarding natural gas trading and
hedging activities.
NJNG’s
derivatives used to economically hedge its natural gas purchasing activities are
recoverable through its BGSS, a component of its tariff. Accordingly, the offset
to the change in fair value of these derivatives is recorded as a Regulatory
asset or liability on the Consolidated Balance Sheets in accordance with SFAS
71.
NJR has
not designated any derivatives as fair value hedges as of September 30, 2008 and
2007.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Revenues
Revenues
from the sale of natural gas to customers of NJNG are recognized in the period
that gas is delivered and consumed by customers, including an estimate for
unbilled revenue.
Unbilled
revenues are associated solely with NJNG. Natural gas sales to individual
customers are based on their meter readings, which are performed on a systematic
basis throughout the month. At the end of each month, the amount of natural gas
delivered to each customer after the last meter reading is estimated, and NJNG
recognizes unbilled revenues related to these amounts. The unbilled revenue
estimates are based on monthly send-out amounts, estimated customer usage by
customer type, weather effects, unaccounted-for gas and the most recent
rates.
Certain
NJRES commodity contracts for physical delivery of natural gas entered into
prior to September 30, 2007 fall within the “normal purchase normal sale” scope
exception of SFAS 133 (NPNS or normal) . The NPNS scope exception requires,
among other things, physical delivery in quantities expected to be used or sold
over a reasonable period in the normal course of business. Contracts that are
designated as NPNS and the related liabilities incurred and assets acquired
under these contracts are recorded when title to the underlying commodity
passes. Certain derivative instruments at NJRES and NJR Energy (encompassing
financial futures, options or swaps) are designed to economically hedge the cash
flows of a forecasted transaction. These derivative instruments and commodity
contracts where NJRES does not elect the NPNS exception are recorded at fair
value on the Consolidated Balance Sheet, and any change in the fair value is
included as a component of Gas purchases or Operating revenues, as appropriate,
on the Consolidated Statements of Income.
NJNG has
elected and continues to elect the NPNS scope exception related to its
off-system sales of natural gas. Derivative instruments at NJNG are recorded at
fair value on the Consolidated Balance Sheets with corresponding changes in fair
value also being recorded on the Consolidated Balance Sheets as regulatory
assets or liabilities.
Revenues
from all other activities are recorded in the period during which products or
services are delivered and accepted by customers, or over the related
contractual term.
Gas
Purchases
NJNG’s
tariff includes a component for BGSS, which is designed to allow NJNG to recover
the commodity cost of natural gas through rates charged to its customers and is
normally revised on an annual basis. As part of computing its BGSS rate, NJNG
projects its cost of natural gas, net of supplier refunds, the impact of hedging
activities and credits from nonfirm sales and transportation activities, and
recovers or refunds the difference, if any, of such projected costs compared
with those included in rates through levelized monthly charges to customers. Any
underrecoveries or overrecoveries are deferred and, subject to BPU approval,
reflected in the BGSS in subsequent years.
NJRES’
gas purchases represent the total commodity contract cost, recognized upon
completion of the transaction, as well as realized gains and losses of settled
derivative instruments and unrealized gains and losses on the change in fair
value of financial derivative instruments that have not yet
settled.
Income
Taxes
The
Company computes income taxes using the liability method, whereby deferred
income taxes are generally determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
See Note 11. Income
Taxes.
Investment
tax credits have been deferred and are being amortized as a reduction to the tax
provision over the average lives of the related properties.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Capitalized
and Deferred Interest
The
Company’s capitalized interest totaled $4.6 million in fiscal 2008, $3.2 million
in fiscal 2007 and $1.1 million in fiscal 2006 with average interest rates of
4.7 percent, 5.4 percent and 4.7 percent, respectively. Allowance for Funds used
during Construction (AFUDC) included in Utility plant related to NJR’s regulated
subsidiary, as well as capitalized interest related to real estate properties
and other and Investments in equity investees on the Consolidated Balance
Sheets, and reflected in the Consolidated Statements of Income as a reduction to
Interest expense, net, are as follows:
|
September
30,
|
($
in thousands)
|
2008
|
2007
|
2006
|
AFUDC
– Utility plant
|
$1,129
|
|
$1,259
|
|
$1,068
|
|
Weighted
average interest rates
|
4.80
|
%
|
5.36
|
%
|
4.69
|
%
|
|
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$79
|
|
$263
|
|
n/a
|
|
Weighted
average interest rates
|
3.70
|
%
|
5.45
|
%
|
n/a
|
|
|
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees
|
$3,355
|
|
$1,687
|
|
n/a
|
|
Weighted
average interest rates
|
5.70
|
%
|
5.41
|
%
|
n/a
|
|
The AFUDC
amounts shown in the table above for fiscal year ended September 30, 2008, 2007
and 2006, represent an interest cost component only, as agreed to in NJNG’s
signed stipulation with Rate Counsel as discussed in Note 2. Regulation – October Rate
Order. Commencing in fiscal 2009, as a result of the October 3, 2008,
final Rate Order issued by the BPU, NJNG will be allowed to recover a cost of
equity component in its AFUDC calculation.
NJR,
through its subsidiary CR&R, capitalizes interest associated with the
development and construction of its commercial buildings. Interest is also
capitalized associated with the acquisition, development and construction of a
natural gas storage facility through NJR’s equity investment in Steckman Ridge
(see Note 4. Investments in
Equity Investees).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to Societal Benefits Clause
(SBC) program costs, which include NJCEP, RAC and USF expenditures. See
Note 2. Regulation.
Accordingly, Other income included $2.6 million, $3.0 million and $2.5 million
of deferred interest related to these SBC program costs in fiscal 2008, 2007 and
2006, respectively.
Sales
Tax Accounting
Sales tax
and Transitional Energy Facilities Assessment (TEFA) are collected from
customers and presented in both operating revenues and operating expenses on the
Consolidated Statements of Income as follows:
|
|
September 30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Sales
Tax
|
|
$ |
51.0 |
|
|
$ |
48.7 |
|
|
$ |
45.5 |
|
TEFA
|
|
|
8.4 |
|
|
|
8.5 |
|
|
|
8.1 |
|
Total
|
|
$ |
59.4 |
|
|
$ |
57.2 |
|
|
$ |
53.6 |
|
Statements
of Cash Flows
For
purposes of reporting cash flows, all temporary investments with original
maturities of three months or less are considered cash
equivalents.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Utility
Plant and Depreciation
Regulated
property, plant and equipment are stated at original cost. Costs include direct
labor, materials and third-party construction contractor costs, allowance for
capitalized interest and certain indirect costs related to equipment and
employees engaged in construction. Upon retirement, the cost of depreciable
regulated property, plus removal costs less salvage, is charged to accumulated
depreciation with no gain or loss recorded.
Depreciation
is computed on a straight-line basis for financial statement purposes, using
rates based on the estimated average lives of the various classes of depreciable
property. The composite rate of depreciation was 3.04 percent of average
depreciable property in fiscal 2008, 3.02 percent in fiscal 2007 and 3.03
percent in fiscal 2006. Pursuant to the final October 3, 2008, rate order,
commencing in fiscal 2009, the BPU has lowered the depreciation amount to be
charged in rates to 2.34 percent for NJNG. Note 2. Regulation – October Rate
Order.
Property
classifications and estimated useful lives, as of September 30, 2008 and 2007,
are as follows:
Property Classifications
|
Estimated
Useful Lives
|
Distribution
Facilities
|
31
to 63 years
|
Transmission
Facilities
|
42
to 62 years
|
Storage
Facilities
|
36
to 47 years
|
All
other property
|
5
to 35 years
|
Impairment
of Long-Lived Assets
The
Company reviews the carrying amount of an asset for possible impairment whenever
events or changes in circumstances indicate that such amount may not be
recoverable.
In the
fourth quarter of fiscal 2007, NJNG signed a stipulation with the BPU and Rate
Counsel, which resulted in the disallowance of certain costs that had previously
been deferred as recoverable pursuant to a regulatory rider associated with the
remediation of a former manufactured gas plant site. The pre-tax charge of $4
million is reflected as a component of Operations and maintenance expense in the
Consolidated Statements of Income. See Note 12 Commitments and Contingent
Liabilities – Legal Proceedings – MGP Remediation.
For the
years ended September 30, 2008, 2007 and 2006, no other circumstances indicating
impairment were identified.
Available
for Sale Securities
Included
in Investments in equity investees on the Consolidated Balance Sheets are
certain investments in equity securities that have a fair value of $8.0 million
and $7.8 million as of September 30, 2008 and 2007, respectively. Unrealized
gains associated with these equity securities, which are included as a part of
Accumulated other comprehensive income, a component of Common stock equity, were
approximately $200,000 ($118,000, after tax) and $1.1 million ($0.6 million,
after tax) for the fiscal years ended September 30, 2008 and 2007,
respectively.
Equity
in Earnings
The
Company accounts for its investment in Iroquois using the equity method and
records its share of earnings net of tax as Equity in earnings in the
Consolidated Statements of Income. Iroquois is a limited partnership, which owns
and operates a 412-mile interstate natural gas transmission pipeline providing
service to local gas distribution companies, electric utilities and electric
power generators, as well as marketers and other end-users, directly or
indirectly, by connecting with pipelines and interconnects throughout the
northeastern United States. Taxes netted in Equity in earnings from Iroquois are
$1.3 million, $1.1 million and $1.2 million and are included in the Consolidated
Statements of Income for the fiscal years ended September 30, 2008, 2007 and
2006, respectively.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Common
Stock Equity
On
January 23, 2008, NJR’s Board of Directors approved a 3 for 2 stock split of the
Company’s common stock in the form of a dividend for the Company’s common stock
shareholders of record on February 8, 2008. The additional shares were issued on
March 3, 2008, resulting in an increase in average shares outstanding from
approximately 28 million to approximately 42 million. All share-related
information for prior periods has been adjusted throughout this report on a
retroactive basis to reflect the effects of the stock split. As well,
Common stock and Premium on common stock amounts have been adjusted as of the
earliest period presented in the Consolidated Statements of Capitalization and
Consolidated Statements of Common Stock Equity.
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of September 30,:
($ in thousands)
|
|
2008
|
|
|
2007
|
|
Customer
accounts receivable - Billed:
|
|
|
|
|
|
|
|
|
|
|
|
|
NJNG
|
|
$
|
21,398 |
|
|
|
9 |
% |
|
$ |
5,583 |
|
|
|
4 |
% |
NJRES
|
|
|
198,902 |
|
|
|
88 |
|
|
|
120,274 |
|
|
|
91 |
|
Retail
and Other
|
|
|
6,832 |
|
|
|
3 |
|
|
|
6,587 |
|
|
|
5 |
|
Total
|
|
$
|
227,132 |
|
|
|
100 |
% |
|
$ |
132,444 |
|
|
|
100 |
% |
Fair
Value of Assets and Liabilities
The fair
value of cash and temporary investments, accounts receivable, accounts payable,
commercial paper and borrowings under revolving credit facilities are estimated
to equal their carrying amounts due to the short maturity of those instruments.
The estimated fair value of long-term debt, excluding current maturities and
capital lease obligations, is based on quoted market prices for similar issues
and is as follows:
|
September 30,
|
(Thousands)
|
2008
|
2007
|
Carrying
value
|
$399,800
|
$329,800
|
Fair
market value
|
$351,400
|
$336,200
|
Asset
Retirement Obligations (ARO)
NJR
adopted the provisions of FASB-issued Financial Interpretation Number 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47), effective as of September 30, 2006. FIN
47 clarifies the term “conditional asset retirement obligation” as used in SFAS
No. 143, Accounting for Asset
Retirement Obligations. A conditional asset retirement obligation refers
to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may or
may not be within the control of the company. FIN 47 removes the conditionality
surrounding an ARO, such that the obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and/or
method of settlement.
FIN 47
requires NJR to recognize a reasonably estimated liability for the fair value of
an ARO. The fair value of a liability for an ARO should be recognized when
incurred, which is generally upon acquisition, construction, development and/or
through the normal operation of the asset. An asset retirement cost will be
capitalized concurrently by increasing the carrying amount of the related asset
by the same amount as the liability. In periods subsequent to the initial
measurement, NJR is required to recognize changes in the liability resulting
from the passage of time (accretion) or due to revisions to either timing or the
amount of the originally estimated cash flows to settle the conditional asset
retirement obligation.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Pension
and Postemployment Plans
NJR has
two noncontributory defined pension plans covering substantially all employees,
including officers. Benefits are based on each employee’s years of service and
compensation. NJR’s funding policy is to contribute annually to these plans at
least the minimum amount required under the Employee Retirement Income Security
Act (ERISA) of 1974, as amended, and not more than can be deducted for federal
income tax purposes. Plan assets consist of equity securities, fixed-income
securities and short-term investments. NJR contributed $10 million in aggregate
to the plans in fiscal 2006. There were no contributions to the pension plans in
fiscal 2008 and 2007.
NJR also
provides two primarily noncontributory medical and life insurance plans for
eligible retirees and dependents. Medical benefits, which make up the largest
component of the plans, are based upon an age and years-of-service vesting
schedule and other plan provisions. Funding of these benefits is made primarily
into Voluntary Employee Beneficiary Association trust funds. NJR contributed
$1.0 million, $685,000 and $3.7 million in aggregate to these plans in fiscal
2008, 2007 and 2006, respectively.
New
Accounting Standards
Recently
Adopted
On
October 1, 2007, the Company adopted 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 has evaluated its tax positions for all jurisdictions and all years for
which the statute of limitations remains open and, in accordance with the
provisions of FIN 48, recorded an additional liability for unrecognized tax
benefits and interest of approximately $4.3 million and an increase in retained
earnings as of October 1, 2007, of approximately $1.2 million. For additional
information on the effect of adoption, see Note 11 Income Tax - Adoption of FIN
48.
Not
Yet Adopted
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value as the amount that would be exchanged to sell
an asset or transfer a liability in an orderly transaction between market
participants, and establishes a fair value hierarchy of quotes and unobservable
data that should be used to develop pricing assumptions. In addition, for assets
and liabilities that are not actively traded, for example, certain kinds of
derivatives, SFAS 157 requires that a fair value measurement include an
adjustment for risks inherent in a valuation technique and/or inputs, such as
those used in pricing models. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company will adopt the provisions of the statement
prospectively on October 1, 2008, and it will have no material impact on its
financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to
elect to measure eligible items at fair value as an alternative to hedge
accounting and to mitigate volatility in earnings. A company can elect either
the fair value option according to a pre-existing policy, when the asset or
liability is first recognized, or when it enters into an eligible firm
commitment. Changes in the fair value of assets and liabilities, for which the
Company chooses to apply the fair value option, are reported in earnings at each
reporting date. SFAS 159 also provides guidance on disclosures that are intended
to provide comparability to other companies’ assets and liabilities that have
different measurement attributes and to other companies with similar financial
assets and liabilities. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company currently does not plan to elect the provisions
of SFAS 159.
On April
10, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (FSP FIN 39-1),
Amendment of FASB Interpretation No. 39. FSP FIN 39-1 provides additional
guidance for parties that are subject to master netting arrangements.
Specifically, for transactions that are executed with the same counterparty, it
permits companies to offset
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
the fair
value amounts recognized for derivatives as well as the related fair value
amounts of cash collateral receivables or payables, when certain conditions
apply. FSP FIN 39-1 is effective for fiscal years beginning after November 15,
2007, with early application permitted. The Company’s policy is to present its
derivative positions and any receivables or payables with the same counterparty
on a gross basis. Therefore, FSP FIN 39-1 will have no impact on its statement
of financial position and results of operations.
In June
2007, the FASB Emerging Issues Task Force (EITF) reached consensus on EITF Issue
No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards (EITF 06-11). EITF 06-11 applies to share-based payment
arrangements that entitle employees to receive dividends or dividend equivalents
and provides that the tax benefit related to dividends on certain share-based
awards be recognized as an increase to additional paid-in capital and should be
included in the pool of excess tax benefits available to absorb future tax
deficiencies on share- based payment awards. EITF 06-11 will be applied
prospectively to the income tax benefits of applicable dividends declared by the
Company for fiscal years beginning after December 15, 2007. The Company will
adopt the provisions of the statement prospectively on October 1, 2008, and does
not anticipate that it will have a material impact on its financial position and
results of operations.
On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 is an amendment of
Accounting Research Bulletin (ARB) No. 51 and was issued to improve the
relevance, comparability and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. This
Statement applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries. SFAS 160 clarifies that a non-controlling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and that a parent company must
recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS
160 is effective for fiscal years beginning after December 15, 2008, and early
adoption is prohibited. The Company has concluded that this statement will have
no impact on its statement of financial position and results of
operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (SFAS 161). SFAS 161 requires
enhanced qualitative and quantitative disclosures on the objectives and
accounting for derivatives and related hedging activities, as well as their
impact to the financial statements. SFAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. Early application as well as
comparative disclosures for earlier periods at initial adoption, are encouraged.
The Company is currently evaluating the effect of adoption of SFAS 161 on its
footnote disclosures.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) used in the United States of America requires NJR
to make estimates that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosure of contingencies during the reporting
period. On a continuous basis, NJR evaluates its estimates, including those
related to the calculation of the fair value of derivative instruments, unbilled
revenues, allowance for doubtful accounts, provisions for depreciation and
amortization, regulatory assets and liabilities, income taxes, pensions and
other postemployment benefits and contingencies related to environmental matters
and litigation. NJR bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources.
NJR has
legal, regulatory and environmental proceedings during the normal course of
business which can result in loss contingencies. When evaluating the potential
for a loss, NJR will establish a reserve if a loss is probable in accordance
with SFAS 5, Accounting for
Contingencies. Where available information is sufficient to estimate the
amount of the liability, it is NJR’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 NJR’s policy to accrue the lower end of the range.
In the
normal course of business estimated amounts are subsequently adjusted to actual
results that may differ from estimates.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
2. REGULATION
Energy
Deregulation Legislation
The
Electric Discount and Energy Competition Act (EDECA) is the legal framework for
New Jersey’s public utility and wholesale energy landscape. NJNG is required,
pursuant to a written order by the BPU under EDECA, to have its residential
markets open to competition from third-party natural gas suppliers. Customers
can choose the supplier of their natural gas commodity in NJNG’s service
territory.
As
required by EDECA, NJNG has restructured its prices to segregate BGSS rates into
two primary components, the commodity portion, which represents the wholesale
cost of natural gas, including the cost for interstate pipeline capacity to
bring the gas to NJNG’s service territory, and the delivery portion, which
represents the transportation of the commodity portion through NJNG’s gas
distribution system to the end-use customer. 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, regardless of
whether it or a third-party supplier provides the wholesale natural gas
commodity.
Under
EDECA, the BPU is required to audit the state’s energy utilities every two
years. The primary purpose of the audit is to ensure that utilities and their
affiliates offering unregulated retail services do not have any unfair
competitive advantage over nonaffiliated providers of similar retail services. A
combined competitive services and management audit of NJNG began in
November 2006, and a final report on findings and recommendations is
currently pending approval before the BPU.
October
Base Rate Order
As a
result of increases in NJNG’s operation, maintenance and capital costs, on
November 20, 2007, NJNG petitioned the New Jersey Board of Public Utilities
(BPU) to increase base rates for delivery service by approximately $58.4
million, which included a return on NJNG’s equity component of 11.375 percent.
This request was consistent with NJNG’s objectives of providing safe and
reliable service to its customers and earning a market-based return on its
regulated investments.
On July
30, 2008, NJNG and the Department of the Public Advocate, Division of Rate
Counsel (Rate Counsel) signed an agreement that stipulated the principal
financial terms of a settlement of its petitioned rate increase (Revenue
Requirement stipulation). As a result, NJNG would receive a revenue increase to
its base rates of $32.5 million, which is inclusive of an approximate $13
million impact of a change to the conservation incentive program baseline usage
level, receive an allowed return on equity component of 10.3 percent, reduce its
depreciation expense component from 3.0 percent to 2.34 percent and reduce its
depreciation expense by $1.6 million annually as a result of the amortization of
previously recovered asset retirement obligations. On August 14, 2008, NJNG,
Rate Counsel and the Staff of the BPU signed an agreement that stipulated
changes in NJNG’s gas tariff and allocated the approximately $32.5 million
revenue requirement increase amongst NJNG’s classes of services.
As a
result of the signed Revenue Requirement stipulation, NJNG recorded an aggregate
after-tax charge in the third quarter of fiscal 2008 of approximately $1.5
million, as it determined that certain regulatory assets were no longer
recoverable in future rates from customers (approximately $769,000) and changed
its computation for its allowance for funds used during construction
(approximately $744,000).
On
October 3, 2008, the BPU unanimously approved, and made effective as of that
date, NJNG’s $32.5 million revenue requirement and associated rate design
stipulations in their entirety (the Board Order).
Conservation
Incentive Program (CIP)
The CIP
is a three-year pilot program designed to decouple the link between customer
usage and NJNG’s utility gross margin to allow NJNG to encourage its customers
to conserve energy. The initial term of the CIP is October 1, 2006, through
September 30, 2009. Under certain conditions, the CIP may be extended one
additional year beyond the
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
initial
term. For the term of the pilot, the Weather Normalization Clause (WNC), which
was previously in effect to allow NJNG to mitigate the impact of weather on its
gross margin, 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 (filed for annually and recovered one year following the
end of the CIP usage year) is subject to additional conditions, including an
earnings test and an evaluation of BGSS-related savings. It is anticipated that
NJNG will file a petition in the spring of 2009 to extend its CIP or implement a
similar mechanism on a permanent basis, seeking to be effective October 1,
2009.
As of
September 30, 2008, NJNG has $22.5 million accrued to recover from residential
and small commercial customers, which includes $9.5 million related to the
weather component of the CIP and $13.0 million related to the usage component of
the CIP.
The
following are NJNG’s BPU filings and results related to CIP since the inception
of the program:
Ÿ
|
June
2007 – NJNG filed its CIP Petition for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2007 and to establish its
CIP recovery rates effective October 1, 2007.
|
|
|
Ÿ
|
August
2007 – NJNG filed an amendment to its June 2007 CIP filing to update
financial information to include actual data.
|
|
|
Ÿ
|
October
2007 – the BPU provisionally approved the implementation of NJNG’s initial
CIP recovery rates, based upon program information NJNG included in an
Amendment to its Petition for Annual Review, which was filed with the BPU
in August 2007. The approved rates add 1.7 percent to the average
residential heating customer’s bill and are designed to recover
approximately $15.6 million of previously accrued
amounts.
|
|
|
Ÿ
|
May
2008 – NJNG filed its CIP Petition for the Annual Review of its CIP
Program for recoverable CIP amounts for fiscal 2008, requesting an
additional $6.8 million, and to modify its CIP recovery rates effective
October 1, 2008.
|
|
|
Ÿ
|
August
1, 2008 – the BPU issued their final order in approving the CIP petition
for fiscal 2007.
|
|
|
Ÿ
|
October
3, 2008 – the BPU provisionally approved NJNG’s CIP petition filed in May
2008 for fiscal 2008, effective the date of the Board
Order.
|
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the pilot program. As
of September 30, 2008, NJNG had a remaining liability of $864,000 related to
these programs.
Basic
Gas Supply Service
NJNG is
allowed to recover the commodity cost of its gas purchased for sale to its
customers through the BGSS rate component of its customers’ bills. NJNG is
required to make an annual filing by June 1 of each year for review of its BGSS
rate with the BPU. At that time NJNG may also request a potential rate change to
be effective at the beginning of the following fiscal year. NJNG is allowed to
make two interim filings during the fiscal year period to subsequently increase
residential and small commercial customer BGSS rates up to 5 percent on a
self-implementing and provisional basis, after proper notice and BPU action on
the June filing. Such increases, if any, are subject to subsequent BPU review
and final approval.
The cost
of the wholesale natural gas commodity passed through to customers can fluctuate
significantly based on many factors associated with supply and demand in the
marketplace. In addition to the annual and interim filings to adjust BGSS rates,
NJNG is permitted to refund or credit back a portion of the commodity cost
previously collected from customers when the natural gas commodity cost
decreases in comparison to amounts projected or adjusted as a component of the
BGSS rates. Before implementing a refund or credit, proper notification and
supporting documentation is filed with the BPU. Refundable amounts may also be
subject to interest.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The
following are NJNG’s BGSS filings and related rate adjustments and refunds to
its residential and small commercial customers:
Ÿ
|
October
2007 – the BPU provisionally approved a decrease to NJNG’s BGSS rate
effective October 4, 2007, which resulted in a 3.6 percent decrease to the
average residential heating customer bill which was subsequently approved
on a final basis in August 2008.
|
|
|
Ÿ
|
November
2007 – NJNG notified the BPU that it would provide refunds to customers
and subsequently issued a credit totaling $32.0 million in December 2007
as a result of the decrease in the anticipated costs of wholesale natural
gas prices.
|
Ÿ
|
March
2008 – NJNG, the BPU staff and Rate Counsel entered into a stipulation to
resolve certain matters related to NJNG’s fiscal year 2007 BGSS filing.
This stipulation was approved by the BPU on May 9, 2008, and resulted in
NJNG recording a nonrecurring settlement charge to its BGSS costs of
$300,000.
|
Ÿ
|
May
2008 – NJNG filed for an increase to the periodic BGSS factor to be
effective October 1, 2008, that would increase an average residential
heating customer’s bill by approximately 18.0 percent due to an increase
in the price of wholesale natural gas. Subsequent to the time of the
filing, wholesale natural gas prices moderated, and on September 22, 2008,
NJNG, the Staff of the BPU and Rate Counsel signed an agreement for an
increase to the periodic BGSS factor that would increase an average
residential heating customer’s bill by approximately 8.9 percent. On
October 3, 2008, the BPU approved the BGSS increase on a provisional
basis, effective the date of the Board
Order.
|
Other
Incentive Programs
NJNG is
eligible to receive financial incentives for reducing BGSS costs through a
series of utility gross margin-sharing programs that include off-system sales,
capacity release, storage incentive and financial risk management (FRM)
programs. In October 2007, the BPU approved an extension of the utility gross
margin-sharing programs mentioned above through October 31, 2008. Concurrently,
the BPU reduced the sharing percentage of the margin generated by the FRM
program retained by NJNG from 20 percent to 15 percent effective November 1,
2007. The July 30, 2008, agreement between NJNG and the Rate Counsel (Revenue
Requirement stipulation) provides for the extension of the incentive programs
through October 31, 2011, along with a moderate expansion of the storage
incentive and FRM programs.
On
October 3, 2008, the BPU approved the Revenue Requirement stipulation. which
extends the incentive programs through October 31, 2011, and provides for an
increase to the FRM program’s annual cost limitation from $3.2 million to $6.4
million, an annual update to the FRM volume limitations and an increase to the
annual Storage Incentive program volumes from 18 Bcf to 20 Bcf, effective the
date of the Board Order. The Board Order also provided for the sharing of Ocean
Peaking Power margins to cease effective the date of the Board
Order.
Societal
Benefits Clause (SBC) and Weather Normalization Clause (WNC)
The SBC
is comprised of three primary components, a Universal Service Fund rider (USF),
a Manufactured Gas Plant Remediation Adjustment Clause (RAC), and the New Jersey
Clean Energy Program (NJCEP). The USF is a permanent statewide program that was
approved by the BPU in March 2003 for all natural gas and electric utilities for
the benefit of income-eligible customers; the RAC is a rider approved by the BPU
in June 1992 that provides for recovery of actual expenditures incurred to
remediate former gas manufacturing facilities; and the NJCEP is a program
approved by the BPU in March 2001 and is designed to promote energy efficiency
and renewable energy. Recovery of SBC program costs is subject to BPU approval
of annual filings that include an updated report of expenditures incurred each
year.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
In
October 2007, the BPU approved the following:
·
|
$14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through June 30, 2006. As of September 30, 2008,
$92.2 million of previously incurred remediation costs, net of recoveries
from customers and insurance proceeds, are included in Regulatory assets
on the Consolidated Balance Sheets;
|
|
|
·
|
a
decrease to the statewide USF recovery rate, which has a negligible impact
on customer rates.
|
In
addition, the BPU approved an increase of $8.1 million, or 0.9 percent, to the
WNC rate to recover the net amounts deferred relating to weather-related gross
margin variations incurred during the fiscal 2005 and 2006 winter periods. In
its May 30, 2008, CIP filing with the BPU, NJNG has proposed decreasing its
current WNC rate to fully recover its remaining balance of approximately $0.84
million. On October 3, 2008, the BPU provisionally approved the WNC decrease
effective the date of the Board Order.
In
February 2008, NJNG filed an application regarding its SBC. The overall request
would result in no change to the current rates approved in October
2007.
Universal
Service Fund
Through
the USF, eligible customers receive a credit toward their utility bill. The
credits applied to eligible customers are recovered through the USF rider in the
SBC. NJNG recovers carrying costs on deferred USF balances.
In June
2008, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to increase the statewide USF recovery rate, effective October 1,
2008. NJNG believes the increase will have a negligible impact on customers. In
the BPU’s October 21, 2008, Order, the USF increase was approved on a
provisional basis effective October 24, 2008. The October 21, 2008, Order also
approved interest on USF-deferred balances at the Treasury Constant Maturity
2-year rate net of tax, with the rate changing on a monthly basis.
New
Jersey Clean Energy Program
The BPU
has established a statewide program to promote energy efficiency and renewable
energy. All New Jersey utilities are required to share in the funding for the
program, NJNG’s funding obligation, which is recoverable from customers through
the SBC, totaled $31.4 million for the period from January 1, 2005, to December
31, 2008. As of September 30, 2008, NJNG has a remaining discounted liability of
$3.1 million and a corresponding Regulatory asset included in SBC.
In
October 2008, the BPU released a final Order, updating state utilities’ funding
obligations for the period from January 1, 2009, to December 31, 2012. NJNG’s
share of the total funding requirement of $1.2 billion is $50.8 million and
gradually increases from $10.3 million in fiscal 2009 to $15.9 million in fiscal
2012.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Regulatory
Assets & Liabilities
At
September 30, 2008 and 2007, respectively, the Company had the following
regulatory assets, all related to NJNG, on the Consolidated Balance
Sheets:
(Thousands)
|
2008
|
|
2007
|
|
Recovery
Period
|
Regulatory
assets–current
|
|
|
|
|
|
Underrecovered
gas costs
|
$ 27,994
|
|
$ —
|
|
Less
than one year (1)
|
WNC
|
919
|
|
8,105
|
|
Less
than one year (2)
|
CIP
|
22,463
|
|
16,529
|
|
Less
than one year (3)
|
Total
current
|
$ 51,376
|
|
$ 24,634
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Notes 2 and 13)
|
|
|
|
|
|
Expended,
net of recoveries
|
$ 92,164
|
|
$ 85,071
|
|
(4)
|
Liability
for future expenditures
|
120,730
|
|
105,340
|
|
(5)
|
CIP
|
2,397
|
|
—
|
|
(6)
|
Deferred
income and other taxes
|
12,726
|
|
13,979
|
|
Various
(7)
|
Derivatives
(Note 3)
|
49,610
|
|
51,861
|
|
(8)
|
Postemployment
benefit costs (Note 9)
|
52,519
|
|
33,988
|
|
(9)
|
SBC
|
10,524
|
|
22,130
|
|
Various (10)
|
Total
noncurrent
|
$340,670
|
|
$312,369
|
|
|
(1)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(2)
|
Recoverable
as a result of BPU approval in October 2008, without interest. This
balance reflects the net results from winter period of fiscal 2006. No new
WNC activity is being recorded due to the existence of the CIP, all
previously deferred amounts with the WNC have been approved for
recovery.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $9.5 million relating to the weather component of
the calculation and approximately $13.0 million relating to the customer
usage component of the calculation. Recovery from customers is designed to
be one year from date of rate approval by the BPU.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated
future expenditures. Recovery will be requested when actual expenditures
are incurred (see Note
12. Commitments and Contingent Liabilities – Legal
Proceedings).
|
(6)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance
includes approximately $1.0 million relating to the weather component of
the calculation and approximately $1.4 million relating to the customer
usage component of the calculation.
|
(7)
|
Recoverable
without interest, subject to BPU approval.
|
(8)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(9)
|
Recoverable
or refundable, subject to BPU approval, without interest. Includes
unrecognized service costs recorded in accordance with SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postemployment Plans that NJNG
has determined are recoverable in rates charged to customers (see Note 9. Employee Benefit
Plans).
|
(10)
|
Recoverable
with interest, subject to BPU
approval.
|
If there
are any changes in regulatory positions that indicate the recovery of regulatory
assets is not probable, the related cost would be charged to income in the
period of such determination.
At
September 30, 2008 and 2007, the Company had the following regulatory
liabilities, all related to NJNG, on the Consolidated Balance
Sheets:
(Thousands)
|
2008
|
|
2007
|
Regulatory
liability–current
|
|
|
|
Overrecovered
gas costs (1)
|
—
|
|
$ 9,583
|
Total
current
|
—
|
|
$ 9,583
|
Regulatory
liabilities–noncurrent
|
|
|
|
Cost
of removal obligation (2)
|
$63,419
|
|
$60,094
|
Market
development fund (MDF) (3)
|
—
|
|
1,176
|
Total-noncurrent
|
$63,419
|
|
$61,270
|
(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
$20.9 million, including accretion of $1.4 million for the fiscal year
ended September 30, 2008, of regulatory assets relating to asset
retirement obligations have been netted against the cost of removal
obligation as of September 30, 2008 (see Note
10. Asset Retirement
Obligations).
|
(3)
|
The
MDF provided financial incentives to encourage customers to switch to
third-party suppliers and has supported other unbundling-related
initiatives. The MDF funding obligations terminated as of October 31,
2006, and the remaining balance was credited back to customers through the
BGSS in October 2007.
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
3. DERIVATIVE
INSTRUMENTS
The
Company and its subsidiaries are subject to market risk due to fluctuations in
the price of natural gas. To manage the risk of such fluctuations, the Company
and its subsidiaries enter into financial futures and forward contracts, option
agreements and swap agreements to economically hedge future purchases and sales
of natural gas.
The
Company and its subsidiaries are involved in the wholesale purchase and sale of
natural gas. Under EITF 03-11, Reporting Realized Gains and Losses
on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not
“Held for Trading
Purposes” as Defined in Issue No 02-3,
NJR has concluded that this is non-trading activity, and therefore, to the
extent the natural gas is physically delivered, NJR presents its revenues and
cost of gas on a gross basis in the Consolidated Statements of Income. Changes
in the fair values of financial derivative transactions as well as certain
physical commodity contracts, as described below, are recognized as a component
of Gas purchases in the Consolidated Statements of Income.
On
October 1, 2007, the Company changed the treatment of its physical commodity
contracts at NJRES, such that the changes in fair value of contracts entered
into after September 30, 2007, are now included currently in earnings, and are
not accounted for using the “normal purchase normal sales” scope exception of
SFAS 133. All NJRES physical commodity contracts entered into after September
30, 2007, are accounted for at fair value on the Consolidated Balance Sheets,
with changes in fair value being reflected as a component of gas purchases on
the Consolidated Statements of Income. All physical commodity contracts at NJRES
that were in existence prior to October 1, 2007, which were previously
designated as meeting the normal purchase normal sales scope exception of SFAS
133, as well as physical commodity contracts at NJNG and NJR Energy, which also
met and were designated under the normal purchase normal sale scope exception,
continue to be accounted for under settlement accounting.
All of
the Company’s financial derivative instruments (financial futures, options or
swaps) are accounted for in accordance with SFAS 133 and recorded at fair value
in the Consolidated Balance Sheets. Changes in fair value, which are referred to
as unrealized gains and losses, are recorded as a component of Gas purchases or
Operating revenues for NJRES and NJR Energy, respectively, in the Consolidated
Statements of Income. Changes in fair value of NJNG’s financial derivative
instruments are recorded as a component of Regulatory assets or liabilities in
the Consolidated Balance Sheets. These amounts will be recovered through future
BGSS amounts as an increase or reduction to the cost of natural gas in NJNG’s
tariff.
The
Company enters into financial derivative instruments as an economic hedge of the
sale of natural gas. The derivatives are marked at fair value and recognized in
the Consolidated Statements of Income as a component of Gas purchases, or
Operating revenues, as appropriate, in the current period. However, the change
in value of the natural gas is recognized only when that natural gas has been
sold, which is normally in a future period. Therefore, the realized gains or
losses that result from the settlement of these derivative instruments prior to
the actual sale of the natural gas that is being economically hedged create
volatility in the results of NJR; volatility is also created, in the opposite
direction, when the actual sale of the natural gas occurs at a later date. The
true economic result will remain unchanged regardless of the settlement of the
derivative instrument relative to the ultimate sale of the natural
gas.
Unrealized
gains (losses) at NJRES related to physical commodity contracts and financial
instruments and certain realized gains (losses) at NJRES related to derivative
instruments that are included as a component of Gas purchases, and unrealized
gains (losses) at NJR Energy related to financial derivative instruments that
are included as a component of Operating revenues, for the fiscal years ended
September 30, 2008, 2007 and 2006, respectively, are as follows:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
NJRES
(Included as part of Gas purchases):
|
|
|
|
|
|
|
|
|
|
Unrealized
gains – Physical Commodity Contracts
|
|
$ |
1,714 |
|
|
$ |
— |
|
|
$ |
— |
|
Unrealized
gains (losses) – Financial Instruments
|
|
|
125 |
|
|
|
(27,988
|
) |
|
|
269,590 |
|
Realized
gains (losses) – Financial Instruments
|
|
|
39,250 |
|
|
|
(2,903
|
) |
|
|
710 |
|
Subtotal
NJRES
|
|
|
41,089 |
|
|
|
(30,891
|
) |
|
|
270,300 |
|
NJR
Energy (Included as part of Operating revenues):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) – Financial Instruments
|
|
|
(8,163
|
) |
|
|
(7,168
|
) |
|
|
(28,379
|
) |
Total
NJRES and NJR Energy unrealized and realized gains
(losses)
|
|
$ |
32,926 |
|
|
$ |
(38,059
|
) |
|
$ |
241,921 |
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Generally,
exchange-traded futures contracts require a deposit of margin cash, the amount
of which is subject to change based on market price movements and in accordance
with exchange rules. The Company maintains broker margin accounts for NJNG and
NJRES. The balances as of September 30, by company are as follows:
(Thousands)
|
|
2008
|
|
|
2007
|
|
NJNG
broker margin deposit
|
|
$ |
41,277 |
|
|
$ |
12,345 |
|
NJRES
broker (liability)
|
|
$ |
(29,072
|
) |
|
$ |
(15,143
|
) |
4. INVESTMENTS
IN EQUITY INVESTEES
On March
2, 2007, NJR, through an indirect wholly owned subsidiary, entered into a series
of joint venture agreements with subsidiaries of Spectra Energy Corporation
(Spectra) and formed the Steckman Ridge partnership. The purpose of the
partnership is to develop and operate an anticipated 17.7 Bcf natural gas
storage facility in western Pennsylvania, which will serve the Northeastern and
Mid- Atlantic regions of the United States. NJR and Spectra each own 50 percent
of the equity interests in Steckman Ridge and are required to fund 50 percent of
total acquisition and development costs up to a maximum of $132.5 million each.
As NJR has the ability to exert significant influence, but not control, it uses
the equity method of accounting for its investment in Steckman
Ridge.
NJR’s
Investments in equity investees as of September 30, 2008 and 2007, respectively,
include the following investments:
(Thousands)
|
2008
|
|
2007
|
Steckman
Ridge
|
$ 84,285
|
|
$56,726
|
Iroquois
|
23,604
|
|
22,073
|
Other
|
8,092
|
|
7,944
|
Total
|
$115,981
|
|
$86,743
|
The
following tables set forth the financial information for Iroquois for the fiscal
years ended September 30:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
$ |
165.9 |
|
|
$ |
160.4 |
|
|
$ |
157.2 |
|
Operating
income
|
|
$ |
87.6 |
|
|
$ |
78.5 |
|
|
$ |
80.1 |
|
Net
income
|
|
$ |
37.1 |
|
|
$ |
29.7 |
|
|
$ |
29.3 |
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Current
assets
|
|
$ |
64.2 |
|
|
$ |
86.2 |
|
Noncurrent
assets
|
|
$ |
729.2 |
|
|
$ |
703.5 |
|
Current
liabilities
|
|
$ |
39.3 |
|
|
$ |
37.7 |
|
Noncurrent
liabilities
|
|
$ |
348.9 |
|
|
$ |
374.7 |
|
Steckman
Ridge is currently under development. As such, there are no earnings currently
associated with the investment in Steckman Ridge, and the invested balance to
date represents the Company’s share of total acquisition and development costs
incurred to acquire the natural gas storage rights, engineering and site
preparation, legal and other third party direct charges and capitalized
interest. Other investments represent investments in equity securities of
publicly traded energy companies, all of which are immaterial on an individual
basis and are accounted for as available for sale securities, with any change in
the value of such investments recorded as Accumulated other comprehensive
income, a component of Common Stock Equity.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
5. EARNINGS
PER SHARE
The
following table presents the calculation of the Company’s basic and diluted
earnings per share for the fiscal years ended September 30:
(Thousands,
except per share amounts)
|
2008
|
|
2007*
|
|
2006*
|
Net
Income, as reported
|
$113,910
|
|
$65,281
|
|
$221,908
|
Basic
earnings per share
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,878
|
|
41,855
|
|
41,793
|
Basic
earnings per common share
|
$2.72
|
|
$1.56
|
|
$5.31
|
Diluted
earnings per share
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
41,878
|
|
41,855
|
|
41,793
|
Incremental
shares**
|
298
|
|
258
|
|
329
|
Weighted
average shares of common stock outstanding–diluted
|
42,176
|
|
42,113
|
|
42,122
|
Diluted
earnings per common share
|
$2.70
|
|
$1.55
|
|
$5.27
|
*
|
Share
and per share data for fiscal years 2007 and 2006 have been retroactively
adjusted to reflect a 3 for 2 stock split effective March 3,
2008.
|
**
|
Incremental
shares consist of stock options, stock awards and performance
units.
|
6. LONG-TERM
DEBT, DIVIDENDS AND RETAINED EARNINGS RESTRICTIONS
Annual
long-term debt, excluding capital leases, redemption requirements are as follows
(in millions):
September 30,
|
Redemption
|
2009
|
$55.0
|
|
2010
|
—
|
|
2011
|
$20.0
|
|
2012
|
—
|
|
2013
|
—
|
|
Thereafter
|
$379.8
|
|
NJNG
First Mortgage Bonds
NJNG’s
mortgage secures its First Mortgage Bonds and represents a lien on substantially
all of its property, including natural gas supply contracts. Certain indentures
supplemental to the mortgage include restrictions as to cash dividends and other
distributions on NJNG’s common stock that apply as long as certain series of
First Mortgage Bonds are outstanding. Under the most restrictive provision,
approximately $218 million of NJNG’s retained earnings were available for such
purposes at September 30, 2008.
NJNG
enters into loan agreements with the New Jersey Economic Development Authority
(the EDA) under which the EDA issues tax-exempt bonds, and the proceeds are
loaned to NJNG to fund capital expenditures for certain portions of its natural
gas service territory. To secure its loans from the EDA, NJNG issues First
Mortgage Bonds to the EDA with interest rates and maturity dates identical to
those of the EDA Bonds.
In
October 2005, NJNG entered into a loan agreement under which the EDA loaned NJNG
the proceeds from $35.8 million of tax-exempt EDA Bonds consisting of $10.3
million, 4.5 percent (Series 2005A) and $10.5 million, 4.6 percent (Series
2005B) Revenue Refunding Bonds; and $15.0 million, 4.9 percent (Series 2005C)
Natural Gas Facilities Revenue Bonds. The EDA’s Series 2005A bonds are supported
by NJNG’s 4.5 percent Series II bonds with a maturity date of August 1, 2023.
The EDA’s Series 2005B bonds are supported by NJNG’s 4.6 percent Series JJ bonds
with a maturity date of August 1, 2024. The EDA’s Series 2005C bonds are
supported by NJNG’s 4.9 percent Series KK bonds with a maturity date of October
1, 2040. The proceeds from the Series 2005C bonds were deposited into a
construction fund. NJNG drew down $6.5 million from the construction fund in
fiscal 2006 and $4.3 million in fiscal 2007. There were no amounts drawn down
during fiscal 2008.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 million of variable-rate debt backed by
securities issued by the New Jersey Economic Development Authority (EDA). The
EDA bonds are commonly referred to as auction rate securities (ARS) and have an
interest rate reset every 7 or 35 days, depending upon the applicable series,
when an auction is held for the purposes of determining the interest rate of the
securities. The interest rate associated with the NJNG variable-rate debt is
based on the rates on the EDA ARS. As of September 30, 2008, most of the
auctions surrounding the EDA ARS have failed, resulting in those bonds bearing
interest at their maximum rates, defined in the EDA ARS as the lesser of (i) 175
percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as applicable to
such series of ARS. As of September 30, 2008, the 30-day LIBOR rate was 3.9
percent. While the failure of the ARS auctions does not signify or constitute a
default on NJNG, the EDA ARS does impact NJNG’s borrowing costs of the
variable-rate debt. As such, NJNG currently has a weighted average interest rate
of 4.6 percent as of September 30, 2008, compared with a weighted average
interest rate of 3.9 percent as of September 30, 2007. There can be no assurance
that the EDA ARS will have enough market liquidity to return interest rates to
below their maximum rate.
NJNG
Medium Term Notes
In May
2008, NJNG issued $125 million of 5.6 percent senior notes due May 15, 2018
(Notes) in the private placement market pursuant to a note purchase agreement.
The notes are secured until the release date (which is the date at which the
security provided by the pledge under NJNG’s mortgage indenture would no longer
be available to holders of any outstanding series of NJNG’s senior secured notes
and such indebtedness would become senior unsecured indebtedness) by an equal
amount of NJNG first mortgage bonds (Series LL), and interest is payable on the
Notes semi-annually. The proceeds from the Notes were used to refinance
short-term debt and will fund capital expenditure requirements.
NJNG
Sale-Leasebacks
NJNG’s
master lease agreement for its headquarters building has a 25.5-year term with
two 5-year renewal options. The present value of the agreement’s minimum lease
payments is reflected as both a capital lease asset and a capital lease
obligation, which are included in Utility plant and Long-term debt,
respectively, on the Consolidated Balance Sheets. In accordance with its
ratemaking treatment, NJNG records rent expense as if the lease was an operating
lease.
NJNG
received $7.5 million, $5.5 million and $4.1 million for fiscal year 2008, 2007
and 2006, respectively, in connection with the sale-leaseback of a portion of
its natural gas meters. This sale-leaseback program is expected to be continued
on an annual basis.
Contractual
commitments for lease payments, under both sale-leasebacks for the meters and
the building, as of the fiscal year end are as follows (in
millions):
Fiscal Year Ended
September 30,
|
Lease
Payments |
2009
|
|
|
$8.8 |
|
2010
|
|
|
9.0 |
|
2011
|
|
|
12.8 |
|
2012
|
|
|
6.8 |
|
2013
|
|
|
7.2 |
|
Thereafter
|
|
|
39.4 |
|
Subtotal
|
|
|
84.0 |
|
Less:
interest component
|
|
|
(23.6
|
) |
Total
|
|
|
$60.4 |
|
NJR
Debt
NJR had
no long-term variable-rate debt outstanding at September 30, 2008 and
2007.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
On
September 24, 2007, NJR issued $50 million of Unsecured Senior Notes, which were
used for financing its initial investment in Steckman Ridge and general
corporate purposes including refinancing short-term debt. These notes have a
10-year maturity and an interest rate of 6.05 percent.
7. SHORT-TERM
DEBT AND CREDIT FACILITIES
A summary
of NJR’s and NJNG’s committed credit facilities, which require commitment fees
on the unused amounts, and NJRES’ committed facility that does not require a
fee, are as follows:
|
September
30,
|
(Thousands)
|
2008
|
2007
|
NJR
|
|
|
|
|
Bank
credit facilities
|
$325,000
|
|
$325,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
$32,700
|
|
$40,250
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
2.46
|
%
|
6.17
|
%
|
NJNG
|
|
|
|
|
Bank
credit facilities
|
$250,000
|
|
$250,000
|
(1)
|
Amount
outstanding at end of period
|
|
|
|
|
Commercial
paper
|
$145,500
|
|
$175,700
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Commercial
paper
|
2.31
|
%
|
5.19
|
%
|
NJRES
|
|
|
|
|
Bank
credit facilities
|
$30,000
|
|
$30,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
$30,000
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
5.78
|
%
|
(1)
The table includes only committed credit facilities for short-term
borrowings. Also included in short-term debt on the Condensed Consolidated
balance sheet as of September 30, 2007, is $10.5 million related to an
uncommitted credit facility.
|
NJR
On
December 13, 2007, NJR refinanced its prior senior credit facility, scheduled to
expire on December 16, 2007, for a new $325 million five-year revolving
unsecured credit facility. The new credit facility permits the borrowing of
revolving loans and swing loans, as well as the issuance of letters of credit.
Swing loans are loans made available on a same-day basis for an aggregate
principal amount of up to $50 million and repayable in full within a maximum of
seven days of borrowing. It also permits an increase to the facility, from time
to time, with the existing or new lenders, in a minimum of $5 million increments
up to a maximum $100 million at the lending bank’s discretion. Borrowings under
the new facility are conditioned upon compliance with a maximum leverage ratio,
as defined in the new credit facility, of not more than 0.65 to 1.00 at any
time. NJR used the initial borrowings under the new credit facility to refinance
its prior credit facility. In addition, certain of NJR’s non-regulated
subsidiaries have guaranteed to the lenders all of NJR’s obligations under the
new credit facility.
On
February 15, 2008, NJR entered into a new agreement for a stand-alone letter of
credit that may be drawn upon through February 15, 2009, for up to $15 million.
No amounts have been drawn under this letter of credit as of September 30,
2008.
As of
September 30, 2008, NJR had two letters of credit outstanding, totaling $17.5
million, on behalf of NJRES. One letter of credit for $500,000 was issued in
conjunction with a long-term natural gas storage agreement. The other, which
totals $17.0 million, is used for margin requirements for natural gas
transactions. Both letters of credit expire on December 31,
2008.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R, which will
expire on December 3, 2009. The letter of credit is in place to support
development activities.
These
letters of credit reduce the amount available under NJR’s committed credit
facility by the same amount. NJR does not anticipate that these letters of
credit will be drawn upon by the counterparties, and they will be renewed as
necessary.
NJNG
In
October 2007, NJNG entered into a new agreement for standby letters of credit
that may be drawn upon through December 15, 2009, for up to $50 million. No
amounts have been drawn under these letters of credit as of September 30, 2008.
These letters of credit do not reduce the amount available to be borrowed under
NJNG’s credit facility. NJNG does not anticipate that these letters of credit
will be drawn upon by the counterparty, and the agreement will be renewed, as
necessary, upon its expiration.
As of
September 30, 2008, NJNG has a $250 million committed facility with several
banks, with a 5-year term expiring in December 2009. This facility is used to
support NJNG’s commercial paper program.
Neither
NJNG nor the results of its operations are obligated or pledged to support the
NJR or NJRES credit facilities.
NJRES
As of
September 30, 2008, NJRES had a 3-year $30 million committed credit facility
that expires in October 2009 with a multinational financial institution. There
were no borrowings under this facility as of September 30, 2008.
8. STOCK
BASED COMPENSATION
Effective
January 24, 2007, the shareholders of NJR approved the NJR 2007 Stock Award and
Incentive Plan (2007 Plan), which replaced the 2002 Employee and Outside
Director Long-Term Incentive Plan (Long-Term Plan). The Long-Term Plan, reserved
for employees and directors, had 887,207 and 130,920 shares, respectively, which
were rolled into the 2007 Plan. In addition to those shares, the 2007 Plan
reserved an additional 1,125,000 shares for issuance to employees for a total
reserve of 2,012,207 and 130,920, respectively, for employees and directors,
which provides for a broader range of equity awards. Shares can be issued in the
form of options, performance shares or restricted stock. As of September 30,
2008, 1,926,918 and 107,203 shares, respectively, remain available for future
awards to employees and directors. All shares noted have been adjusted to
reflect NJR’s 3 for 2 stock split effective March 3, 2008.
During
the fiscal year ended September 30, 2008, included in Operation and maintenance
expense is $3.2 million related to stock-based compensation. As of September 30,
2008, there remains $2.7 million of deferred compensation related to unvested
shares and options, which is expected to be recognized over the next 3
years.
The
following table summarizes all stock-based compensation expense recognized
during the fiscal years ended September 30, 2008, 2007 and 2006,
respectively:
(Thousands)
|
2008
|
|
2007
|
|
2006
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
Stock
options
|
$294
|
|
$278
|
|
$430
|
|
Performance
shares
|
939
|
|
292
|
|
270
|
|
Restricted
stock
|
1,989
|
|
747
|
|
21
|
|
Compensation
expense included in Operation and Maintenance expense
|
3,222
|
|
1,317
|
|
721
|
|
Income
tax benefit
|
(1,324
|
)
|
(541
|
)
|
(294
|
)
|
Total,
net of tax
|
$1,898
|
|
$776
|
|
$427
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Stock
Options
There
were no stock options granted in fiscal 2008 and 2007. The following table
summarizes the assumptions used in the Black-Scholes option-pricing model and
the resulting weighted average fair value of the stock options issued during
fiscal year 2006:
|
2008
|
2007
|
2006
|
Dividend
yield
|
—
|
%
|
—
|
%
|
3.2
|
%
|
Volatility
|
—
|
%
|
—
|
%
|
13.2
|
%
|
Expected
life (years)
|
—
|
|
—
|
|
7
|
|
Risk-free
interest rate
|
—
|
%
|
—
|
%
|
4.6
|
%
|
Weighted
average fair value
|
—
|
|
—
|
|
$5.44
|
|
The
following table summarizes the stock option activity for the past three fiscal
years:
|
Shares
|
Weighted
Average
Exercise
Price
|
Outstanding
at September 30, 2005
|
2,316,145
|
|
$19.52
|
Granted
|
42,300
|
|
$28.55
|
Exercised
|
(1,325,680
|
)
|
$17.49
|
Forfeited
|
(27,531
|
)
|
$24.46
|
Outstanding
at September 30, 2006
|
1,005,234
|
|
$22.43
|
Granted
|
—
|
|
—
|
Exercised
|
(299,300
|
)
|
$19.40
|
Forfeited
|
(5,625
|
)
|
$19.01
|
Outstanding
at September 30, 2007
|
700,309
|
|
$23.75
|
Granted
|
—
|
|
—
|
Exercised
|
(121,166
|
)
|
$19.40
|
Forfeited
|
—
|
|
—
|
Outstanding
at September 30, 2008
|
579,143
|
|
$24.66
|
Exercisable
at September 30, 2008
|
506,130
|
|
$23.93
|
Exercisable
at September 30, 2007
|
551,284
|
|
$22.17
|
Exercisable
at September 30, 2006
|
726,198
|
|
$20.33
|
For the
stock options listed above, there are $147,000 in costs related to unvested
options that are expected to be recognized over the next 2 years.
The
following table summarizes stock options outstanding and exercisable as of
September 30, 2008:
|
Outstanding
|
Exercisable
|
Exercise Price Range
|
Number
of Stock
Options
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
Number
of Stock
Options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
$15.18
– $18.22
|
86,230
|
1.3
|
$17.38
|
$1,596
|
86,230
|
$17.38
|
$1,596
|
$18.22
– $21.25
|
190,625
|
3.9
|
$20.58
|
2,919
|
190,625
|
$20.58
|
2,919
|
$21.25
– $24.93
|
11,250
|
4.5
|
$22.43
|
151
|
11,250
|
$22.43
|
151
|
$24.93
– $27.33
|
19,500
|
5.3
|
$25.08
|
211
|
16,500
|
$25.10
|
178
|
$27.33
– $30.37
|
271,538
|
6.7
|
$29.91
|
1,624
|
201,525
|
$29.90
|
1,207
|
Total
|
579,143
|
4.9
|
$24.66
|
$6,501
|
506,130
|
$23.93
|
$6,051
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Performance
Shares
The
Company has issued performance shares, which are market conditions awards, to
various officers. The following table summarizes the Performance Unit activity
under the Employee and Outside Director Long-Term Incentive Compensation Plan
for the past three fiscal years:
|
Shares(1)
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested
and outstanding at September 30, 2005
|
55,125
|
|
$30.37
|
Granted
|
10,800
|
|
$28.53
|
Vested
|
—
|
|
—
|
Cancelled/forfeited
|
(3,375
|
)
|
$30.37
|
Non-vested
and outstanding at September 30, 2006
|
62,550
|
|
$30.05
|
Granted
|
—
|
|
—
|
Vested
|
(15,637
|
)
|
$30.05
|
Cancelled/forfeited
|
(31,275
|
)
|
$30.05
|
Non-vested
and outstanding at September 30, 2007
|
15,638
|
|
$30.05
|
Granted
|
61,980
|
|
$31.84
|
Vested
|
(15,638
|
)
|
$30.05
|
Cancelled/forfeited
|
—
|
|
—
|
Non-vested
and outstanding at September 30, 2008
|
61,980
|
|
$31.84
|
(1)
|
The
number of common shares issued related to performance shares may range
from zero to 150 percent of the number of shares shown in the table above
based on the Company’s achievement of performance goals associated with
NJR total shareowner return relative to a selected peer group of
companies.
|
The
Company measures compensation expense related to performance shares based on the
fair value of these awards at their date of grant. Compensation expense for
performance shares is recognized for awards that ultimately vest, and is not
adjusted based on actual achievement of the performance goals. The Company
estimated the fair value of the performance shares on the date of grant using a
Lattice model.
There is
$950,000 in costs related to unvested performance shares that are expected to be
recognized over the next two years.
Restricted
Stock
In fiscal
2008 and 2007, the Company issued 61,980 and 55,031 shares of Restricted Stock,
respectively, under the 2007 Plan, which vest in equal annual installments over
three years, subject to certain conditions, and 35,385 and 26,612, respectively,
restricted shares that vested immediately.
There is
$1.6 million in costs related to unvested restricted stock shares that are
expected to be recognized over the next three years.
9. EMPLOYEE
BENEFIT PLANS
Pension
and Other Postemployment Benefit Plans (OPEB)
NJR has
two trusteed, noncontributory defined benefit retirement plans covering regular
represented and nonrepresented employees with more than one year of service. All
represented employees of NJRHS hired on or after October 1, 2000, are covered by
an enhanced defined contribution plan instead of the defined benefit
plan.
Defined
benefit plan benefits are based on years of service and average compensation
during the highest 60 consecutive months of employment.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The
Company also maintains an unfunded nonqualified pension equalization plan (PEP)
that was established to provide employees with the full level of benefits as
stated in the qualified plan without reductions due to various limitations
imposed by the provisions of federal income tax laws and regulations. There were
no plan assets in the nonqualified plan due to the nature of the
plan.
The
Company provides postemployment medical and life insurance benefits to employees
who meet certain eligibility requirements.
NJR’s
funding policy for its pension plans is to contribute at least the minimum
amount required by the Employment Retirement Income Security Act of 1974, as
amended. In fiscal 2008 and 2007, the Company had no minimum funding
requirements; however, NJR made a discretionary contribution of $10 million in
fiscal 2006 to the pension plans. The Company elected to make this discretionary
tax-deductible contribution to improve the funded status of the pension plans.
The Company currently has no additional requirement to fund the pension plans
over the next five years; however, funding requirements are uncertain and can
depend significantly on changes in actuarial assumptions, returns on plan assets
and changes in the demographics of eligible employees and covered
dependents.
NJR made
tax-deductible contributions of $1.0 million in fiscal 2008 and $685,000 in
fiscal 2007 to the OPEB plans. It is anticipated that the funding level to the
OPEB plans will range from $1.2 million to $1.4 million annually over the next
five years.
The
accumulated benefit obligation (ABO) for the pension plans, including the
Pension Equalization Plan, at September 30, 2008 and 2007, was $89.9 million and
$95.5 million, respectively. As of September 30, 2008, the ABO exceeded the fair
value of plan assets of $80.6 million, and the projected benefit obligation was
$102.4 million.
The
following summarizes the changes in the funded status of the plans and the
related liabilities recognized in the Consolidated Balance Sheets:
|
|
Pension
(1)
|
|
|
OPEB
|
|
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Change
in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
107,875 |
|
|
$ |
105,746 |
|
|
$ |
53,031 |
|
|
$ |
51,375 |
|
Service
cost
|
|
|
2,913 |
|
|
|
2,932 |
|
|
|
1,795 |
|
|
|
1,819 |
|
Interest
cost
|
|
|
6,594 |
|
|
|
6,217 |
|
|
|
3,252 |
|
|
|
3,028 |
|
Plan
participants’ contributions
|
|
|
47 |
|
|
|
55 |
|
|
|
4 |
|
|
|
6 |
|
Actuarial
loss
|
|
|
(10,134
|
) |
|
|
(2,218
|
) |
|
|
(2,548
|
) |
|
|
(1,545
|
) |
Benefits
paid, net of retiree subsidies received
|
|
|
(4,912
|
) |
|
|
(4,857
|
) |
|
|
(2,082
|
) |
|
|
(1,652
|
) |
Benefit
obligation at end of year
|
|
$ |
102,383 |
|
|
$ |
107,875 |
|
|
$ |
53,452 |
|
|
$ |
53,031 |
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$ |
105,389 |
|
|
$ |
95,835 |
|
|
$ |
29,475 |
|
|
$ |
26,570 |
|
Actual
return on plan assets
|
|
|
(20,122 |
) |
|
|
14,106 |
|
|
|
(5,613 |
) |
|
|
3,946 |
|
Employer
contributions
|
|
|
215 |
|
|
|
250 |
|
|
|
1,014 |
|
|
|
685 |
|
Benefits
paid, net of plan participants’ contributions
|
|
|
(4,864
|
) |
|
|
(4,802
|
) |
|
|
(2,165
|
) |
|
|
(1,726
|
) |
Fair
value of plan assets at end of year
|
|
$ |
80,618 |
|
|
$ |
105,389 |
|
|
$ |
22,711 |
|
|
$ |
29,475 |
|
Funded
status
|
|
$ |
(21,765
|
) |
|
$ |
(2,486
|
) |
|
$ |
(30,741
|
) |
|
$ |
(23,556
|
) |
Amounts
recognized on Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postemployment
employee benefit liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
(218
|
) |
|
$ |
(217
|
) |
|
$ |
(148
|
) |
|
$ |
(83
|
) |
Non-current
|
|
|
(21,547
|
) |
|
|
(2,269
|
) |
|
|
(30,593
|
) |
|
|
(23,473
|
) |
Total
|
|
$ |
(21,765
|
) |
|
$ |
(2,486
|
) |
|
$ |
(30,741
|
) |
|
$ |
(23,556
|
) |
|
(1) Includes
NJR’s Pension Equalization
Plan.
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
On
September 30, 2006, NJR prospectively adopted SFAS 158, Employers’ Accounting for Defined
Benefit Pension and Other Postemployment Plans, which requires that NJR
recognize a liability for its underfunded benefit plans. NJR records the offset
to Regulatory Assets for the portion of liability relating to its regulated
utility and to Accumulated Other Comprehensive Income for the portion of the
liability related to its non-regulated operations. The amounts recognized in
Regulatory Assets and Accumulated Other Comprehensive Income as of September 30,
2007 and September 30, 2008 are as follows:
|
|
|
Accumulated
Other
|
|
Regulatory
Assets
|
|
Comprehensive
Income
|
|
Pension
|
|
|
Pension
|
|
|
Plan
|
OPEB
|
|
Plan
|
OPEB
|
|
|
|
|
|
|
Balance
at October 1, 2006
|
—
|
—
|
|
—
|
—
|
|
|
|
|
|
|
Amounts arising during the
period:
|
|
|
|
|
|
Net
actuarial loss
|
$17,034
|
$12,782
|
|
$1,578
|
$ 4,920
|
Prior
service cost
|
317
|
311
|
|
89
|
39
|
Net
Transition Obligation
|
—
|
1,728
|
|
—
|
442
|
Balance
at September 30, 2007
|
$17,351
|
$14,821
|
|
$1,667
|
$ 5,401
|
|
|
|
|
|
|
Amounts arising during the
period:
|
|
|
|
|
|
Net
actuarial loss (gain)
|
$14,487
|
$ 6,608
|
|
$4,232
|
$(1,079)
|
|
|
|
|
|
|
Amounts amortized to net periodic
costs:
|
|
|
|
|
|
Net
actuarial (loss)
|
$ (972)
|
$ (569)
|
|
$(129)
|
$ (235)
|
Prior
service cost
|
(39)
|
(69)
|
|
(17)
|
(9)
|
Net
Transition Obligation
|
—
|
(286)
|
|
—
|
(71)
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
$30,827
|
$20,505
|
|
$5,753
|
$ 4,007
|
There
were no deferred gains or losses, prior service costs or transition obligation
costs recognized in Regulatory Assets or Accumulated Other Comprehensive Income
prior to October 1, 2006.
Amounts
included in Regulatory Assets and Accumulated Other Comprehensive Income
expected to be recognized as components of net periodic benefit cost in fiscal
year 2009 are as follows:
|
|
|
Accumulated
Other
|
|
Regulatory
Assets
|
Comprehensive
Income
|
|
Pension
|
|
Pension
|
|
(Thousands)
|
Plan
|
OPEB
|
Plan
|
OPEB
|
|
|
|
|
|
Net
actuarial gain (loss)
|
$480
|
$ 883
|
$74
|
$184
|
Prior
service (cost) credit
|
39
|
69
|
17
|
9
|
Net
Transition Obligation
|
—
|
286
|
—
|
71
|
Total
|
$519
|
$1,238
|
$91
|
$264
|
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and life
insurance) for employees and covered dependents were as follows:
|
|
Pension
|
|
|
OPEB
|
|
(Thousands)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
Service
cost
|
$2,913
|
$2,932
|
$3,034
|
$1,795
|
$1,819
|
$1,582
|
Interest
cost
|
6,594
|
6,217
|
5,746
|
3,252
|
3,028
|
2,472
|
Expected
return on plan assets
|
(8,731)
|
(8,208)
|
(7,127)
|
(2,465)
|
(2,161)
|
(1,832)
|
Recognized
actuarial loss
|
1,101
|
1,596
|
1,731
|
804
|
1,063
|
—
|
Recognized
net initial obligation
|
—
|
—
|
(11)
|
357
|
357
|
357
|
Prior
service cost amortization
|
56
|
84
|
85
|
78
|
78
|
78
|
Special
termination benefit
|
—
|
—
|
—
|
—
|
—
|
834
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The
weighted average assumptions used to determine benefit costs and obligations as
of September 30 are as follows:
|
|
|
Pension
|
|
|
|
|
OPEB
|
|
|
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
Benefit
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
6.25
|
%
|
6.00
|
%
|
5.75
|
%
|
6.25
|
%
|
6.00
|
%
|
5.75
|
%
|
Expected
asset return
|
9.00
|
%
|
9.00
|
%
|
9.00
|
%
|
8.50
|
%
|
8.50
|
%
|
8.50
|
%
|
Compensation
increase
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
7.75
|
%
|
6.25
|
%
|
6.00
|
%
|
7.75
|
%
|
6.25
|
%
|
6.00
|
%
|
Expected
asset return
|
9.00
|
%
|
9.00
|
%
|
9.00
|
%
|
8.50
|
%
|
8.50
|
%
|
8.50
|
%
|
Compensation
increase
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
3.75
|
%
|
In
selecting an assumed discount rate, NJR uses a modeling process that involves
selecting a portfolio of high-quality corporate debt issuances (AA- or better)
whose cash flows (via coupons or maturities) match the timing and amount of
NJR’s expected future benefit payments. NJR considers the results of this
modeling process, as well as overall rates of return on high-quality corporate
bonds and changes in such rates over time, in determination of its assumed
discount rate.
NJR’s
general approach for determining the overall expected long-term rate of return
on assets considers historical and expected future asset returns, the current
and future targeted asset mix of the plan assets, historical and future expected
real rates of return for equities and fixed income securities, and historical
and expected inflation statistics. The expected long-term rate of return on plan
assets to be used to develop net periodic benefit costs for fiscal 2009 is 9.0
percent for pension costs and 8.5 percent for OPEB costs.
Information
relating to the assumed health care cost trend rate (HCCTR) used to determine
expected OPEB benefits as of September 30, and the effect of a 1 percent change
in the rate, are as follows:
($
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
HCCTR
|
|
|
9.0
|
% |
|
|
10.0
|
% |
|
|
10.0
|
% |
Ultimate
HCCTR
|
|
|
5.0
|
% |
|
|
5.0
|
% |
|
|
5.0
|
% |
Year
ultimate HCCTR reached
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of a 1 percentage point increase in the HCCTR on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end
benefit obligation
|
|
$ |
8,052 |
|
|
$ |
8,493 |
|
|
$ |
8,096 |
|
Total
service and interest cost
|
|
$ |
973 |
|
|
$ |
959 |
|
|
$ |
921 |
|
Effect
of a 1 percentage point decrease in the HCCTR on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end
benefit obligation
|
|
$ |
(6,571
|
) |
|
$ |
(6,850
|
) |
|
$ |
(6,489
|
) |
Total
service and interest costs
|
|
$ |
(771
|
) |
|
$ |
(752
|
) |
|
$ |
(721
|
) |
NJR’s
investment objective is a long-term real rate of return on assets before
permissible expenses that is approximately 6.0 percent greater than the assumed
rate of inflation as measured by the Consumer price Index. The expected
long-term rate of return is based on the asset categories in which the Company
invests and the current expectations and historical performance for these
categories.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The mix
and targeted allocation of the pension and OPEB plans’ assets are as
follows:
|
|
2009
|
|
Assets
at
|
|
|
Target
|
|
September 30,
|
Asset Allocation
|
|
Allocation
|
|
2008
|
|
2007
|
U.S.
equity securities
|
|
|
53
|
% |
|
|
53
|
% |
|
|
53
|
% |
International
equity securities
|
|
|
17 |
|
|
|
15 |
|
|
|
19 |
|
Fixed
income
|
|
|
30 |
|
|
|
32 |
|
|
|
28 |
|
Total
|
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the following years:
(Thousands)
|
Pension
|
|
OPEB
|
2009
|
$5,249
|
|
$2,387
|
2010
|
$5,406
|
|
$2,511
|
2011
|
$5,733
|
|
$2,606
|
2012
|
$6,019
|
|
$2,754
|
2013
|
$6,229
|
|
$2,916
|
2014-2018
|
$36,603
|
|
$18,906
|
NJR’s
OPEB plans provide prescription drug benefits that are actuarially equivalent to
those provided by Medicare Part D. Therefore, under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 NJR qualifies for federal
subsidies.
The
estimated subsidy payments are:
|
Estimated Subsidy Payment
|
Fiscal
Year
|
(Thousands)
|
2009
|
$143
|
2010
|
$162
|
2011
|
$192
|
2012
|
$201
|
2013
|
$218
|
2014-2018
|
$1,340
|
Defined
Contribution Plan
The
Company offers an Employees’ Retirement Savings Plan (Savings Plan) to eligible
employees. The Company matches 50 percent of participants’ contributions up to 6
percent of base compensation.
For
represented NJRHS employees who are not eligible for participation in the
defined benefit plan, the Company contributes between 2 and 3 percent of base
compensation, depending on years of service, into the Savings Plan on their
behalf.
The
amount expensed and contributed for the matching provision of the Savings Plan
was $1.3 million in fiscal 2008, $1.2 million in fiscal 2007 and $1.1 million in
fiscal 2006.
10. ASSET
RETIREMENT OBLIGATIONS (ARO)
NJR
recognizes AROs related to the costs associated with cutting and capping its
main and service gas distribution pipelines of NJNG, which are required by New
Jersey law when taking such gas distribution pipeline out of
service.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The
following is an analysis of the change in the ARO liability for the fiscal year
ended September 30:
(Thousands)
|
2008
|
2007
|
Balance
at October 1
|
$23,895
|
$23,293
|
Accretion
|
1,401
|
1,322
|
Additions
|
89
|
160
|
Retirements
|
(969)
|
(880)
|
Balance
at September 30
|
$24,416
|
$23,895
|
Accretion
amounts are not reflected as an expense on NJR’s Consolidated Statements of
Income, but rather are deferred as a regulatory asset and netted against NJNG’s
regulatory liabilities, for presentation purposes, on the Consolidated Balance
Sheet.
Accretion
for the next five years is estimated to be as follows:
(Thousands)
|
|
Fiscal Year
Ended September 30,
|
Estimated
Accretion
|
2009
|
$1,477
|
|
2010
|
$1,556
|
|
2011
|
$1,637
|
|
2012
|
$1,727
|
|
2013
|
$1,821
|
|
11. INCOME
TAXES
The
Company’s federal income tax returns through fiscal 2004 have either been
reviewed by survey, examined by the Internal Revenue Service (IRS), or the
related statute of limitations has expired and all matters have been
settled.
A
reconciliation of the United States federal statutory rate of 35 percent to the
effective rate from operations for the fiscal years ended September 30, 2008,
2007 and 2006 is as follows:
(Thousands)
|
2008
|
|
2007
|
|
2006
|
|
Statutory
income tax expense
|
$64,161
|
|
$37,343
|
|
$129,662
|
|
Change
resulting from
|
|
|
|
|
|
|
State
income taxes
|
9,501
|
|
7,109
|
|
21,766
|
|
Change
in tax rate
|
(1,705
|
)
|
(221
|
)
|
(216
|
)
|
Depreciation
and cost of removal
|
(2,253
|
)
|
(1,774
|
)
|
(1,674
|
)
|
Investment
tax credits
|
(322
|
)
|
(322
|
)
|
(322
|
)
|
Other
|
22
|
|
(720
|
)
|
(662
|
)
|
Income
tax provision (1)
|
$69,404
|
|
$41,415
|
|
$148,554
|
|
Effective
income tax rate
|
37.9
|
%
|
38.8
|
%
|
40.1
|
%
|
(1) Income tax provision
includes taxes associated with investments in Equity investees of $1.3
million, $1.1 million and $1.2 million for the years ended September 30,
2008, 2007 and 2006, respectively. These amounts are reported as part of
Equity in earnings of Equity investees, net of tax, in the Consolidated
Statements of Income.
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
The
Income tax provision (benefit) from operations consists of the
following:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
28,534 |
|
|
$ |
36,846 |
|
|
$ |
37,631 |
|
State
|
|
|
4,750 |
|
|
|
12,282 |
|
|
|
11,636 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
29,972 |
|
|
|
(5,758
|
) |
|
|
78,088 |
|
State
|
|
|
6,470 |
|
|
|
(1,633
|
) |
|
|
21,521 |
|
Investment
tax credits
|
|
|
(322
|
) |
|
|
(322
|
) |
|
|
(322
|
) |
Income
tax provision
|
|
$ |
69,404 |
|
|
$ |
41,415 |
|
|
$ |
148,554 |
|
The
temporary differences, which give rise to deferred tax assets and liabilities,
consist of the following:
(Thousands)
|
|
2008
|
|
|
2007
|
|
Current
|
|
|
|
|
|
|
Underrecovered
gas costs
|
|
$ |
11,501 |
|
|
$ |
(3,937
|
) |
WNC/CIP
|
|
|
9,606 |
|
|
|
10,120 |
|
Conservation
program
|
|
|
1,767 |
|
|
|
2,766 |
|
Pension
Liability
|
|
|
(6,247
|
) |
|
|
— |
|
Other
|
|
|
(2,814
|
) |
|
|
(2,009
|
) |
Current
deferred tax liability, net
|
|
$ |
13,813 |
|
|
$ |
6,940 |
|
Noncurrent
|
|
|
|
|
|
|
|
|
Property-related
items
|
|
$ |
141,255 |
|
|
$ |
133,289 |
|
Unamortized
investment tax credits
|
|
|
(3,873
|
) |
|
|
(4,046
|
) |
Remediation
costs
|
|
|
35,323 |
|
|
|
28,905 |
|
Deferred
service contract revenue
|
|
|
(2,528
|
) |
|
|
(2,452
|
) |
Deferred
gain
|
|
|
(1,615
|
) |
|
|
(1,990
|
) |
Fair
value of derivatives
|
|
|
58,110 |
|
|
|
47,204 |
|
Other
|
|
|
13,031 |
|
|
|
15,348 |
|
Total
non-current deferred tax liabilities, net
|
|
$ |
239,703 |
|
|
$ |
216,258 |
|
Total
deferred tax liabilities, net
|
|
$ |
253,516 |
|
|
$ |
223,198 |
|
ADOPTION
OF FIN 48
FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109) and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it does
not have a greater than 50 percent likelihood of being sustained. Additionally,
FIN 48 provides guidance on derecognition, declassification and interest and
penalties, among other items.
The
Company adopted the provisions of FIN 48 on October 1, 2007. The total amount of
FIN 48 liabilities as of the date of adoption was $6.5 million, including $4.7
million of uncertain tax liabilities and $1.8 million of interest and penalties.
As a result of the implementation of FIN 48, the Company recognized an
additional $4.3 million as an increase in the liability for unrecognized tax
benefits and interest. The previously recorded amount of $2.2 million, as well
as the additional amount recognized associated with the adoption of FIN 48, are
included as a component of Deferred and accrued taxes in the Current
classification of the Consolidated Balance Sheets.
There are
$1.6 million of state taxes included in the balance of unrecognized tax benefits
as of October 1, 2007. If they were to be recognized the effective tax rate
would be impacted, as this amount had previously been fully reserved for, and
was fully reflected as a component of current Deferred and accrued taxes in the
Consolidated Balance Sheets. As of September 30, 2008 no additions were made
that would alter this conclusion.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
There are
$3.1 million included in the balance of unrecognized tax benefits as of October
1, 2007, that relates to a filing position the Company took concerning the
depreciable life of certain fixed assets at NJNG. The Company filed an automatic
change in method of accounting for the period ended September 30, 2005, which is
currently under audit by the Internal Revenue Service (IRS). The Company
anticipates closing the audit and settling this issue within the next 12 months.
The settlement of this issue would reduce the FIN 48 reserve by approximately
$3.6 million, which includes associated interest. As of September 30, 2008 no
additions were made which would alter this conclusion.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits as additional tax expense. Upon adoption of FIN 48 on October 1, 2007,
the Company had $1.8 million of accrued interest and penalties related to the
above liability computed under FIN 48, which had previously been expensed in the
Consolidated Statements of Income. As of September 30, 2008, the total amount of
accrued interest and penalties (net of tax) related to all tax positions is $2.6
million.
As of
September 30, 2008, the Company’s gross unrecognized tax benefit was $4.7
million. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
(Millions)
|
|
Balance
at October 1, 2007
|
$4.7
|
Additions
based on tax positions related to the current year
|
—
|
Additions
for tax positions of prior years
|
—
|
Reductions
for tax positions of prior years
|
—
|
Settlements
|
—
|
Expiration
of statute of limitations
|
—
|
Balance
at September 30, 2008
|
$4.7
|
The
Company and one or more of its subsidiaries files or expects to file income
and/or franchise tax returns in the United States Federal jurisdiction and in
the states of New Jersey, New York, Connecticut, Texas and Louisiana. The
Company neither files in, nor believes it has a filing requirement in, any
foreign jurisdictions.
The
Company is no longer subject to United States federal income tax examinations
for years prior to fiscal 2004. The IRS commenced an examination of the
Company’s fiscal 2005 federal income tax return during the third quarter of
fiscal 2007 and the Company’s fiscal 2006 federal income tax return in the
fourth quarter of fiscal 2008. The fiscal 2005 exam is expected to be completed
by the end of the first quarter of fiscal 2009, and the fiscal 2006 exam is
expected to be completed by the end of the second quarter of fiscal
2010.
The
Company is not currently under examination in any state; however, all periods
subsequent to those ended September 30, 2003, are statutorily open to
examination (in New York all periods subsequent to September 30, 2004, are
statutorily open to examination). As previously disclosed, NJNG was party to a
case pending before the Tax Court of New Jersey (the “Tax Court.”). In that
case, NJNG disputed the State of New Jersey’s (the “State”) application of its
tax apportionment rules. On April 15, 2008 the Tax Court issued a decision in
favor of the State. NJNG paid the resulting assessment of approximately $3
million (including interest and penalities) on October 15, 2008. The effect of
the Tax Court’s decision will not impact the Company’s effective tax rate, as
this amount had been fully reserved and was reflected as a component of current
Deferred and accrued taxes in the Consolidated Balance Sheets as of September
30, 2008.
12. 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 $104.4 million at current contract rates
and volumes, which are recoverable through the BGSS.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
For the
purpose of securing adequate storage and pipeline capacity, NJRES enters into
storage and pipeline capacity contracts, which require the payment of certain
demand charges by NJRES in order to maintain the ability to access such natural
gas storage or pipeline capacity, during a fixed time period, which generally
ranges from one to five years. Demand charges are based on established rates as
regulated by the Federal Energy Regulatory Commission (FERC). These demand
charges represent commitments to pay storage providers or pipeline companies for
the right to store and transport natural gas utilizing their respective assets.
As of September 30, 2008, NJRES had contractual obligations for current demand
charges related to storage contracts and pipeline capacity contracts of $21.7
million and $40.2 million, respectively.
As of
September 30, 2008, there were NJR guarantees covering approximately $333
million of natural gas purchases and demand fee commitments of NJRES and NJNG
not yet reflected in Accounts payable on the Consolidated Balance Sheet.
Commitments as of September 30, 2008, for natural gas purchases and future
demand fees for the next five fiscal year periods are as follows:
(Thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
NJRES
|
|
|
|
|
|
|
Natural
gas purchases
|
$606,428
|
$263,002
|
$ 2,633
|
$ —
|
$ —
|
$ —
|
Storage
demand fees
|
21,667
|
11,520
|
8,310
|
5,846
|
1,635
|
1,388
|
Pipeline
demand fees
|
40,217
|
19,853
|
16,322
|
6,833
|
4,384
|
4,634
|
Sub-total
NJRES
|
$668,312
|
$294,375
|
$ 27,265
|
$12,679
|
$ 6,019
|
$ 6,022
|
NJNG
|
|
|
|
|
|
|
Natural
gas purchases
|
$108,803
|
$ 18,017
|
$ 1,530
|
$ —
|
$ —
|
$ —
|
Storage
demand fees
|
23,884
|
21,966
|
14,550
|
7,738
|
7,039
|
4,106
|
Pipeline
demand fees
|
80,510
|
81,639
|
80,352
|
73,757
|
72,159
|
78,050
|
Sub-total
NJNG
|
$213,197
|
$121,622
|
$ 96,432
|
$81,495
|
$79,198
|
$82,156
|
Total
|
$881,509
|
$415,997
|
$123,697
|
$94,174
|
$85,217
|
$88,178
|
NJNG’s
capital expenditures are estimated at $77.3 million for fiscal 2009, of which
approximately $1.5 million has been committed and $70.9 million for fiscal 2010,
and consist primarily of its construction program to support customer growth,
maintenance of its distribution system and replacement needed under pipeline
safety regulations.
The
Company’s future minimum lease payments under various operating leases are less
than $3.1 million annually for the next five years and $1.9 million in the
aggregate for all years thereafter.
Legal
Proceedings
Manufactured Gas Plant
Remediation
NJNG is
responsible for the remedial cleanup of three Manufactured Gas Plant (MGP)
sites, dating back to gas operations in the late 1800s and early 1900s, which
contain contaminated residues from former gas manufacturing operations. NJNG is
currently involved in administrative proceedings with the New Jersey Department
of Environmental Protection (NJDEP), as well as participating in various studies
and investigations by outside consultants to determine the nature and extent of
any such contaminated residues and to develop appropriate programs of remedial
action, where warranted, under Administrative Consent Orders or Memoranda of
Agreement with the NJDEP.
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a remediation adjustment
clause (RAC) approved by the BPU. In October 2007, the BPU approved $14.7
million in eligible costs to be recovered annually for MGP remediation
expenditures incurred through June 30, 2006. As of September 30, 2008, $92.2
million of previously incurred remediation costs, net of recoveries from
customers and insurance proceeds, are included in Regulatory assets on the
Consolidated Balance Sheet.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
In
September 2008, NJNG updated an environmental review of the MGP sites, including
a review of potential liability for investigation and remedial action. NJNG
estimated at the time of the review that total future expenditures to remediate
and monitor the three MGP sites for which it is responsible will range from
approximately $120.7 million to $177.2 million. NJNG’s estimate of these
liabilities is based upon known facts, existing technology and enacted laws and
regulations in place when the review was completed. However, NJNG expects actual
costs to differ from these estimates. Where it is probable that costs will be
incurred, but the information is sufficient only to establish a range of
possible liability, and no point within the range is more likely than any other,
it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has
recorded an MGP remediation liability and a corresponding Regulatory asset of
$120.7 million on the Consolidated Balance Sheet. The actual costs to be
incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG is
presently investigating the potential settlement of alleged Natural Resource
Damage claims that might be brought by the NJDEP concerning the three MGP sites.
NJDEP has not made any specific demands for compensation for alleged injury to
groundwater or other natural resources. NJNG’s evaluation of these potential
claims is in the early stages, and it is not yet possible to quantify the amount
of compensation, if any that NJDEP might seek to recover. NJNG anticipates any
costs associated with this matter would be recoverable through the
RAC.
NJNG will
continue to seek recovery of MGP-related costs through the RAC. If any future
regulatory position indicates that the recovery of such costs is not probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there can be
no assurance as to the ultimate recovery through the RAC or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed above, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, results of operations or
cash flows.
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
13. BUSINESS
SEGMENT AND OTHER OPERATIONS DATA
Information
related to the Company’s various business segments and other operations,
excluding capital expenditures, which are presented in the Consolidated
Statements of Cash Flows, is detailed below.
The
Natural Gas Distribution segment consists of regulated energy and off-system,
capacity and storage management operations. The Energy Services segment consists
of unregulated wholesale energy operations. The retail and other business
operations (Retail and Other) consists of energy related investments,
appliance and installation services, commercial real estate development, and
other corporate activities.
(Thousands)
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
1,078,824 |
|
|
$ |
1,005,588 |
|
|
$ |
1,138,774 |
|
Energy
Services
|
|
|
2,714,733 |
|
|
|
1,994,682 |
|
|
|
2,133,540 |
|
Segment
subtotal
|
|
|
3,793,557 |
|
|
|
3,000,270 |
|
|
|
3,272,314 |
|
Intercompany
revenues (1)
|
|
|
(197
|
) |
|
|
(281
|
) |
|
|
(274
|
) |
Retail
and Other
|
|
|
22,850 |
|
|
|
21,776 |
|
|
|
(811
|
) |
Total
|
|
$ |
3,816,210 |
|
|
$ |
3,021,765 |
|
|
$ |
3,271,229 |
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
37,723 |
|
|
$ |
35,648 |
|
|
$ |
34,146 |
|
Energy
Services
|
|
|
206 |
|
|
|
214 |
|
|
|
211 |
|
Segment
subtotal
|
|
|
37,929 |
|
|
|
35,862 |
|
|
|
34,357 |
|
Retail
and Other
|
|
|
535 |
|
|
|
373 |
|
|
|
396 |
|
Total
|
|
$ |
38,464 |
|
|
$ |
36,235 |
|
|
$ |
34,753 |
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
88,136 |
|
|
$ |
88,528 |
|
|
$ |
88,029 |
|
Energy
Services
|
|
|
116,454 |
|
|
|
40,913 |
|
|
|
324,045 |
|
Segment
subtotal
|
|
|
204,590 |
|
|
|
129,441 |
|
|
|
412,074 |
|
Intercompany
expense (1)
|
|
|
160 |
|
|
|
— |
|
|
|
— |
|
Retail
and Other
|
|
|
(3,300
|
) |
|
|
(2,191
|
) |
|
|
(23,690
|
) |
Total
|
|
$ |
201,450 |
|
|
$ |
127,250 |
|
|
$ |
388,384 |
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
42,479 |
|
|
$ |
44,480 |
|
|
$ |
46,870 |
|
Energy
Services
|
|
|
71,908 |
|
|
|
21,298 |
|
|
|
188,372 |
|
Segment
subtotal
|
|
|
114,387 |
|
|
|
65,778 |
|
|
|
235,242 |
|
Retail
and Other
|
|
|
(477
|
) |
|
|
(497
|
) |
|
|
(13,334
|
) |
Total
|
|
$ |
113,910 |
|
|
$ |
65,281 |
|
|
$ |
221,908 |
|
(1)
Consists of transactions between subsidiaries that are eliminated and
reclassified in consolidation
|
|
|
|
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
Because
NJR uses the non-GAAP terms of Financial margin and Net financial earnings, the
Company has determined that it is appropriate to disclose these key terms by
segment and business operations. A reconciliation from Operating income to
Financial margin and Net income to Net financial earnings, for the fiscal years
ended September 30, 2008, 2007 and 2006, respectively, are as
follows:
(Thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
88,136 |
|
|
$ |
88,528 |
|
|
$ |
88,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Services
|
|
|
116,454 |
|
|
|
40,913 |
|
|
|
324,045 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments, net of taxes
|
|
|
(1,839
|
) |
|
|
27,988 |
|
|
|
(269,590
|
) |
Realized
(gain) loss from derivative instruments related to natural gas inventory,
net of taxes
|
|
|
(39,250
|
) |
|
|
2,903 |
|
|
|
(710
|
) |
Financial
margin – Energy Services
|
|
|
75,365 |
|
|
|
71,804 |
|
|
|
53,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
and Other
|
|
|
(3,300
|
) |
|
|
(2,191
|
) |
|
|
(23,690
|
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments, net of taxes
|
|
|
8,163 |
|
|
|
7,168 |
|
|
|
28,379 |
|
Financial
margin – Retail and Other
|
|
|
4,863 |
|
|
|
4,977 |
|
|
|
4,689 |
|
Intercompany
expenses (1)
|
|
|
160 |
|
|
|
— |
|
|
|
— |
|
Consolidated
financial margin
|
|
$ |
168,524 |
|
|
$ |
165,309 |
|
|
$ |
146,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
42,479 |
|
|
$ |
44,480 |
|
|
$ |
46,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Services
|
|
|
71,908 |
|
|
|
21,298 |
|
|
|
188,372 |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(gain) loss on derivative instruments, net of taxes
|
|
|
(1,127
|
) |
|
|
17,079 |
|
|
|
(159,838
|
) |
Realized
(gain) loss from derivative instruments related to natural gas inventory,
net of taxes
|
|
|
(23,778
|
) |
|
|
1,771 |
|
|
|
(421
|
) |
Net
financial earnings – Energy Services
|
|
|
47,003 |
|
|
|
40,148 |
|
|
|
28,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
and Other
|
|
|
(477
|
) |
|
|
(497
|
) |
|
|
(13,334
|
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments, net of taxes
|
|
|
4,810 |
|
|
|
4,223 |
|
|
|
16,870 |
|
Net
financial earnings – Retail and Other
|
|
|
4,333 |
|
|
|
3,726 |
|
|
|
3,536 |
|
Consolidated
net financial earnings
|
|
$ |
93,815 |
|
|
$ |
88,354 |
|
|
$ |
78,519 |
|
(1)
Consists of transactions between subsidiaries that are eliminated and
reclassified in consolidation
|
|
The
Company’s assets for the various business segments and business operations are
detailed below:
(Thousands)
|
|
2008
|
|
|
2007
|
|
Assets
at end of period:
|
|
|
|
|
|
|
Natural
Gas Distribution
|
|
$ |
1,761,964 |
|
|
$ |
1,565,566 |
|
Energy
Services
|
|
|
689,992 |
|
|
|
487,482 |
|
Segment
subtotal
|
|
|
2,451,956 |
|
|
|
2,053,048 |
|
Intercompany
Assets (1)
|
|
|
(58,115
|
) |
|
|
(16,947
|
) |
Retail
and Other
|
|
|
231,551 |
|
|
|
194,644 |
|
Total
|
|
$ |
2,625,392 |
|
|
$ |
2,230,745 |
|
(1)
Consists of transactions between subsidiaries that are eliminated and
reclassified in consolidation
|
|
New
Jersey Resources Corporation
Part
II
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (Continued)
|
|
14. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary
of financial data for each quarter of fiscal 2008 and 2007 follows. Due to the
seasonal nature of the Company’s businesses, quarterly amounts vary
significantly during the fiscal year. In the opinion of management, the
information furnished reflects all adjustments necessary for a fair presentation
of the results of the interim periods.
(Thousands, except per share data)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
2008
|
|
|
|
|
|
|
|
Operating
revenues
|
$811,138
|
|
$1,177,545
|
|
$1,000,439
|
|
$827,088
|
Gross
margin
|
$94,157
|
|
$62,870
|
|
$36,388
|
|
$188,191
|
Operating
income (loss)
|
$54,537
|
|
$20,335
|
|
$(5,693
|
)
|
$132,271
|
Net
income (loss)
|
$30,185
|
|
$12,535
|
|
$(7,597
|
)
|
$78,787
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
$0.73
|
|
$0.30
|
|
$(0.18
|
)
|
$1.87
|
Diluted
|
$0.72
|
|
$0.30
|
|
$(0.18
|
)
|
$1.86
|
2007
|
|
|
|
|
|
|
|
Operating
revenues
|
$737,401
|
|
$1,029,043
|
|
$662,218
|
|
$593,103
|
Gross
margin
|
$90,286
|
|
$55,809
|
|
$87,998
|
|
$58,937
|
Operating
income (loss)
|
$54,830
|
|
$16,271
|
|
$46,548
|
|
$9,601
|
Net
income (loss)
|
$29,434
|
|
$7,961
|
|
$25,377
|
|
$2,509
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
$0.71
|
|
$0.19
|
|
$0.61
|
|
$0.06
|
Diluted
|
$0.70
|
|
$0.19
|
|
$0.60
|
|
$0.06
|
The sum
of quarterly earnings per share may not equal annual earnings per share due to
rounding.
Immaterial
Error
As of
October 1, 2007, NJR elected to treat as derivatives all new forward physical
contracts to purchase or sell natural gas entered into at NJRES, effectively not
utilizing the normal purchase normal sale scope exception of SFAS 133. As such,
these contracts are recorded at fair value on the Consolidated Balance Sheets
and any resulting changes in fair value are recognized in Gas purchases in the
Consolidated Statements of Income. Subsequent to the issuance of its third
quarter financial statements for fiscal 2008, the Company became aware that it
had incorrectly recorded the fair value of certain of these contracts during the
second and third quarters of fiscal 2008.
The
Company made a quantitative and qualitative assessment of the error and
concluded that the resulting misstatements are not material. Accordingly,
financial statements for the second and third quarters of fiscal 2008 have not
been restated. The cumulative error has been corrected in the fourth quarter of
fiscal 2008 resulting in a $5.2 million increase in reported Net income in the
fourth quarter, of which approximately $1.9 million and $3.3 million related to
the second and third quarters of fiscal 2008, respectively. The results for the
fiscal year ended September 30, 2008 are recorded using the appropriate fair
value amounts.
These
errors have no impact on the economic value associated with the underlying
forecasted transactions. There was no impact on reported cash flow from
operations or liquidity, and these errors do not result in any future change to
cash flow from operations or liquidity.
New
Jersey Resources Corporation
Part
II
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
None
ITEM
9A. CONTROLS AND
PROCEDURES
|
|
Disclosure Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
the principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) (the Exchange Act), as of
the end of the period covered by this report. Based on this evaluation, the
Company’s principal executive officer and principal financial officer concluded
that, as of end of the period covered by this report, the Company’s disclosure
controls and procedures were not effective due to a material weakness in
internal control over financial reporting described below, to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to the Company’s
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
In
connection with the Company’s preparation of its consolidated financial
statements for the fiscal year ended September 30, 2007, the Company identified
an immaterial error in the recording of certain physical natural gas
transactions, which were not recorded at the appropriate fair value during the
interim quarters ended March 31, 2008 and June 30, 2008, as they were valued at
an incorrect price. Controls were not designed properly or operating
effectively to prevent or detect these pricing errors. Natural gas prices are
volatile and it is reasonably possible that the volume of these transactions
could have been larger during any interim period or for the fiscal year ended
September 30, 2008. The Company concluded that it was reasonably possible that
this control weakness could have resulted in a material error in its
Consolidated Financial Statements had the volume of these transactions been
larger.
The
Company continually reviews its disclosure controls and procedures and makes
changes, as necessary, to ensure the quality of its financial reporting. The
Company’s independent registered public accounting firm, Deloitte &
Touche LLP, and management have discussed these issues with the Company’s Audit
Committee. As detailed below, the Company has implemented certain additional
controls that it believes will significantly reduce the potential for similar
issues to arise in the future.
Management’s
Annual Report on Internal Control over Financial Reporting
The
report of management required under this ITEM 9A is contained in ITEM 8 of this
Form 10-K under the caption “Management’s Report on Internal Control over
Financial Reporting.”
Attestation
Report of Registered Public Accounting Firm
The
attestation report required under this ITEM 9A is contained in ITEM 8 of this
10-K under the caption “Report of Independent Registered Public Accounting
Firm.”
Changes
in Internal Control over Financial Reporting
There has
been no change in internal control over financial reporting (as such term is
defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended
September 30, 2008, that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
New
Jersey Resources Corporation
Part
II
ITEM
9A. CONTROLS AND
PROCEDURES
(Continued)
|
|
Remediation
of Material Weakness
Management
and the Board of Directors are committed to the remediation of the material
weakness set forth above as well as the continued improvement of the Company’s
overall system of internal control over financial reporting. Management is
in the process of actively addressing and remediating the material weakness in
internal control over financial reporting described above. Subsequent to the
quarter and fiscal year ended September 30, 2008, in connection with the
material weakness in internal control over financial reporting detailed above,
the Company has implemented or will implement the following controls designed to
substantially reduce the risk of a similar material weakness occurring in the
future:
·
|
improve
training, education and accounting reviews for all relevant personnel
involved in the accounting treatment and disclosures for the Company’s
derivative instruments;
|
·
|
ensure
the Company has the accounting technical expertise requirements necessary
for compliance;
|
·
|
initiate
a thorough review of the design of the internal control over financial
reporting related to the accounting of derivative instruments which will
incorporate an analysis of the current staffing levels, job assignments
and the design of all internal control processes for the accounting for
derivative instruments and implement new and improved processes and
controls, if warranted; and
|
·
|
increase
the level of review and discussion of significant accounting matters and
supporting documentation with senior finance
management.
|
As part
of the Company’s fiscal 2009 assessment of internal control over financial
reporting, management will conduct sufficient testing and evaluation of the
controls to be implemented as part of this remediation plan to ascertain that
they operate effectively. The Company anticipates that these remediation actions
represent ongoing improvement measures. While the Company has taken steps to
remediate the material weakness, these steps may not be adequate to fully
remediate the material weakness, and additional measures may be required. The
Company believes, however, these measures will fully remediate the above
identified material weakness in its internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
|
|
None
New
Jersey Resources Corporation
Part
III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
|
|
Information
required by this item, including information concerning the Board of Directors
of the Company, the members of the Company’s Audit Committee, the Company’s
Audit Committee Financial Expert, compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and shareholder proposals, is
incorporated by reference to the Company’s Proxy Statement for the 2009 Annual
Meeting of Shareholders, which will be filed with Securities and Exchange
Commission (SEC) pursuant to Regulation 14A within 120 days after September 30,
2008. The information regarding executive officers is included in this report
following Item 4, as Item 4A, under the caption “Executive Officers of the
Company.”
The Board
of Directors has adopted the Principal Executive Officer and Senior Financial
Officers Code of Ethics governing the chief executive officer and senior
financial officers, in compliance with the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) and SEC regulations and the Code of Conduct, a code for all
directors, officers and employees as required by the New York Stock Exchange, or
NYSE, rules (collectively, the Codes). Copies of both Codes are available free
of charge on the Company’s website at http://investor.njresources.com under the
caption “Corporate Governance.” A printed copy of each Code is available free of
charge to any shareholder who requests it by contacting the Corporate Secretary
at 1415 Wyckoff Road, Wall, New Jersey 07719. The Company will disclose any
amendments to, or waivers from, a provision of the Codes that applies to the
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions that relate to
any element of the Codes as defined in Item 406 of Regulation S-K by posting
such information on the Company’s website.
Because
the Company’s common stock is listed on the NYSE, the chief executive officer is
required to make, and he has made, an annual certification to the NYSE stating
that he was not aware of any violation by the Company of the corporate
governance listing standards of the NYSE. The chief executive officer made his
annual certification to that effect to the NYSE as of February 20, 2008. In
addition, the Company has filed, as exhibits to the Annual Report on Form 10-K,
the certifications of the principal executive officer and principal financial
officer required under Sections 906 and 302 of the Sarbanes-Oxley to be filed
with the SEC regarding the quality of its public disclosure.
ITEM 11. EXECUTIVE
COMPENSATION
|
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
|
Information
required by this Item is incorporated by reference from the Registrant’s Proxy
Statement.
New
Jersey Resources Corporation
Part
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
|
(a)
1.
|
Financial
Statements.
|
All
Financial Statements of the Registrant are filed as part of this report and
included in Item 8 of Part II of this Form 10-K.
(a)
2.
|
Financial
Statement Schedules–See Index to Financial Statement
Schedules in Item 8.
|
|
|
(a)
3.
|
Exhibits–See
Exhibit Index on
page 109.
|
New
Jersey Resources Corporation
INDEX TO FINANCIAL STATEMENT SCHEDULES
|
|
Page
|
|
Schedule
I—Condensed financial information of registrant for each of the three
years in the period ended September 30, 2008
|
106
|
|
|
|
|
Schedule
II—Valuation and qualifying accounts and reserves for each of
the three years in the period ended September 30,
2008
|
107
|
Schedules
other than those listed above are omitted because they are not required or are
not applicable, or the required information is shown in the financial statements
or notes thereto.
New
Jersey Resources Corporation
SCHEDULE
I
NEW
JERSEY RESOURCES CORPORATION (Parent Company)
CONDENSED
FINANCIAL STATEMENTS
YEARS
ENDED SEPTEMBER 30, 2008, 2007 and 2006
STATEMENTS
OF INCOME
(Thousands)
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Operating
expenses
|
|
|
8,667 |
|
|
|
9,068 |
|
|
|
7,349 |
|
Operating
loss
|
|
|
(8,667
|
) |
|
|
(9,068
|
) |
|
|
(7,349
|
) |
Other
income
|
|
|
10,023 |
|
|
|
10,589 |
|
|
|
9,008 |
|
Interest
expense, net
|
|
|
1,348 |
|
|
|
1,802 |
|
|
|
1,676 |
|
Income
(loss) before income taxes and equity in earnings of
affiliates
|
|
|
8 |
|
|
|
(281
|
) |
|
|
(17
|
) |
Income
tax provision
|
|
|
(51
|
) |
|
|
(122
|
) |
|
|
(28
|
) |
Equity
in earnings of subsidiaries, net of tax
|
|
|
113,851 |
|
|
|
65,440 |
|
|
|
221,897 |
|
Net
income
|
|
$ |
113,910 |
|
|
$ |
65,281 |
|
|
$ |
221,908 |
|
STATEMENTS
OF CASH FLOWS
(Thousands)
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
63,886 |
|
|
$ |
35,827 |
|
|
$ |
43,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
repayments from associated companies
|
|
$ |
9,584 |
|
|
$ |
89,529 |
|
|
$ |
45,642 |
|
Investments
in affiliates
|
|
|
(28,242
|
) |
|
|
(58,153
|
) |
|
|
— |
|
Cash
flows (used in) provided by investing activities
|
|
$ |
(18,658
|
) |
|
$ |
31,376 |
|
|
$ |
45,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Payments) proceeds
from long-term debt
|
|
$ |
(493
|
) |
|
$ |
50,000 |
|
|
$ |
— |
|
Tax
benefit from stock options exercised
|
|
|
630 |
|
|
|
1,761 |
|
|
|
6,791 |
|
Proceeds
from common stock
|
|
|
16,028 |
|
|
|
18,515 |
|
|
|
25,346 |
|
Net
borrowings from associated companies
|
|
|
2,472 |
|
|
|
2,941 |
|
|
|
3,685 |
|
Purchases
of treasury stock
|
|
|
(11,039
|
) |
|
|
(9,024
|
) |
|
|
(40,883
|
) |
Payments
of common stock dividends
|
|
|
(45,201
|
) |
|
|
(42,446
|
) |
|
|
(39,445
|
) |
Net
payments of short-term debt
|
|
|
(7,550
|
) |
|
|
(88,950
|
) |
|
|
(44,900
|
) |
Cash
flows used in financing activities
|
|
$ |
(45,153
|
) |
|
$ |
(67,203
|
) |
|
$ |
(89,406
|
) |
Change
in cash and temporary investments
|
|
$ |
75 |
|
|
|
— |
|
|
$ |
(80
|
) |
Cash
and temporary investments, beginning of year
|
|
|
— |
|
|
|
— |
|
|
|
80 |
|
Cash
and temporary investments, end of year
|
|
$ |
75 |
|
|
|
— |
|
|
$ |
— |
|
New
Jersey Resources Corporation
SCHEDULE
I
NEW
JERSEY RESOURCES CORPORATION (Parent Company)
CONDENSED
FINANCIAL STATEMENTS (Continued)
BALANCE
SHEETS
(Thousands)
|
|
|
|
|
|
|
September
30,
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
$ |
16,377 |
|
|
$ |
14,598 |
|
Investments
|
|
|
736,476 |
|
|
|
689,934 |
|
Intercompany
receivable, net
|
|
|
106,587 |
|
|
|
81,047 |
|
Deferred
charges and other assets
|
|
|
2,511 |
|
|
|
2,552 |
|
Total
assets
|
|
$ |
861,951 |
|
|
$ |
788,131 |
|
CAPITALIZATION
AND LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities (1)
|
|
$ |
81,039 |
|
|
$ |
61,245 |
|
Long-term
debt
|
|
|
50,000 |
|
|
|
75,000 |
|
Deferred
credits and other liabilities
|
|
|
3,954 |
|
|
|
7,089 |
|
Common
stock equity
|
|
|
726,958 |
|
|
|
644,797 |
|
Total
capitalization and liabilities
|
|
$ |
861,951 |
|
|
$ |
788,131 |
|
(1) Includes
current portion of long-term debt.
NOTE
TO CONDENSED FINANCIAL STATEMENTS
Pursuant
to rules and regulations of the Securities and Exchange Commission (SEC), the
unconsolidated condensed financial statements of New Jersey Resources
Corporation do not reflect all of the information and notes normally included
with financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. Therefore, these condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in this Form 10-K.
NJR has
accounted for the earnings of its subsidiaries under the equity method in these
unconsolidated condensed financial statements. Cash dividends paid to NJR from
its subsidiaries were $45.2 million, $41.9 million and $39.5 million during
fiscal 2008, 2007 and 2006 respectively.
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
YEARS
ENDED SEPTEMBER 30, 2008, 2007 and 2006
(Thousands)
|
CLASSIFICATION
|
BEGINNING
BALANCE
|
ADDITIONS
CHARGED
TO
EXPENSE
|
OTHER
(1)
|
ENDING
BALANCE
|
2008:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$2,703
|
|
$ 529
|
|
$(3,130
|
)
|
$ 102
|
|
Allowance
for Doubtful Accounts
|
$3,166
|
|
$4,422
|
|
$
(3,008
|
)
|
$4,580
|
|
2007:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$ 678
|
|
$2,025
|
|
$ —
|
|
$2,703
|
|
Allowance
for Doubtful Accounts
|
$2,679
|
|
$3,174
|
|
$(2,687
|
)
|
$3,166
|
|
2006:
|
|
|
|
|
|
|
|
|
Regulatory
asset reserve
|
$ 290
|
|
$ 388
|
|
$ —
|
|
$ 678
|
|
Allowance
for Doubtful Accounts
|
$5,297
|
|
$3,612
|
|
$(6,230
|
)
|
$2,679
|
|
(1) Uncollectible
accounts written off, less recoveries and changes to adjust reserve to
appropriate level.
New
Jersey Resources Corporation
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
NEW
JERSEY RESOURCES CORPORATION
|
|
(Registrant)
|
Date:
November 21, 2008
|
|
|
By:/s/
Glenn C. Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:
November
21, 2008
|
/s/
Laurence M. Downes
|
November
21, 2008
|
/s/
Alfred C. Koeppe
|
|
Laurence
M. Downes
Chairman,
President and
Chief
Executive Officer
Director
|
|
Alfred
C. Koeppe
Director
|
|
|
|
|
November
21, 2008
|
/s/
Nina Aversano
|
November
21, 2008
|
/s/
Glenn C. Lockwood
|
|
Nina
Aversano
Director
|
|
Glenn
C. Lockwood
Senior
Vice President and
Chief
Financial Officer
(Principal
Accounting Officer)
|
|
|
|
|
November
21, 2008
|
/s/
Lawrence R. Codey
|
November
21, 2008
|
/s/
J. Terry Strange
|
|
Lawrence
R. Codey
Director
|
|
J.
Terry Strange
Director
|
|
|
|
|
November
21, 2008
|
/s/
Donald L. Correll
|
November
21, 2008
|
/s/
David A. Trice
|
|
Donald
L. Correll
Director
|
|
David
A. Trice
Director
|
|
|
|
|
November
21, 2008
|
/s/ M.
William Howard, Jr.
|
November
21, 2008
|
/s/
William H. Turner
|
|
M.
William Howard, Jr.
Director
|
|
William
H. Turner
Director
|
|
|
|
|
November
21, 2008
|
/s/
Jane M. Kenny
|
November
21, 2008
|
/s/ George R. Zoffinger
|
|
Jane
M. Kenny
Director
|
|
George
R. Zoffinger
Director
|
New
Jersey Resources Corporation
EXHIBIT
INDEX
Exhibit
Number
|
Exhibit Description
|
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended (incorporated by reference to
Exhibit 3-1 to the Annual Report on Form 10-K for the year ended
September 30, 1996, as filed on December 30, 1996 and Exhibit
3.1 to the Current Report on Form 8-K, as filed on March 6,
2008)
|
|
|
3.2
|
By-Laws
of the Company, as amended on November 14, 2007 (incorporated by reference
to Exhibit 3.2 to the Current Report on Form 8-K, as filed on
November 15, 2007)
|
|
|
4.1
|
Specimen
Common Stock Certificates (incorporated by reference to Exhibit 4-1
to Registration Statement No. 033-21872)
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|
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4.2
|
Indenture
of Mortgage and Deed of Trust between NJNG and Harris Trust and Savings
Bank, as Trustee, dated April 1, 1952, as supplemented by twenty-one
Supplemental Indentures (incorporated by reference to
Exhibit 4(g) to Registration Statement
No. 002-9569)
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4.2(a)
|
Twenty-Fifth
Supplemental Indenture, dated as of July 15, 1995 (incorporated by
reference to Exhibit 4.2(Y) to the Annual Report on
Form 10-K for the year ended September 30, 1995, as filed on
December 29, 1995)
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4.2(b)
|
Twenty-Sixth
Supplemental Indenture, dated as of October 1, 1995 (incorporated by
reference to Exhibit 4.2(X) to the Annual Report on
Form 10-K for the year ended September 30, 1995, as filed on
December 29, 1995)
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4.2(c)
|
Twenty-Seventh
Supplemental Indenture, dated as of September 1, 1997 (incorporated
by reference to Exhibit 4.2(J) to the Annual Report on
Form 10-K as filed on December 29, 1997)
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4.2(d)
|
Twenty-Eighth
Supplemental Indenture, dated as of January 1, 1998 (incorporated by
reference to Exhibit 4.2(K) to the Annual Report on
Form 10-K for the year ended September 30, 1998, as filed on
December 24, 1998)
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4.2(e)
|
Twenty-Ninth
Supplemental Indenture, dated as of April 1, 1998 (incorporated by
reference to Exhibit 4.2(L) to the Annual Report on
Form 10-K for the year ended September 30, 1988, as filed on
December 24, 1998)
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4.2(f)
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Thirtieth
Supplemental Indenture, dated as of December 1, 2003 (incorporated by
reference to Exhibit 4.2(J) to the Annual Report on
Form 10-K for the year ended September 30, 2003, as filed on
December 16, 2003)
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4.2(g)
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Thirty-First
Supplemental Indenture, dated as of October 1, 2005 (incorporated by
reference to Exhibit 4.2(I) to the Annual Report on
Form 10-K for the year ended September 30, 2005, as filed on
November 29, 2005)
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4.2(h)
|
Thirty-Second
Supplemental Indenture, dated as of May 1, 2008 (incorporated by reference
to Exhibit 4.2(i) to the Current Report on Form 8-K, as
filed on May 20, 2008)
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4.3
|
$225,000,000
Revolving Credit Facility Credit Agreement (the “$225,000,000 Revolving
Credit Facility”) by and among NJNG, PNC Bank, NA as Administrative Agent,
the banks party thereto, JPMorgan Chase Bank, NA and Fleet National Bank,
as Syndication Agents, Bank Of Tokyo-Mitsubishi Trust Company and Citicorp
North America, Inc., As Documentation Agents and PNC Capital
Markets, Inc., as Lead Arranger, dated as of December 16, 2004
(incorporated by reference to Exhibit 4-2 to the Quarterly Report on
Form 10-Q as filed on February 7, 2005)
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4.3(a)
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First
Amendment dated as of August 31, 2005 to the $225,000,000 Revolving
Credit Facility, dated as of December 16, 2004 (incorporated by
reference to Exhibit 4-3A to the Annual Report on Form 10-K for
the year ended September 30, 2005, as filed on November 29,
2005)
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4.3(b)
|
Second
Amendment and Consent dated as of November 15, 2005 to the
$225,000,000 Revolving Credit Facility, dated as of December 16, 2004
(incorporated by reference to Exhibit 4-3B to the Annual Report on
Form 10-K for the year ended September 30, 2005, as filed on
November 29, 2005)
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4.4
|
$325,000,000
Revolving Credit Facility Credit Agreement (the “$325,000,000 Revolving
Credit Facility”) by and among the Company, the guarantors thereto, PNC
Bank, NA as Administrative Agent, the banks party thereto, JPMorgan Chase
Bank, NA and l Bank of America, N.A., as Syndication Agents, Bank Of Nova
Scotia and Citibank, N.A., as Documentation Agents and PNC Capital Markets
LLC., as Lead Arranger, dated as of December 13, 2007 (incorporated
by reference to Exhibit 4.9 to the Quarterly Report on Form 10-Q
as filed on February 6, 2008)
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4.5
|
$30,000,000
Credit Agreement by and among the Company, NJR Energy Services Company, as
the Borrowers, and Bank of Tokyo-Mitsubishi UFJ Trust Company, as the
Bank, dated as of October 12, 2006
|
New
Jersey Resources Corporation
Exhibit
Number
|
Exhibit Description
|
|
|
|
|
4.6
|
$60,000,000
Note Purchase Agreement by and among NJNG and J.P. Morgan Securities Inc.,
as Placement Agent, dated March 15, 2004 (incorporated by reference
to Exhibit 4-1 to the Quarterly Report on Form 10-Q as filed on
May 10, 2004)
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4.7
|
$25,000,000
Note Purchase Agreement by and among NJR and J.P. Morgan Securities Inc.,
as Placement Agent, dated March 15, 2004 (incorporated by reference
to Exhibit 4-2 to the Quarterly Report on Form 10-Q as filed on
May 10, 2004)
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4.8
|
$50,000,000
Note Purchase Agreement dated as of September 24, 2007, by and among the
Company, New York Life Insurance Company and New York Life Insurance and
Annuity Company (incorporated by reference to Exhibit 4.8 to the Annual
Report on Form 10-K as filed on December 10, 2007)
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4.9
|
$125,000,000
Note Purchase Agreement dated as of May 15, 2008, by and among New Jersey
Natural Gas Company and the Purchasers party thereto (incorporated by
reference to Exhibit 4.9 to the Current Report on Form 8-K, as filed on
May 20, 2008)
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10.2**
|
Retirement
Plan for Represented Employees, as amended on October 1, 1984
(incorporated by reference to Registration Statement
No. 002-73181)
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10.3**
|
Retirement
Plan for Non-Represented Employees, as amended October 1, 1985
(incorporated by reference to Registration Statement
No. 002-73181)
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10.4**
|
Supplemental
Retirement Plans covering each of the Executive Officers (incorporated by
reference to Exhibit 10.9 to the Annual Report on Form 10-K for
the year ended September 30, 1986)
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10.5(a)
|
Service
Agreement for Rate Schedule FTS-4 by and between NJNG and Texas Eastern
Transmission Company, dated as of June 21, 1995 (incorporated by
reference to Exhibit 10-5A to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
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10.5(b)
|
Service
Agreement for Rate Schedule SS-1by and between NJNG and Texas Eastern
Transmission Company, dated as of June 21, 1995 (incorporated by
reference to Exhibit 10-5B to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
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10.5(c)
|
Service
Agreement for Rate Schedule CDS by and between NJNG and Texas Eastern
Transmission Company, dated as of November 15, 1995 (incorporated by
reference to Exhibit 10-5C to the Annual Report on Form 10-K for
the year ended September 30, 1996, as filed on December 30,
1996)
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10.6**
|
The
Company’s Officer Incentive Plan effective as of October 1, 1986
(incorporated by reference to Exhibit 10-6 to the Annual Report on
Form 10-K for the year ended September 30, 1996, as filed on
December 30, 1996)
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10.7
|
Lease
Agreement between NJNG, as Lessee and State Street Bank and Trust Company
of Connecticut, National Association, as Lessor for NJNG’s Headquarters
Building dated December 21, 1995 (incorporated by reference to
Exhibit 10-7 to the Annual Report on Form 10-K for the year
ended September 30, 1996, as filed on December 30,
1996)
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10.10**
|
The
Company’s Long-Term Incentive Compensation Plan, as amended, effective as
of October 1, 1995 (incorporated by reference to Appendix A to the
Proxy Statement for the 1996 Annual Meeting as filed on January 4,
1996)
|
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10.12**
|
Employment
Continuation Agreement between the Company and Laurence M. Downes dated
February 20, 2007 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, as filed on February 26,
2007)
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10.12(a)**
|
Schedule
of Employee Continuation Agreements (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K, as filed on February 26,
2007)
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10.13
|
Gas
Sales Agreements between NJNG and Alberta Northeast Gas Limited dated as
of February 7, 1991 (incorporated by reference to Exhibit 10-13
to the Annual Report on Form 10-K for the year ended
September 30, 1992)
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10.14
|
Gas
Transportation Contract for Firm Reserved Service between NJNG and
Iroquois Gas Transmission System, L.P., dated February 7, 1991
(incorporated by reference to Exhibit 10-14 to the Annual Report on
Form 10-K for the year ended September 30,
1992)
|
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10.15
|
Service
Agreement between NJNG and CNG Transmission Corporation dated as of
December 1, 1993 (incorporated by reference to Exhibit 10-15 to
the Annual Report on Form 10-K for the year ended September 30,
1996, as filed on December 30,
1996)
|
New
Jersey Resources Corporation
Exhibit
Number
|
Exhibit Description
|
|
|
|
|
10.15(a)
|
Service
Agreement between NJNG and CNG Transmission Corporation dated as of
December 1, 1993 (incorporated by reference to Exhibit 10-15A to
the Annual Report on Form 10-K for the year ended September 30,
1996, as filed on December 30, 1996)
|
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10.15(b)
|
Service
Agreement between NJNG and CNG Transmission Corporation dated
December 1, 1993 and, as amended, as of December 21, 1993
(incorporated by reference to Exhibit 10-15B to the Annual Report on
Form 10-K for the year ended September 30, 1996, as filed on
December 30, 1996)
|
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10.16**
|
Summary
of Company’s Non-Employee Director Compensation (incorporated by reference
to Exhibit 10.16 to the Current Report on Form 8-K as filed on November
13, 2008)
|
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10.17**
|
The
Company’s 2007 Stock Award and Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K as filed on January 12,
2007)
|
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10.18**
|
2007
Stock Award and Incentive Plan Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K as filed on January 25, 2007)
|
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10.19**
|
2007
Stock Award and Incentive Plan Form of Performance Units Agreement
(incorporated by reference to Exhibit 10.2 to the Current Report on Form
8-K as filed on January 25, 2007)
|
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10.20**
|
2007
Stock Award and Incentive Plan Form of Restricted Stock Agreement
(incorporated by reference to Exhibit 10.3 to the Current Report on Form
8-K as filed on January 25, 2007)
|
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10.21**
|
2007
Stock Award and Incentive Plan Form of Performance Share Agreement
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K as filed on January 4, 2008)
|
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10.22
|
Settlement
Agreement and Mutual Release dated January 24, 2007 by and between NJNG
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 (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q as filed on February 7,
2007)
|
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10.23
|
Limited
Liability Company Agreement of Steckman Ridge GP, LLC dated as of March 2,
2007 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q, as filed on May 3, 2007)
|
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10.24
|
Limited
Partnership Agreement of Steckman Ridge, LP dated as of March 2, 2007
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q, as filed on May 3, 2007).
|
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21.1
|
Subsidiaries
of the Registrant*
|
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23.1
|
Consent
of Independent Registered Public Accounting Firm*
|
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31.1
|
Certification
of the Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act*
|
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31.2
|
Certification
of the Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act*
|
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32.1
|
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act* †
|
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32.2
|
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act* †
|
[Missing Graphic Reference]
* Filed
herewith
** Denotes
compensatory plans or arrangements or management contracts
† This
certificate accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 or any other provision of the Securities Exchange
Act of 1934, as amended.