form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD FROM
TO
Commission
file number 1-8359
NEW
JERSEY RESOURCES CORPORATION
(Exact
name of registrant as specified in its charter)
New
Jersey
|
|
22-2376465
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
1415
Wyckoff Road, Wall, New Jersey 07719
|
|
732-938-1480
|
(Address
of principal
executive
offices)
|
|
(Registrant’s
telephone number,
including
area code)
|
|
Securities
registered pursuant to Section 12 (b) of the
Act:
|
Common
Stock - $2.50 Par Value
|
|
New
York Stock Exchange
|
(Title
of each class)
|
|
(Name
of each exchange on which
registered)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: x No: o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes: o No: o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer: x Accelerated
filer: o Non-accelerated
filer: o Smaller
reporting company: o
(Do
not check if a smaller
reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes: o No: x
The
number of shares outstanding of $2.50 par value Common Stock as of May 06,
2009 was 42,139,988.
New
Jersey Resources Corporation
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New
Jersey Resources Corporation
Part
I
Certain
statements contained in this report, including, without limitation, statements
as to management expectations and beliefs presented in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Part I, Item 3. “Quantitative and Qualitative Disclosures about
Market Risk,” Part II, Item I. “Legal Proceedings” and in the notes to the
financial statements are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements can
also be identified by the use of forward-looking terminology such as “may,”
“intend,” “expect,” “believe” or “continue” or comparable terminology and are
made based upon management’s expectations and beliefs concerning future
developments and their potential effect upon New Jersey Resources Corporation
(NJR or the Company). There can be no assurance that future developments will be
in accordance with management’s expectations or that the effect of future
developments on the Company will be those anticipated by
management.
The
Company cautions readers that the assumptions that form the basis for
forward-looking statements regarding customer growth, customer usage, financial
condition, results of operations, cash flows, capital requirements, market risk
and other matters for fiscal 2009 and thereafter include many factors that are
beyond the Company’s ability to control or estimate precisely, such as estimates
of future market conditions, the behavior of other market participants and
changes in the debt and equity capital markets. The factors that could cause
actual results to differ materially from NJR’s expectations include, but are not
limited to, those discussed in Risk Factors in Item 1A, as well as the
following:
Ÿ
|
weather
and economic conditions;
|
Ÿ
|
demographic
changes in the New Jersey Natural Gas (NJNG) service
territory;
|
Ÿ
|
the
rate of NJNG customer growth;
|
Ÿ
|
volatility
of natural gas commodity prices and its impact on customer usage, cash
flow, NJR Energy Services’ (NJRES) operations and on the Company’s risk
management efforts;
|
Ÿ
|
changes
in rating agency requirements and/or credit ratings and their effect on
availability and cost of capital to the Company;
|
Ÿ
|
continued
volatility or seizure of the credit markets that would result in the
decreased availability and access to credit at NJR to fund and support
physical gas inventory purchases and other working capital needs at NJRES,
and all other non-regulated subsidiaries, as well as negatively affect
access to the commercial paper market and other short-term financing
markets at NJNG to allow it to fund its commodity purchases and meet its
short-term obligations as they come due;
|
Ÿ
|
the
impact to the asset values and funding obligations of NJR’s pension and
postemployment benefit plans as a result of declines in the financial
markets;
|
Ÿ
|
increases
in borrowing costs associated with variable-rate debt;
|
Ÿ
|
commercial
and wholesale credit risks, including creditworthiness of customers and
counterparties;
|
Ÿ
|
the
ability to obtain governmental approvals and/or financing for the
construction, development and operation of certain non-regulated energy
investments;
|
Ÿ
|
risks
associated with the management of the Company’s joint ventures and
partnerships;
|
Ÿ
|
the
impact of governmental regulation (including the regulation of
rates);
|
Ÿ
|
conversion
activity and other marketing efforts;
|
Ÿ
|
actual
energy usage of NJNG’s customers;
|
Ÿ
|
the
pace of deregulation of retail gas markets;
|
Ÿ
|
access
to adequate supplies of natural gas;
|
Ÿ
|
the
regulatory and pricing policies of federal and state regulatory
agencies;
|
Ÿ
|
the
ultimate outcome of pending regulatory proceedings, including the possible
expiration of the Conservation Incentive Program (CIP);
|
Ÿ
|
changes
due to legislation at the federal and state level;
|
Ÿ
|
the
availability of an adequate number of appropriate counterparties in the
wholesale energy trading market;
|
Ÿ
|
sufficient
liquidity in the wholesale energy trading market and continued access to
the capital markets;
|
Ÿ
|
the
disallowance of recovery of environmental-related expenditures and other
regulatory changes;
|
Ÿ
|
environmental-related
and other litigation and other uncertainties;
|
Ÿ
|
the
effects and impacts of inflation on NJR and its subsidiaries
operations;
|
Ÿ
|
change
in accounting pronouncements issued by the appropriate standard setting
bodies; and
|
Ÿ
|
terrorist
attacks or threatened attacks on energy facilities or unrelated energy
companies.
|
While the
Company periodically reassesses material trends and uncertainties affecting the
Company’s results of operations and financial condition in connection with its
preparation of management’s discussion and analysis of results of operations and
financial condition contained in its Quarterly and Annual Reports, the Company
does not, by including this statement, assume any obligation to review or revise
any particular forward-looking statement referenced herein in light of future
events.
New
Jersey Resources Corporation
Part
I
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands, except per share data)
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
$937,516
|
|
$1,177,545
|
|
$1,738,820
|
|
$1,988,683
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Gas
purchases
|
782,130
|
|
1,065,925
|
|
1,480,275
|
|
1,750,619
|
|
Operation
and maintenance
|
37,365
|
|
34,605
|
|
73,773
|
|
66,784
|
|
Regulatory
rider expenses
|
20,744
|
|
17,789
|
|
34,305
|
|
29,954
|
|
Depreciation
and amortization
|
7,508
|
|
9,517
|
|
14,869
|
|
18,920
|
|
Energy
and other taxes
|
31,981
|
|
29,374
|
|
55,614
|
|
47,534
|
|
Total
operating expenses
|
879,728
|
|
1,157,210
|
|
1,658,836
|
|
1,913,811
|
|
OPERATING
INCOME
|
57,788
|
|
20,335
|
|
79,984
|
|
74,872
|
|
Other
income
|
1,058
|
|
1,540
|
|
1,916
|
|
3,068
|
|
Interest
expense, net
|
4,219
|
|
6,692
|
|
10,766
|
|
14,502
|
|
INCOME
BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF AFFILIATES
|
54,627
|
|
15,183
|
|
71,134
|
|
63,438
|
|
Income
tax provision
|
19,897
|
|
3,394
|
|
25,142
|
|
21,888
|
|
Equity
in earnings of affiliates, net of tax
|
787
|
|
746
|
|
1,301
|
|
1,170
|
|
NET
INCOME
|
$ 35,517
|
|
$
12,535
|
|
$ 47,293
|
|
$
42,720
|
|
|
|
|
|
|
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EARNINGS
PER COMMON SHARE
|
|
|
|
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|
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|
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BASIC
|
$0.84
|
|
$0.30
|
|
$1.12
|
|
$1.02
|
|
DILUTED
|
$0.83
|
|
$0.30
|
|
$1.11
|
|
$1.02
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
$0.31
|
|
$0.28
|
|
$0.62
|
|
$0.55
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
BASIC
|
42,305
|
|
41,840
|
|
42,238
|
|
41,758
|
|
DILUTED
|
42,693
|
|
42,099
|
|
42,598
|
|
42,018
|
|
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
|
Six Months Ended
March 31,
|
(Thousands)
|
2009
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
Net
income
|
$ 47,293
|
|
$
42,720
|
|
Adjustments
to reconcile net income to cash flows from operating
activities:
|
|
|
|
|
Unrealized
loss on derivative instruments
|
45,008
|
|
72,051
|
|
Depreciation
and amortization
|
15,303
|
|
19,070
|
|
Allowance
for funds (equity) used during construction
|
—
|
|
(755
|
)
|
Allowance
for bad debt expense
|
3,801
|
|
2,544
|
|
Deferred
income taxes
|
(22,428
|
)
|
(2,942
|
)
|
Manufactured
gas plant remediation costs
|
(9,851
|
)
|
(7,958
|
)
|
Equity
in earnings from investments, net of distributions
|
(1,301
|
)
|
766
|
|
Cost
of removal – asset retirement obligations
|
(463
|
)
|
(355
|
)
|
Contributions
to employee benefit plans
|
(563
|
)
|
(381
|
)
|
Changes
in:
|
|
|
|
|
Components
of working capital
|
284,371
|
|
27,852
|
|
Other
noncurrent assets
|
(17,426
|
)
|
14,543
|
|
Other
noncurrent liabilities
|
2,126
|
|
565
|
|
Cash
flows from operating activities
|
345,870
|
|
167,720
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
Expenditures
for:
|
|
|
|
|
Utility
plant
|
(37,802
|
)
|
(29,385
|
)
|
Real
estate properties and other
|
(240
|
)
|
(588
|
)
|
Cost
of removal
|
(3,583
|
)
|
(3,641
|
)
|
Investments
in equity investees
|
(28,525
|
)
|
(5,259
|
)
|
Withdrawal
from restricted cash construction fund
|
4,200
|
|
—
|
|
Cash
flows used in investing activities
|
(65,950
|
)
|
(38,873
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Proceeds
from issuance of common stock
|
6,959
|
|
9,915
|
|
Tax
benefit from stock options exercised
|
993
|
|
568
|
|
Proceeds
from sale-leaseback transaction
|
6,268
|
|
7,485
|
|
Payments
of long-term debt
|
(57,594
|
)
|
(2,310
|
)
|
Purchases
of treasury stock
|
(3,291
|
)
|
(11,040
|
)
|
Payments
of common stock dividends
|
(24,384
|
)
|
(21,734
|
)
|
Net
(payments) proceeds from short-term debt
|
(168,200
|
)
|
(107,579
|
)
|
Cash
flows used in financing activities
|
(239,249
|
)
|
(124,695
|
)
|
Change
in cash and temporary investments
|
40,671
|
|
4,152
|
|
Cash
and temporary investments at beginning of period
|
42,626
|
|
5,140
|
|
Cash
and temporary investments at end of period
|
$ 83,297
|
|
$ 9,292
|
|
CHANGES
IN COMPONENTS OF WORKING CAPITAL
|
|
|
|
|
Receivables
|
$
(25,651
|
)
|
$(264,803
|
)
|
Inventories
|
415,082
|
|
193,659
|
|
Recovery
of gas costs
|
41,865
|
|
1,352
|
|
Gas
purchases payable
|
(150,386
|
)
|
116,692
|
|
Prepaid
and accrued taxes, net
|
115,528
|
|
83,474
|
|
Accounts
payable and other
|
(3,140
|
)
|
(24,322
|
)
|
Restricted
broker margin accounts
|
(65,546
|
)
|
(72,426
|
)
|
Customers’
credit balances and deposits
|
(49,203
|
)
|
(7,062
|
)
|
Other
current assets
|
5,822
|
|
1,288
|
|
Total
|
$284,371
|
|
$ 27,852
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$12,277
|
|
$14,302
|
|
Income
taxes
|
$ 9,227
|
|
$21,977
|
|
See Notes
to Condensed Unaudited Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
|
March
31,
|
September 30,
|
(Thousands)
|
2009
|
2008
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
Utility
plant, at cost
|
$1,402,392
|
|
$1,366,237
|
|
Real
estate properties and other, at cost
|
30,047
|
|
29,808
|
|
|
1,432,439
|
|
1,396,045
|
|
Accumulated
depreciation and amortization
|
(393,912
|
)
|
(378,759
|
)
|
Property,
plant and equipment, net
|
1,038,527
|
|
1,017,286
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash and temporary investments
|
83,297
|
|
42,626
|
|
Customer accounts receivable
|
|
|
|
|
Billed
|
208,827
|
|
227,132
|
|
Unbilled revenues
|
50,492
|
|
9,417
|
|
Allowance for doubtful accounts
|
(5,501
|
)
|
(4,580
|
)
|
Regulatory assets
|
7,795
|
|
51,376
|
|
Gas in storage, at average cost
|
63,523
|
|
478,549
|
|
Materials and supplies, at average cost
|
5,054
|
|
5,110
|
|
Prepaid state taxes
|
—
|
|
37,271
|
|
Derivatives, at fair value
|
242,814
|
|
208,703
|
|
Restricted broker margin accounts
|
104,497
|
|
41,277
|
|
Other
|
22,424
|
|
12,785
|
|
Total current assets
|
783,222
|
|
1,109,666
|
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
|
Investments in equity investees and other
|
148,739
|
|
115,981
|
|
Regulatory assets
|
411,211
|
|
340,670
|
|
Derivatives, at fair value
|
22,891
|
|
24,497
|
|
Restricted cash construction fund
|
—
|
|
4,200
|
|
Other
|
12,001
|
|
13,092
|
|
Total noncurrent assets
|
594,842
|
|
498,440
|
|
Total assets
|
$2,416,591
|
|
$2,625,392
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
CAPITALIZATION
AND LIABILITIES
|
March
31,
|
September 30,
|
(Thousands)
|
2009
|
2008
|
|
|
CAPITALIZATION
|
|
|
|
|
Common
stock equity
|
$ 757,291
|
|
$ 726,958
|
|
Long-term
debt
|
458,998
|
|
455,117
|
|
Total
capitalization
|
1,216,289
|
|
1,182,075
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Current
maturities of long-term debt
|
5,934
|
|
60,119
|
|
Short-term
debt
|
10,000
|
|
178,200
|
|
Gas
purchases payable
|
165,130
|
|
315,516
|
|
Accounts
payable and other
|
48,009
|
|
61,735
|
|
Dividends
payable
|
13,101
|
|
11,776
|
|
Deferred
and accrued taxes
|
77,616
|
|
24,720
|
|
Regulatory
liabilities
|
13,871
|
|
—
|
|
New
Jersey clean energy program
|
9,777
|
|
3,056
|
|
Derivatives,
at fair value
|
285,255
|
|
146,320
|
|
Restricted
broker margin accounts
|
26,746
|
|
29,072
|
|
Customers’
credit balances and deposits
|
14,254
|
|
63,455
|
|
Total
current liabilities
|
669,693
|
|
893,969
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
Deferred
income taxes
|
202,860
|
|
239,703
|
|
Deferred
investment tax credits
|
7,031
|
|
7,192
|
|
Deferred
revenue
|
8,729
|
|
9,090
|
|
Derivatives,
at fair value
|
13,038
|
|
25,016
|
|
Manufactured
gas plant remediation
|
120,230
|
|
120,730
|
|
Postemployment
employee benefit liability
|
55,096
|
|
52,272
|
|
Regulatory
liabilities
|
58,587
|
|
63,419
|
|
New
Jersey clean energy program
|
31,062
|
|
—
|
|
Asset
retirement obligation
|
24,695
|
|
24,416
|
|
Other
|
9,281
|
|
7,510
|
|
Total
noncurrent liabilities
|
530,609
|
|
549,348
|
|
Commitments
and contingent liabilities (Note 13)
|
|
|
|
|
Total
capitalization and liabilities
|
$2,416,591
|
|
$2,625,392
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
New
Jersey Resources Corporation
Part
I
ITEM
1. FINANCIAL STATEMENTS
(Continued)
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Net
income
|
$35,517
|
|
$12,535
|
|
$47,293
|
|
$42,720
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on investments in equity investees, net of
tax of $444, $90, $64 and $(28), respectively
|
(637
|
)
|
(129
|
)
|
(92
|
)
|
41
|
|
Net
unrealized (loss) on derivatives, net of tax of $15, $34, $34 and $59,
respectively
|
(22
|
)
|
(10
|
)
|
(48
|
)
|
(52
|
)
|
Other
comprehensive income
|
(659
|
)
|
(139
|
)
|
(140
|
)
|
(11
|
)
|
Comprehensive
income
|
$34,858
|
|
$12,396
|
|
$47,153
|
|
$42,709
|
|
See Notes
to Unaudited Condensed Consolidated Financial Statements
The
accompanying unaudited condensed consolidated financial statements have been
prepared by New Jersey Resources Corporation (NJR or the Company) in accordance
with the rules and regulations of the Securities and Exchange Commission (SEC).
The September 30, 2008 balance sheet data is derived from the audited financial
statements of the Company. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in NJR’s 2008 Annual Report on Form 10-K.
The
unaudited condensed consolidated financial statements include the accounts of
NJR and its subsidiaries, New Jersey Natural Gas Company (NJNG), NJR Energy
Services Company (NJRES), NJR Retail Holdings Corporation (Retail Holdings), NJR
Energy Investment Corporation (NJREI) and NJR Service Company (NJR Service).
Intercompany transactions and accounts have been eliminated. NJREI’s primary
subsidiaries are NJR Energy Corporation (NJR Energy) and NJR Steckman Ridge
Storage Company. NJR Energy invests primarily in energy-related ventures through
its subsidiary, NJNR Pipeline Company (Pipeline), which holds the Company’s 5.53
percent ownership interest in Iroquois Gas and Transmission System, L.P.
(Iroquois). NJR Steckman Ridge Storage Company holds the Company’s 50 percent
combined interest in Steckman Ridge GP, LLC and Steckman Ridge, LP
(collectively, Steckman Ridge), a natural gas storage facility that was acquired
and is being developed with a partner in Pennsylvania. Retail Holdings’ two
principal subsidiaries are NJR Home Services Company (NJRHS) and Commercial
Realty & Resources Corporation (CR&R).
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments necessary for a fair presentation
of the results of the interim periods presented. These adjustments are of a
normal and recurring nature. Because of the seasonal nature of NJR’s utility and
wholesale energy services operations, in addition to other factors, the
financial results for the interim periods presented are not indicative of the
results that are to be expected for the fiscal year ended September 30,
2009.
Customer
Accounts Receivable
Customer
accounts receivable include outstanding billings from the following subsidiaries
as of:
|
March
31,
|
September
30,
|
(Thousands)
|
2009
|
2008
|
NJNG
|
$ 94,007
|
|
45
|
%
|
$ 21,398
|
|
9
|
%
|
|
NJRES
|
107,155
|
|
51
|
|
198,902
|
|
88
|
|
|
NJRHS
and other
|
7,665
|
|
4
|
|
6,832
|
|
3
|
|
|
Total
|
$208,827
|
|
100
|
%
|
$227,132
|
|
100
|
%
|
|
Accounts
receivable related to estimated unbilled revenues and allowance for doubtful
accounts are associated with NJNG only.
Gas
in Storage
The
following table summarizes Gas in storage by company as of:
|
March
31,
|
September
30,
|
|
2009
|
2008
|
($
in thousands)
|
Assets
|
Bcf
|
Assets
|
Bcf
|
NJNG
|
$19,391
|
1.9
|
$189,828
|
22.1
|
NJRES
|
44,132
|
13.1
|
288,721
|
27.6
|
Total
|
$63,523
|
15.0
|
$478,549
|
49.7
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
New
Accounting Standards
Recently
Adopted
Effective
October 1, 2008 NJR adopted Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value
Measurements (SFAS 157) for its financial assets and liabilities, with
the exception of its pension assets. On October, 1, 2009, in accordance with
SFAS 157-2, NJR will prospectively apply the provisions of SFAS 157 to its
non-financial assets and liabilities that are not measured at least annually. In
addition, the provisions of SFAS 157 will be applied to NJR’s annual pension
disclosures in accordance with FASB Staff Position (FSP) No. FAS 132(R)-1 (FSP
132(R)-1), Employers’
disclosures about Pensions and Other Postretirement Benefits, beginning
in fiscal 2010.
SFAS 157
defines fair value as the amount that would be exchanged to sell an asset or
transfer a liability in an orderly transaction between market participants, and
establishes a fair value hierarchy of market and unobservable data that is used
to develop pricing assumptions. The adoption of SFAS 157 did not have a material
impact on NJR’s financial position or results of operations. See Note 4, Fair Value
Measurements, for more information on the adoption of SFAS 157, as well
as the required disclosures.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (SFAS 161). SFAS 161 requires
enhanced qualitative and quantitative disclosures on the objectives and
accounting for derivatives and related hedging activities, as well as their
impacts on the financial statements. NJR adopted SFAS 161 effective January
1, 2009. As SFAS 161 provisions only require additional disclosures, there was
no impact to NJR’s statement of financial position and results of operations
upon adoption. See Note 3
Derivative Instruments for a description of NJR’s derivative activities,
including the additional disclosures required by SFAS 161.
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 the fair values of amounts recognized for
derivatives as well as the related fair value amounts of cash collateral
receivables or payables, when certain conditions apply. FSP FIN 39-1 became
effective for fiscal years beginning after November 15, 2007. As NJR’s policy
has been to present its derivative positions and any receivables or payables
with the same counterparty on a gross basis, FSP FIN 39-1 had no impact on its
statement of financial position and results of operations.
Other
Recently Issued Standards
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to
elect to measure eligible items at fair value as an alternative to hedge
accounting and to mitigate volatility in earnings. A company can either elect
the fair value option according to a pre-existing policy, when the asset or
liability is first recognized or when it enters into an eligible firm
commitment. Changes in the fair value of assets and liabilities that the company
chooses to apply the fair value option to, are reported in earnings at each
reporting date. SFAS 159 also provides guidance on disclosures that are intended
to provide comparability to other companies’ assets and liabilities that have
different measurement attributes and to other companies with similar
financial assets and liabilities. SFAS 159 became effective for NJR as of
October 1, 2008; however, since the Company did not elect the fair value option
for any items, the provisions of SFAS 159 do not impact our results of
operations or financial condition.
On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 is an amendment of
Accounting Research Bulletin (ARB) No. 51 and was issued to improve the
relevance, comparability and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. This
Statement applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries. SFAS 160 clarifies that a non-controlling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and that a parent company must
recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS
160 is effective for fiscal years beginning after December 15, 2008, and early
adoption is prohibited. The Company has concluded that this statement will have
no impact on its statement of financial position or results of
operations.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
On
December 30, 2008, the FASB issued FSP 132(R)-1, which requires additional
disclosures surrounding postretirement benefit plan assets. Specifically, the
objective of FSP 132(R)-1 is to provide users of financial statements
information related to a company’s plan assets, investment policies and
strategies and significant concentrations of risk. In addition, certain
disclosure provisions from FAS 157 will be applied, including those related to
inputs and valuation techniques that are used to measure plan assets and the
effect of level three measurements on changes in plan assets. FSP 132(R)-1 is
effective for fiscal years ending after December 15, 2009. As it is a disclosure
only standard, it will have no impact on the Company’s statement of financial
position or results of operations.
On April
9, 2009 the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Values of
Financial Instruments, which amends SFAS 107, Disclosures about Fair Values of Financial Instruments,
and requires that companies also disclose the fair value of financial
instruments during interim reporting similar to those that are currently
provided annually. FSP No. FAS 107-1 and APB 28-1 is effective for interim
reporting periods ending after June 15, 2009 and it will have no impact on the
Company’s statement of financial position or results of operations.
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
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the Conservation Incentive Program (CIP) baseline usage
rate, received an allowed return on equity component of 10.3 percent, reduced
its depreciation expense component from 3.0 percent to 2.34 percent and reduced
its annual depreciation expense by $1.6 million as a result of the amortization
of previously recovered asset retirement obligations.
Conservation
Incentive Program (CIP)
The CIP
allows NJNG to recover utility gross margin variations related to both weather
and customer usage. Recovery of such utility gross margin variations (filed for
annually and recovered one year following the end of the CIP usage year) is
subject to additional conditions, including an earnings test and an evaluation
of Basic Gas Supply Service (BGSS) related savings.
In May
2008, NJNG filed its Petition for the Annual Review of its CIP for recoverable
CIP amounts for fiscal 2008, requesting an additional $6.8 million and approval
to modify its CIP recovery rates effective October 1, 2008. The additional
amount brought the total recovery requested to $22.4 million. The total
recovery requested includes amounts accrued and estimated through September 30,
2008. On October 3, 2008, the BPU approved the CIP petition on a provisional
basis, effective the date of the Board Order. As of March 31, 2009, NJNG has
$7.6 million accrued in Regulatory Assets in the Unaudited Condensed
Consolidated Balance Sheets. On April 1, 2009, NJNG filed a petition with
the BPU requesting an extension of its CIP for an additional year through
October 1, 2010. The extension was requested due to the continuing nature of
energy efficiency programs at the state and federal levels in concert with the
issuance of the economic stimulus programs. If accepted by the BPU, the CIP
would remain in effect for an additional year or until a final Board Order is
issued by the BPU.
In
conjunction with the CIP, NJNG incurs costs related to its obligation to fund
programs that promote customer conservation efforts during the three-year term
of the CIP pilot program. As of March 31, 2009, NJNG had a remaining liability
of $305,000 related to these programs.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Basic
Gas Supply Service
BGSS is a
BPU approved rate mechanism designed to allow for the recovery of natural gas
commodity costs. As necessary, NJNG adjusts its periodic BGSS rates for its
residential and small commercial customers to reflect increases or decreases in
the cost of natural gas sold to customers.
In May
2008, NJNG filed for an increase to the periodic BGSS factor to be effective
October 1, 2008, that would have increased an average residential heating
customer’s bill by approximately 18 percent due to an increase in the price of
wholesale natural gas. Subsequent to the filing, wholesale natural gas prices
moderated, and on September 22, 2008, NJNG, the Staff of the BPU and the
Department of the Public Advocate, Division of Rate Counsel (Rate Counsel)
signed an agreement for an increase to the periodic BGSS factor that would
increase an average residential heating customer’s bill by approximately 8.9
percent. On October 3, 2008, the BPU approved the BGSS increase on a provisional
basis, effective the date of the Board Order.
On
December 17, 2008, NJNG provided notice that it would implement a $30 million
BGSS-related temporary rate credit that would lower residential and small
commercial sales customers’ bills in January and February 2009. This temporary
rate credit was due primarily to a decline in wholesale commodity costs
subsequent to the October 2008 BGSS price change. NJNG also extended and
increased the per therm temporary rate credit to lower customer bills by an
additional $15 million through March 31, 2009 due to continuing lower wholesale
natural gas costs.
Other
Incentive Programs
NJNG is
eligible to receive financial incentives for reducing BGSS costs through a
series of utility gross margin-sharing programs that include off-system sales,
capacity release, storage incentive and financial risk management (FRM)
programs. In October 2007, the BPU reduced the sharing percentage of the margin
generated by the FRM program retained by NJNG from 20 percent to 15 percent
effective November 1, 2007. In October 2008, the Board’s base rate order
provided for the extension of the incentive programs through October 31, 2011,
along with an expansion of the storage incentive and FRM programs.
Societal
Benefits Clause (SBC) and Weather Normalization Clause (WNC)
The SBC
is comprised of three primary components: a Universal Service Fund rider (USF),
a Manufactured Gas Plant (MGP) Remediation Adjustment (RA), and the New Jersey
Clean Energy Program (NJCEP). In February 2008, NJNG filed an application
regarding its SBC proposing no change to the rates previously approved in
October 2007 (February 2008 SBC filing). On January 27, 2009, NJNG filed an
application regarding its SBC to increase its RA factor and its NJCEP factor
while maintaining its effective rate on USF (January 2009 SBC filing). The
January 2009 SBC filing is subject to BPU staff and Rate Counsel review and must
be approved by the BPU prior to implementing the new SBC rates.
USF
Through
the USF, eligible customers receive a credit toward their utility bill. The
credits applied to eligible customers are recovered through the USF rider in the
SBC. NJNG recovers carrying costs on deferred USF balances.
In June
2008, the natural gas utilities in the State of New Jersey collectively filed
with the BPU to increase the statewide USF recovery rate effective October 1,
2008. In the BPU’s October 21, 2008 Order, the USF increase was approved on a
provisional basis, effective October 24, 2008, and it also approved interest on
USF deferred balances at the Treasury Constant Maturity 2-year rate, plus 60
basis points, net of tax, with the rate changing on a monthly basis. NJNG
believes the increase has a negligible impact on customers.
MGP
In
October 2007, the BPU approved $14.7 million in eligible costs to be recovered
annually for MGP remediation expenditures incurred through June 30, 2006. The February
2008 SBC filing included MGP remediation expenditures incurred through June 30,
2007, resulting in an expected annual recovery of $17.7 million. The January
2009 SBC filing included MGP remediation expenditures incurred through June 30,
2008 resulting in an expected annual recovery of $20.7 million.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJCEP
In
October 2008, the BPU released a final Order, updating state utilities’ funding
obligations for NJCEP for the period from January 1, 2009 to December 31, 2012.
NJNG’s share of the total funding requirement of $1.2 billion is $50.8 million.
Accordingly, NJNG recorded the initial obligation and a corresponding regulatory
asset at a present value of $44.3 in the Unaudited Condensed Consolidated
Balance Sheets. NJNG’s annual obligation gradually increases from $10.3 million
in fiscal 2009 to $15.9 million in fiscal 2012. As of March 31, 2009, NJNG had a
$40.8 million obligation remaining.
The
January 2009 SBC filing included an increase to the NJCEP factor. The proposed
factor is expected to recover $12.9 million annually.
WNC
As of
March 31, 2009, NJNG has a $243,000 unrecovered balance related to gross margin
variations incurred during the fiscal 2006 winter period. On October 3, 2008,
the BPU provisionally approved a decrease to NJNG’s WNC rate, effective the date
of the Board Order, to fully recover its remaining WNC balance.
Economic
Stimulus
On
January 20, 2009, NJNG filed two petitions with the BPU seeking approval to
implement programs designed to both stimulate the state and local economy
through infrastructure investments and encourage energy efficiency. The
Accelerated Infrastructure Program (AIP) would allow NJNG to accelerate $70.8
million of 14 previously planned infrastructure projects, maintaining safe and
reliable service to NJNG’s customers while creating opportunity for
approximately 75 to 100 new jobs. The AIP would be funded through an annual
adjustment to customers’ base rates. The second filing, for an Energy Efficiency
(EE) Program and associated cost recovery mechanism, requests BPU approval to
implement various programs to encourage energy efficiency for residential and
commercial customers. NJNG proposed to recover the EE costs of approximately
$22.9 million over a 4-year period through a clause mechanism similar to the
SBC. Both programs include the recovery of NJNG’s overall weighted average cost
of capital.
On April
16, 2009, the BPU approved NJNG’s AIP allowing NJNG to commence construction on
its 14 infrastructure projects. NJNG will make a filing for the recovery of
infrastructure program investment costs in June 2010 to be effective October 1,
2010. The filing will allow the recovery of costs of the AIP construction
activities for the period ending August 31, 2010, including the recovery of
NJNG’s overall weighted average cost of capital.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Regulatory
Assets & Liabilities
The
Company had the following regulatory assets, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
March
31,
2009
|
September
30,
2008
|
Recovery
Period
|
Regulatory
assets–current
|
|
|
|
|
|
Underrecovered
gas costs
|
$ —
|
|
$ 27,994
|
|
Less
than one year (1)
|
WNC
|
243
|
|
919
|
|
Less
than one year (2)
|
CIP
|
7,552
|
|
22,463
|
|
Less
than one year (3)
|
Total
current
|
$ 7,795
|
|
$ 51,376
|
|
|
Regulatory
assets–noncurrent
|
|
|
|
|
|
Remediation
costs (Notes 2 and 13)
|
|
|
|
|
|
Expended,
net of recoveries
|
$ 84,826
|
|
$ 92,164
|
|
(4)
|
Liability
for future expenditures
|
120,230
|
|
120,730
|
|
(5)
|
CIP
|
88
|
|
2,397
|
|
(6)
|
Deferred
income and other taxes
|
12,574
|
|
12,726
|
|
Various
(7)
|
Derivatives
(Note 3)
|
99,055
|
|
49,610
|
|
(8)
|
Postemployment
benefit costs (Note 10)
|
52,397
|
|
52,519
|
|
(9)
|
SBC/Clean
Energy
|
42,041
|
|
10,524
|
|
Various (10)
|
Total
noncurrent
|
$411,211
|
|
$340,670
|
|
|
(1)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(2)
|
Recoverable
as a result of BPU approval in October 2008, without interest. This
balance reflects the net results from winter period of fiscal 2006. No new
WNC activity has been recorded since October 1, 2006 due to the existence
of the CIP.
|
(3)
|
Recoverable
or refundable, subject to BPU annual approval, without interest.
Balance, as of March 31, 2009, includes approximately $3.0 million
relating to the weather component of the calculation and approximately
$4.6 million relating to the customer usage component of the calculation.
Recovery from customers is designed to be one year from date of rate
approval by the BPU.
|
(4)
|
Recoverable,
subject to BPU approval, with interest over rolling 7-year
periods.
|
(5)
|
Estimated future expenditures. Recovery will be
requested when actual expenditures are incurred (see Note 13.
Commitments and Contingent Liabilities – Legal
Proceedings).
|
(6)
|
Recoverable
or refundable, subject to BPU annual approval, without interest. Balance,
as of March 31, 2009, includes approximately $88,000 relating to the
customer usage component of the calculation.
|
(7)
|
Recoverable
without interest, subject to BPU approval.
|
(8)
|
Recoverable,
subject to BPU approval, through BGSS, without
interest.
|
(9)
|
Recoverable or refundable, subject to BPU approval,
without interest. Includes unrecognized service costs recorded in
accordance with SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postemployment
Plans that NJNG has determined are recoverable in base rates
charged to customers (see Note 10.
Employee Benefit Plans).
|
(10)
|
Recoverable
with interest, subject to BPU
approval.
|
If there
are any changes in regulatory positions that indicate the recovery of regulatory
assets is not probable, the related cost would be charged to income in the
period of such determination.
The
Company had the following regulatory liabilities, all related to NJNG, on the
Unaudited Condensed Consolidated Balance Sheets:
(Thousands)
|
March
31, 2009
|
September
30, 2008
|
Regulatory
liabilities–current
|
|
|
|
|
Overrecovered
gas costs (1)
|
$13,871
|
|
—
|
|
Total current
|
$13,871
|
|
—
|
|
Regulatory
liabilities–noncurrent
|
|
|
|
|
Cost
of removal obligation (2)
|
$58,587
|
|
$63,419
|
|
Total noncurrent
|
$58,587
|
|
$63,419
|
|
(1)
|
Refundable,
subject to BPU approval, through BGSS with interest.
|
(2)
|
NJNG accrues and collects for cost of removal in
rates. This liability represents collections in excess of actual
expenditures. Approximately $21.6 million, including accretion of $742,000
for the six months ended March 31, 2009, of regulatory assets relating to
asset retirement obligations have been netted against the cost of removal
obligation as of March 31, 2009 (see Note 11. Asset
Retirement
Obligations).
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The
Company and its subsidiaries are subject to commodity price risk due to
fluctuations in the market price of natural gas. To manage this risk, the
Company and its subsidiaries enter into a variety of derivative instruments
including, but not limited to, futures contracts, physical forward contracts,
financial options, and swaps to economically hedge the commodity price risk
associated with its existing and anticipated commitments to purchase and sell
natural gas. These contracts generally qualify as derivatives in accordance
with SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. As a result, in
accordance with the provisions of SFAS 133 all of the financial and certain of
the Company’s physical derivative instruments are recorded at fair value in the
Unaudited Condensed Consolidated Balance Sheets. The Company chooses not to
designate its derivatives as hedging instruments pursuant to SFAS 133, and
therefore changes in the fair value of the derivative instruments are recorded
as a component of Gas purchases or Operating revenues, for NJRES and NJR Energy,
respectively, in the Unaudited Condensed Consolidated Statements of Income as
unrealized gains or losses. Changes in fair value of NJNG’s derivative
instruments are recorded as a component of Regulatory assets or liabilities in
the Unaudited Condensed Consolidated Balance Sheets, as these amounts will be
recovered through future BGSS amounts as an increase or reduction to the cost of
natural gas in NJNG’s tariff.
Effective
October 1, 2007, the Company elected to discontinue the use of the “normal
purchase normal sales” (normal) scope exception of SFAS 133 for all new physical
commodity contracts entered into on or after October 1, 2007 by NJRES. For these
contracts, the changes in fair value are included currently in earnings. Also,
effective October 1, 2008, due to changes in the Company’s ability to assert
physical delivery, the Company is no longer applying normal treatment to
physical commodity contracts executed prior to October 1, 2007. Therefore, all
NJRES physical commodity contracts are derivatives and are accounted for at fair
value in the Unaudited Condensed Consolidated Balance Sheets, with changes in
fair value included as a component of operating revenue or gas purchases, as
appropriate, in the Unaudited Condensed Consolidated Statements of Income. The
Company continues to apply the normal scope exception for all physical commodity
contracts at NJNG and NJR Energy, and as a result the profit or loss on these
contracts is not recorded until physical delivery occurs.
As
described in Note 1, General, NJR adopted the provisions
of SFAS 161, which requires enhanced disclosures surrounding derivative
activities. The additional quantitative and qualitative disclosures are included
throughout this note. For a more detailed discussion of the Company’s fair
value policies and level disclosures please see Note 4, Fair Value Measurements.
The
following table reflects the fair value of NJR's derivative assets and
liabilities recognized in its Unaudited Condensed Consolidated Balance Sheets as
of March 31, 2009:
|
|
Fair
Value
|
(Thousands)
|
Balance
Sheet Location
|
Asset
Derivatives
|
Liability
Derivatives
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
|
|
NJNG:
|
|
|
|
Financial
derivative commodity contracts
|
Derivatives
- Current
|
$ 12,229
|
$108,207
|
|
Derivatives
- Noncurrent
|
—
|
3,078
|
NJRES:
|
|
|
|
Physical
forward commodity contracts
|
Derivatives
- Current
|
18,848
|
16,071
|
|
Derivatives
- Noncurrent
|
6,631
|
31
|
Financial
derivative commodity contracts
|
Derivatives
- Current
|
210,557
|
160,402
|
|
Derivatives
- Noncurrent
|
14,309
|
9,697
|
NJR
Energy:
|
|
|
|
Financial
derivative commodity contracts
|
Derivatives
- Current
|
1,180
|
575
|
|
Derivatives
- Noncurrent
|
1,951
|
232
|
Total
fair value of derivatives
|
|
$265,705
|
$298,293
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
As
discussed above, the Company no longer applies the normal scope exception at
NJRES and chooses not to apply the hedge accounting provisions of SFAS 133 to
any of NJR and subsidiaries’ derivatives. As a result, any unrealized gains
(losses) related to NJRES’ open financial and physical commodity contracts and
NJR Energy’s financial derivatives are recognized in the Unaudited Condensed
Consolidated Statements of Income as a component of Operating revenue or Gas
purchases, as appropriate. NJRES’ utilizes financial derivatives to hedge the
margin associated with the purchase of physical gas for injection into storage
and the subsequent sale of physical gas at a later date. The gains (losses) on
these financial transactions are recognized upon settlement in Gas purchases.
The gains (losses) on the financial transactions that are economic hedges of the
cost of the purchased gas are recognized prior to the gains (losses) on the
physical transaction that is recognized when the natural gas is sold. Therefore,
mismatches between the timing of recognizing realized gains or losses on the
financial derivative instruments and the timing of the actual sale of the
natural gas that is being economically hedged creates volatility in the results
of NJRES, although the Company’s intended economic results relating to the
entire transaction are unaffected.
Gains
(losses) at NJRES and NJR Energy included as a component of Gas purchases and
Operating revenues, as noted below, for the three months ended March 31, 2009
are as follows:
(Thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative
|
Amount
of Gain or (Loss) Recognized in Income on Derivative
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
|
|
|
|
|
|
|
NJRES:
|
|
|
|
Physical
commodity contracts
|
Operating
revenues
|
$ 8,039
|
|
Physical
commodity contracts
|
Gas
purchases
|
(570
|
)
|
Financial
derivatives
|
Gas
purchases
|
32,157
|
|
Subtotal
NJRES
|
|
39,626
|
|
NJR
Energy:
|
|
|
|
Financial
derivatives
|
Operating
revenues
|
(10,010
|
)
|
Total
NJRES and NJR Energy unrealized and realized gains
|
|
$29,616
|
|
NJNG’s
financial derivatives are part of its regulated risk management activities that
serve to mitigate BGSS costs passed on to its customers. As these transactions
are entered into pursuant to and recoverable through regulatory riders, any
changes in the value of NJNG’s financial derivatives are deferred in Regulatory
Assets or Liabilities and there is no impact to earnings.
As of
March 31, 2009, NJNG, NJRES and NJR Energy had the following outstanding long
(short) derivatives:
|
|
Volume
(Bcf)
|
NJNG
|
Futures
|
16.8
|
|
|
Swaps
|
(0.3
|
)
|
|
Options
|
10.4
|
|
NJRES
|
Futures
|
(6.7
|
)
|
|
Swaps
|
(39.5
|
)
|
|
Options
|
3.6
|
|
|
Physical
|
65.8
|
|
NJR
Energy
|
Swaps
|
3.8
|
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Generally,
exchange-traded contracts require posted collateral, referred to as margin,
usually in the form of cash. The amount of margin required is comprised of a
fixed initial amount based on the contract and a variable amount based on market
price movements from the initial trade price. The Company maintains broker
margin accounts for NJNG and NJRES. The balances are as follows:
(Thousands)
|
Balance
Sheet Location
|
March
31, 2009
|
September
30, 2008
|
NJNG
broker margin deposit
|
Broker
margin - Current Assets
|
$104,497
|
|
$ 41,277
|
|
NJRES
broker margin (liability)
|
Broker
margin - Current Liabilities
|
$
(26,746
|
)
|
$(29,072
|
)
|
Wholesale
Credit Risk
NJNG,
NJRES and NJR Energy are exposed to credit risk as a result of their wholesale
marketing activities. NJR monitors and manages the credit risk of its wholesale
marketing operations through credit policies and procedures that management
believes reduce overall credit risk. These policies include a review and
evaluation of current and prospective counterparties’ financial statements
and/or credit ratings, daily monitoring of counterparties’ credit limits and
exposure, daily communication with traders regarding credit status and the use
of credit mitigation measures, such as collateral requirements and netting
agreements. Examples of collateral include letters of credit and cash received
for either prepayment or margin deposit. Collateral may be requested due to
NJR’s election not to extend credit or because exposure exceeds defined
thresholds. Most of NJR’s wholesale marketing contracts contain standard netting
provisions. These contracts include those governed by the International Swaps
and Derivatives Association (ISDA) and the North American Energy Standards Board
(NAESB). The netting provisions refer to payment netting, whereby receivables
and payables with the same counterparty are offset and the resulting net amount
is paid to the party to which it is due.
As a
result of the inherent volatility in the prices of natural gas commodities and
derivatives, the market value of contractual positions with individual
counterparties could exceed established credit limits or collateral provided by
those counterparties. If a counterparty failed to perform the obligations under
its contract (for example, failed to deliver or pay for natural gas), then the
Company could sustain a loss.
The
following is a summary of gross credit exposures grouped by investment and
noninvestment grade counterparties, as of March 31, 2009. Internally-rated
exposure applies to counterparties that are not rated by Standard & Poor’s
(S&P) or Moody’s Investors Service, Inc (Moody’s). In these cases, the
company’s or guarantor’s financial statements are reviewed, and similar
methodologies and ratios used by S&P and/or Moody’s are applied to arrive at
a substitute rating. Gross credit exposure is defined as the unrealized fair
value of physical and financial derivative commodity contracts plus any
outstanding receivable for the value of natural gas delivered for which payment
has not yet been received. The amounts presented below have not been reduced by
any collateral received or netting and exclude accounts receivable for retail
natural gas sales and services.
(Thousands)
|
Gross Credit
Exposure
|
Investment
grade
|
$163,664
|
|
Noninvestment
grade
|
14,960
|
|
Internally
rated investment grade
|
17,014
|
|
Internally
rated noninvestment grade
|
1,897
|
|
Total
|
$197,535
|
|
Conversely,
certain of NJRES’, NJNG’s and NJR Energy’s derivative instruments are tied to
agreements containing provisions that would require cash collateral payments
from the Company if certain events occur. These provisions vary based upon the
terms in individual counterparty agreements and can result in cash payments if
NJNG’s credit rating were to fall below its current level. NJNG’s credit
rating, with respect to Standard and Poor’s, reflects the overall corporate
credit profile. Specifically, most, but not all, of these additional
payments will be triggered if NJNG’s debt is downgraded by the major credit
agencies, regardless of investment grade status. As well, some of these
agreements include threshold amounts that would result in additional collateral
payments if the values of derivative liabilities were to exceed the maximum
values provided for in relevant counterparty agreements. Other provisions
include payment features that are not specifically tied to ratings, but are
based on certain financial metrics.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Collateral
amounts associated with any of these conditions, are determined based on a
sliding scale and are contingent upon the degree to which the Company’s credit
rating and/or financial metrics deteriorate, and the extent to which liability
amounts exceed applicable threshold limits. The aggregate fair value of all
derivative instruments with credit-risk-related contingent features that are in
a net liability position on March 31, 2009, is $43.2 million for which the
Company has not posted any collateral. If all the thresholds related to the
credit-risk-related contingent features underlying these agreements were invoked
on March 31, 2009, the Company would be required to post a total of $14.1
million of collateral to its counterparties. This amount differs from the
Company’s net derivative liability because the credit agreements also include
clauses, commonly known as “Rights of Offset,” that would permit the Company to
offset its derivative assets against its derivative liabilities for determining
additional collateral to be posted.
As noted
in Note 1, General, NJR
adopted SFAS 157 effective October 1, 2008 and has applied the provisions to its
financial assets and liabilities, as appropriate, which include financial
derivatives and physical commodity contracts qualifying as derivatives,
available for sale securities and other financial assets and liabilities. SFAS
157 defines and establishes a framework for measuring fair value. SFAS 157
requires that companies consider assumptions market participants would make when
pricing assets and liabilities that are required to be recognized at fair value
in accordance with previously issued accounting pronouncements.
SFAS 157
also requires additional disclosures that are intended to convey the reliability
of price inputs used to determine fair value. To facilitate this, SFAS 157
established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value based on the source of the data used to
develop the price inputs. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities and the
lowest priority to inputs that are based on unobservable market data and include
the following:
Level 1
|
Unadjusted
quoted prices for identical assets or liabilities in active markets; NJR’s
Level 1 assets and liabilities include primarily exchange traded financial
derivative contracts and listed equities;
|
|
|
Level 2
|
Significant
price data, other than Level 1 quotes, that is observed either directly or
indirectly; NJR’s level 2 assets and liabilities include over-the-counter
physical forward commodity contracts and swap contracts or derivatives
that are initially valued using observable quotes and are subsequently
adjusted to include time value, credit risk or estimated transport pricing
components. These additional adjustments are not considered to be
significant to the ultimate recognized values.
|
|
|
Level 3
|
Inputs
derived from a significant amount of unobservable market data; these
include NJR’s best estimate of fair value and are derived primarily
through the use of internal valuation methodologies. Certain of NJR’s
physical commodity contracts that are to be delivered to inactively traded
points on a pipeline are included in this
category.
|
NJNG’s,
NJRES’ and NJR Energy’s financial derivatives portfolios consist mainly of
futures, options and swaps. NJR primarily uses the market approach and its
policy is to use actively quoted market prices when available. The principal
market for its derivative transactions is the natural gas wholesale market,
therefore, the primary source for its price inputs is the New York Mercantile
(NYMEX) exchange. NJRES also uses Natural Gas Exchange (NGX) for Canadian
delivery points and Platts and NYMEX ClearPort for certain over-the-counter
physical forward commodity contracts. However, NJRES also engages in
transactions that result in transporting natural gas to delivery points for
which there is no actively quoted market price. In these cases, NJRES’ policy is
to use the best information available to determine fair value based on internal
pricing models, which include estimates extrapolated from broker quotes or
pricing services. As of March 31, 2009, less than one percent of the total fair
value of NJRES’ derivative assets and liabilities was derived using such
inputs.
NJR
Energy uses NYMEX settlement prices to value its long-dated swap contracts. NJR
also has available for sale securities and other financial assets that include
listed equities, mutual funds and money market funds for which there are active
exchange quotes available.
When NJR
determines fair values, measurements are adjusted, as needed, for credit risk
associated with counterparties, as well as our own credit risk. NJR determines
these adjustments by using historical default probabilities that correspond to
the applicable Standard and Poor’s issuer ratings, while also taking into
consideration collateral and netting arrangements that serve to mitigate risk.
In addition, NJR further adjusts certain fair values, based on the change in a
market index that tracks the credit default swaps of investment grade companies,
to factor in the current instability in the credit markets.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The
adoption of SFAS 157 did not have any impact on NJR’s financial condition or
results of operations. Assets and liabilities measured at fair value on a
recurring basis as of March 31, 2009 are summarized as follows:
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|
(Thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
ASSETS:
|
|
|
|
|
Physical
forward commodity contracts
|
$
—
|
|
$25,477
|
|
$2 |
|
$ 25,479
|
Financial
derivative contracts
|
195,837 |
|
44,389
|
|
— |
|
240,226
|
Available
for sale securities (1)
|
7,805 |
|
— |
|
— |
|
7,805
|
Other
assets
|
1,284 |
|
— |
|
— |
|
1,284
|
Total
assets at fair value
|
$204,926
|
|
$69,866
|
|
$2 |
|
$274,794
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
Physical
forward commodity contracts
|
$ —
|
|
$16,102
|
|
$—
|
|
$16,102
|
Financial
derivative contracts
|
240,245 |
|
41,946 |
|
— |
|
282,191
|
Other
liabilities
|
1,284 |
|
— |
|
— |
|
1,284
|
Total
liabilities at fair value
|
$241,529
|
|
$58,048
|
|
$—
|
|
$299,577
|
(1)
|
Included
in Investments in equity investees and other in the Unaudited Condensed
Consolidated Balance
Sheets.
|
A
reconciliation of the beginning and ending balances of NJRES’ derivatives
measured at fair value based on significant unobservable inputs as of March 31,
2009, is as follows:
|
Fair
Value Measurements Using
|
|
Significant
Unobservable Inputs
|
|
(Level
3)
|
(Thousands)
|
Three
Months Ended
|
Six
Months Ended (1)
|
Beginning
balance
|
$123
|
|
$937
|
|
Total gains
realized and unrealized
|
79
|
|
320
|
|
Purchases,
sales, issuances and settlements, net
|
(200
|
)
|
(772
|
)
|
Net
transfers in and/or out of level 3
|
—
|
|
(483
|
)
|
Ending
balance
|
$2
|
|
$2
|
|
|
|
|
|
|
Net
unrealized gains included in net income relating to
|
|
|
|
|
derivatives
still held at March 31, 2009
|
$2
|
|
$2
|
|
(1)
|
The
amounts included in the Level 3 roll forward table for the six month
period ended March 31, 2009 include corrections to amounts
previously disclosed for the three month period ended December 31,
2008. The net impact of these corrections (in 000’s) on the ending
balance of the Level 3 roll forward table as of December 31, 2008 was a
decrease of $8. The net impact included the following
corrections: a decrease in the beginning balance as of October 1,
2008 of $4,405, a net increase in unrealized gains (losses) of
$105, a decrease in purchases, sales, issuances, settlements, net of $327,
and a decrease in the net transfers out of level 3 of $3,965. Such
corrections will be made to the Level 3 roll forward table for the three
month period ended December 31, 2008 the next time such amounts are
presented in a future
filing.
|
NJR will prospectively apply the
provisions of SFAS 157 to its pension assets and non-financial assets and
liabilities during fiscal 2010.
NJR’s
Investments in equity investees and other include the following
investments:
(Thousands)
|
March
31,
2009
|
September
30,
2008
|
Steckman
Ridge
|
$115,085
|
|
$ 84,285
|
|
Iroquois
|
25,849
|
|
23,604
|
|
Other
|
7,805
|
|
8,092
|
|
Total
|
$148,739
|
|
$115,981
|
|
NJR’s
investment in Steckman Ridge increased $30.8 million during the six months ended
March 31, 2009, including cash investments of $28.5 million and capitalized
costs and interest of $2.3 million.
New
Jersey Resources Corporation
Part
I
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJR uses the equity method of
accounting for its investments in Steckman Ridge and
Iroquois.
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.
The
following tables are summarized financial information for Iroquois:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Millions)
|
2009
|
2008
|
2009
|
2008
|
Operating
revenues
|
$51.0
|
|
$44.7
|
|
$92.8
|
|
$83.5
|
|
Operating
income
|
$30.3
|
|
$26.1
|
|
$52.0
|
|
$45.3
|
|
Net
income
|
$14.4
|
|
$11.5
|
|
$23.9
|
|
$19.0
|
|
(Millions)
|
March
31,
2009
|
September
30,
2008
|
Current
assets
|
$ 65.1
|
|
$ 64.2
|
|
Noncurrent
assets
|
$775.1
|
|
$729.2
|
|
Current
liabilities
|
$ 62.5
|
|
$ 39.3
|
|
Noncurrent
liabilities
|
$335.3
|
|
$348.9
|
|
The
following table sets forth the calculation of the Company’s basic and diluted
earnings per share:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands,
except per share amounts)
|
2009
|
2008
|
2009
|
2008
|
Net
income, as reported
|
$35,517
|
|
$12,535
|
|
$47,293
|
|
$42,720
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
42,305
|
|
41,840
|
|
42,238
|
|
41,758
|
|
Basic
earnings per common share
|
$0.84
|
|
$0.30
|
|
$1.12
|
|
$1.02
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding–basic
|
42,305
|
|
41,840
|
|
42,238
|
|
41,758
|
|
Incremental
shares (1)
|
388
|
|
259
|
|
360
|
|
260
|
|
Weighted
average shares of common stock outstanding–diluted (2)
|
42,693
|
|
42,099
|
|
42,598
|
|
42,018
|
|
Diluted
earnings per common share
|
$0.83
|
|
$0.30
|
|
$1.11
|
|
$1.02
|
|
(1) Incremental
shares consist of stock options, stock awards and performance
units.
(2) The
Company has no securities that are antidilutive for the three and six months
ended March 31, 2009
NJR
On March
15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured
Senior notes at maturity.
On
December 13, 2007, NJR entered into a $325 million unsecured committed
credit facility expiring in December 2012. As of March 31, 2009, NJR had no
borrowings outstanding under the facility.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
As of
March 31, 2009, NJR has a $5 million letter of credit outstanding on behalf
of NJRES, which is used for margin requirements for natural gas transactions and
will expire on June 30, 2009.
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R,
which will expire on December 3, 2009. The letter of credit is in place to
support development activities.
NJNG
On
November 1, 2008, NJNG repaid its $30 million, 6.27 percent, Series X First
Mortgage bonds at maturity.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
may be drawn upon through December 15, 2009 for up to $50 million. As of March
31, 2009, no letters of credit have been issued under this agreement. These
letters of credit would not reduce the amount available to be borrowed under
NJNG’s credit facility.
As of
March 31, 2009, NJNG has a $250 million committed credit facility with several
banks, expiring in December 2009. This facility is used to support NJNG’s
commercial paper program. NJNG had $10 million outstanding under this facility
as of March 31, 2009.
NJNG
received $6.3 million and $7.5 million in December 2008 and 2007, respectively,
in connection with the sale-leaseback of its natural gas meters. This
sale-leaseback program is expected to be continued on an annual
basis.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 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. On
those dates, an auction is held for the purposes of determining the interest
rate of the securities. The interest rate associated with the NJNG variable-rate
debt is based on the rates on the EDA ARS. For the six months ended March 31,
2009, all of the auctions surrounding the EDA ARS have failed, resulting in
those bonds bearing interest at their maximum rates, defined as the lesser of
(i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as
applicable to such series of ARS. As of March 31, 2009, the 30-day LIBOR rate
was 0.5 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 0.9 percent as of March 31, 2009, compared with a weighted average
interest rate of 4.6 percent as of September 30, 2008. There can be no assurance
that the EDA ARS will have enough market liquidity to avoid failed auctions in
the future.
In
October 2005, NJNG entered into a loan agreement under which the EDA loaned NJNG
the proceeds from $35.8 million of tax-exempt EDA Bonds. NJNG deposited $15.0
million of the proceeds into a construction fund to finance subsequent
construction in the northern division of NJNG’s territory. NJNG drew down $10.8
million from the construction fund prior to fiscal year 2008 and drew down the
remaining $4.2 million during the first quarter of fiscal 2009.
Neither
NJNG nor the results of its operations are obligated or pledged to support the
NJR or NJRES credit facilities.
NJRES
As of
March 31, 2009, NJRES had a 3-year, $30 million committed credit facility that
expires in October 2009 with a multinational financial institution. There were
no borrowings under this facility as of March 31, 2009.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
A summary
of NJR’s and NJNG’s long-term debt, committed credit facilities which require
annual commitment fees, and NJRES’ committed facility that does not require a
commitment fee, are as follows:
|
March
31,
|
September
30,
|
(Thousands)
|
2009
|
2008
|
NJR
|
|
|
|
|
Long
- term debt
|
$ 50,000
|
|
$ 75,000
|
|
Bank
credit facilities
|
$325,000
|
|
$325,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
$ 32,700
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
2.46
|
%
|
NJNG
|
|
|
|
|
Long
- term debt (1)
|
$349,800
|
|
$379,800
|
|
Bank
credit facilities
|
$250,000
|
|
$250,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Commercial
paper
|
$ 10,000
|
|
$145,500
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Commercial
paper
|
0.34
|
%
|
2.31
|
%
|
NJRES
|
|
|
|
|
Bank
credit facilities
|
$ 30,000
|
|
$ 30,000
|
|
Amount
outstanding at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
—
|
|
Weighted
average interest rate at end of period
|
|
|
|
|
Notes
payable to banks
|
—
|
|
—
|
|
(1) Long
- term debt excludes lease obligations of $65.1 million and $60.4 million
at March 31, 2009 and September 30, 2008,
respectively.
|
Allowance
for funds used during construction, (AFUDC) included in Utility plant, and
capitalized interest included in Real estate properties and other and
Investments in equity investees on the Unaudited Condensed Consolidated Balance
Sheets, are as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
|
2008
|
|
AFUDC
– Utility plant
|
$172
|
|
$549
|
|
$429
|
|
$1,085
|
|
Weighted
average rate
|
2.00
|
%
|
8.31
|
%
|
3.00
|
%
|
8.31
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Real estate properties and other
|
$—
|
|
$28.6
|
|
$—
|
|
$65
|
|
Weighted
average interest rates
|
—
|
%
|
3.86
|
%
|
—
|
%
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
Capitalized
interest – Investments in equity investees and other
|
$827
|
|
$832
|
|
$1,670
|
|
$1,686
|
|
Weighted
average interest rates
|
5.34
|
%
|
5.63
|
%
|
5.44
|
%
|
5.81
|
%
|
The AFUDC
amounts shown in the table above for the three and six months ended March 31,
2008 include an equity component based on NJNG’s prior return on equity rate of
11.5 percent. As a result of the BPU’s Base Rate Order issued in October 2008,
NJNG implemented certain rate design changes, including a change to its AFUDC
calculation and a return on equity rate of 10.3 percent (see Note 2. Regulation). Effective
October 3, 2008, NJNG is allowed to recover an incremental cost of equity
component during periods when its short-term debt balances are lower than its
construction work in progress. For the three and six months ended March 31,
2009, AFUDC only includes a debt component.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJR,
through its CR&R subsidiary, capitalizes interest associated with the
development and construction of its commercial buildings. Interest is also
capitalized associated with the acquisition, development and construction of a
natural gas storage facility through NJR’s equity investment in Steckman Ridge
(see Note 5. Investments in
Equity Investees and other).
Pursuant
to a BPU order, NJNG is permitted to recover carrying costs on uncollected
balances related to SBC program costs, which include NJCEP, RAC and USF
expenditures. Accordingly, Other income included $491,000 and $690,000 of
interest related to these SBC program costs for the three months ended March 31,
2009 and 2008, respectively, and $1.1 million and $1.4 million for the six
months ended March 31, 2009 and 2008, respectively.
On
November 11, 2008, the Company granted 106,730 restricted shares that vested
immediately. On the same date, the Company also granted 8,481 shares that vested
immediately and were issued on November 17, 2008. On January 21, 2009 the
members of the Board of Directors were issued 12,000 shares for their annual
retainer. On March 11, 2009, the Company granted 46,500 restricted shares
two-thirds of which may vest on October 1, 2009 and one-third of which may vest
on October 1, 2010, subsequent to meeting certain performance
milestones.
As of
March 31, 2009, 2,398,623 and 95,203 shares, respectively, remain available for
future awards to employees and directors.
Included
in Operation and maintenance expense is $1.2 million and $1.3 million for
the six months ended March 31, 2009 and 2008, respectively, related to
stock-based compensation. As of March 31, 2009, there remains $3.3 million of
deferred compensation related to unvested shares and options, which is expected
to be recognized over the next 2 years.
Pension
and Other Postemployment Benefit Plans (OPEB)
The
components of the net periodic cost for pension benefits, including NJR’s
Pension Equalization Plan, and OPEB costs (principally health care and life
insurance) for employees and covered dependents were as follows:
|
Pension
|
OPEB
|
|
Three
Months
Ended
March
31,
|
Six
Months
Ended
March
31,
|
Three
Months
Ended
March
31,
|
Six
Months
Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
Service
cost
|
$678
|
|
$ 729
|
|
$1,356
|
|
$1,457
|
|
$ 280
|
|
$436
|
|
$ 864
|
|
$ 924
|
|
Interest
cost
|
1,937
|
|
1,649
|
|
3,874
|
|
3,297
|
|
1,023
|
|
810
|
|
2,029
|
|
1,631
|
|
Expected
return on plan assets
|
(2,188
|
)
|
(2,182
|
)
|
(4,376
|
)
|
(4,365
|
)
|
(351
|
)
|
(627
|
)
|
(998
|
)
|
(1,210
|
)
|
Recognized
actuarial loss
|
139
|
|
276
|
|
278
|
|
551
|
|
215
|
|
181
|
|
534
|
|
443
|
|
Prior
service cost amortization
|
14
|
|
14
|
|
28
|
|
28
|
|
19
|
|
19
|
|
39
|
|
39
|
|
Transition
obligation amortization
|
—
|
|
—
|
|
—
|
|
—
|
|
90
|
|
89
|
|
179
|
|
178
|
|
Net
periodic cost
|
$580
|
|
$ 486
|
|
$1,160
|
|
$ 968
|
|
$1,276
|
|
$908
|
|
$2,647
|
|
$2,005
|
|
For
fiscal 2009, the Company has no minimum pension funding requirements. However,
funding requirements are uncertain and can depend significantly on changes in
actuarial assumptions, returns on plan assets and changes in demographic
factors. It is anticipated that the annual funding level to the OPEB plans will
range from $1.2 million to $1.4 million over the next five years. Additional
contributions may be made based on market conditions and various
assumptions.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJR
recognizes AROs related to the costs associated with cutting and capping its
main and service gas distribution pipelines of NJNG, which is required by New
Jersey law when taking such gas distribution pipelines out of
service.
The
following is an analysis of the change in the ARO liability for the period ended
March 31, 2009:
(Thousands)
Balance
at October 1, 2008
|
$24,416
|
|
Accretion
|
742
|
|
Additions
|
—
|
|
Retirements
|
(463
|
)
|
Balance
at March 31, 2009
|
$24,695
|
|
Accretion
amounts are not reflected as an expense on NJR’s Unaudited Condensed
Consolidated Statements of Income, but rather are deferred as a regulatory asset
and netted against NJNG’s regulatory liabilities, for presentation purposes, on
the Unaudited Condensed Consolidated Balance Sheet.
As of
September 30, 2008, the Company had a FIN 48 (Reserve for Uncertain Tax
Positions) balance of $6.5 million. During the first quarter of fiscal year
2009, the Company settled a tax court case with the State of New Jersey, which
resulted in a $2.7 million decrease to the reserve balance.
During
the second quarter of fiscal 2009, the Company settled the September 30, 2005
Internal Revenue Service (IRS) tax audit. The settlement resulted in an
additional reduction to the remaining FIN 48 balance of $3.8 million bringing it
to its current balance of zero. The prior balance of $3.8 million related
to one issue which has been settled favorably and will result in no changes to
the company’s tax liability related to the issue.
Currently
the Company has no reason to believe that there will be any new additions to the
FIN 48 reserve.
Cash
Commitments
NJNG has
entered into long-term contracts, expiring at various dates through 2023, for
the supply, storage and delivery of natural gas. These contracts include current
annual fixed charges of approximately $89.9 million at current contract rates
and volumes, which are recoverable through the BGSS.
For the
purpose of securing adequate storage and pipeline capacity, NJRES enters into
storage and pipeline capacity contracts, which require the payment of certain
demand charges by NJRES, in order to maintain the ability to access such natural
gas storage or pipeline capacity, during a fixed time period, which generally
range from one to five years. Demand charges are based on established rates as
regulated by the Federal Energy Regulatory Commission (FERC). These demand
charges represent commitments to pay storage providers or pipeline companies for
the right to store and transport natural gas utilizing their respective assets.
As of March 31, 2009, NJRES had contractual obligations for current annual
demand charges related to storage contracts and pipeline capacity contracts of
$37.5 million and $47.9 million, respectively.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
As of
March 31, 2009, there were NJR guarantees covering approximately $394 million of
natural gas purchases and demand fee commitments of NJRES and NJNG not yet
reflected in Accounts payable on the Unaudited Condensed Consolidated Balance
Sheet. Commitments as of March 31, 2009 for natural gas purchases and future
demand fees, for the next five fiscal year periods, are as follows:
(Thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
NJRES:
|
|
|
|
|
|
|
Natural
gas purchases
|
$256,244
|
$247,995
|
$119,000
|
$123,566
|
$10,417
|
$ —
|
Pipeline
demand fees
|
29,342
|
33,661
|
20,794
|
6,924
|
5,794
|
5,906
|
Storage
demand fees
|
20,914
|
27,629
|
16,082
|
10,616
|
4,020
|
2,025
|
Sub-total
NJRES
|
$306,500
|
$309,285
|
$155,876
|
$141,106
|
$20,231
|
$7,931
|
NJNG:
|
|
|
|
|
|
|
Natural
gas purchases
|
$ 84,699
|
$ 31,218
|
$ 1,644
|
$ —
|
$ —
|
$ —
|
Pipeline
demand fees
|
29,213
|
77,972
|
80,143
|
73,895
|
72,917
|
320,849
|
Storage
demand fees
|
10,940
|
20,575
|
14,473
|
8,993
|
8,297
|
4,735
|
Sub-total
NJNG
|
$124,852
|
$129,765
|
$ 96,260
|
$ 82,888
|
$ 81,214
|
$325,584
|
Total
|
$431,352
|
$439,050
|
$252,136
|
$223,994
|
$101,445
|
$333,515
|
Costs for
storage and pipeline demand fees, included as a component of Gas purchases on
the Unaudited Condensed Consolidated Statements of Income, are as
follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
NJRES
|
$29.8
|
|
$31.5
|
|
$ 58.3
|
|
$59.0
|
|
NJNG
|
22.3
|
|
19.5
|
|
42.8
|
|
38.2
|
|
Total
|
$52.1
|
|
$51.0
|
|
$101.1
|
|
$97.2
|
|
NJNG’s
capital expenditures are estimated at $87.4 million for fiscal 2009, including
$6 million related to AIP construction costs, of which approximately $39.0
million has been committed. Capital expenditures consist primarily of NJNG’s
construction program to support customer growth, maintenance of its distribution
system, replacement needed under pipeline safety regulations, an automated meter
reading installation project and AIP.
The
Company’s future minimum lease payments under various operating leases are less
than $3.6 million annually for the next five years and $1.6 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.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NJNG may,
subject to BPU approval, recover its remediation expenditures, including
carrying costs, over rolling 7-year periods pursuant to a Remediation Adjustment
(RA) approved by the BPU. In October 2007, the BPU approved $14.7 million in
eligible costs to be recovered annually for MGP remediation expenditures
incurred through June 30, 2006. In February 2008, NJNG filed an application
regarding its SBC which included MGP remediation expenditures incurred through
June 30, 2007, resulting in an expected annual recovery of $17.7 million. On
January 27, 2009, NJNG filed an application regarding its SBC including MGP
remediation expenditures incurred through June 30, 2008 resulting in an expected
annual recovery of $20.7 million. As of March 31, 2009, $84.8 million of
previously incurred remediation costs, net of recoveries from customers and
insurance proceeds, are included in Regulatory assets on the Unaudited Condensed
Consolidated Balance Sheet.
In
September 2008, NJNG updated an environmental review of the MGP sites, including
a review of potential liability for investigation and remedial action. NJNG
estimated at the time of the review that total future expenditures to remediate
and monitor the three MGP sites for which it is responsible will range from
approximately $120.2 million to $177.2 million. NJNG’s estimate of these
liabilities is based upon known facts, existing technology and enacted laws and
regulations in place when the review was completed. However, NJNG expects actual
costs to differ from these estimates. Where it is probable that costs will be
incurred, but the information is sufficient only to establish a range of
possible liability, and no point within the range is more likely than any other,
it is NJNG’s policy to accrue the lower end of the range. Accordingly, NJNG has
recorded an MGP remediation liability and a corresponding Regulatory asset of
$120.2 million on the Unaudited Condensed Consolidated Balance Sheet. The actual
costs to be incurred by NJNG are dependent upon several factors, including final
determination of remedial action, changing technologies and governmental
regulations, the ultimate ability of other responsible parties to pay and any
insurance recoveries.
NJNG will
continue to seek recovery of MGP-related costs through the RAC. If any future
regulatory position indicates that the recovery of such costs is not probable,
the related cost would be charged to income in the period of such determination.
However, because recovery of such costs is subject to BPU approval, there can be
no assurance as to the ultimate recovery through the RAC or the impact on the
Company’s results of operations, financial position or cash flows, which could
be material.
General
The
Company is party to various other claims, legal actions and complaints arising
in the ordinary course of business. In the Company’s opinion, other than as
disclosed in Part II Item 1 of this Form 10-Q, the ultimate disposition of these
matters will not have a material adverse effect on its financial condition,
results of operations or cash flows.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Information
related to the Company’s various business segments and other operations,
excluding capital expenditures, which are presented in the Unaudited Condensed
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 operations
consist of appliance and installation services, commercial real estate
development, investments and other corporate activities.
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$469,261
|
|
$476,818
|
|
$810,169
|
|
$761,178
|
|
Energy
Services
|
472,763
|
|
687,912
|
|
935,857
|
|
1,208,123
|
|
Segment
subtotal
|
942,024
|
|
1,164,730
|
|
1,746,026
|
|
1,969,301
|
|
Retail
and Other
|
(2,350
|
)
|
12,859
|
|
(5,004
|
)
|
19,490
|
|
Intersegment
revenues (1)
|
(2,158
|
)
|
(44
|
)
|
(2,202
|
)
|
(108
|
)
|
Total
|
$937,516
|
|
$1,177,545
|
|
$1,738,820
|
|
$1,988,683
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$7,291
|
|
$9,332
|
|
$14,452
|
|
$18,565
|
|
Energy
Services
|
51
|
|
53
|
|
102
|
|
106
|
|
Segment
subtotal
|
7,342
|
|
9,385
|
|
14,554
|
|
18,671
|
|
Retail
and Other
|
166
|
|
132
|
|
315
|
|
249
|
|
Total
|
$7,508
|
|
$9,517
|
|
$14,869
|
|
$18,920
|
|
Interest
Income (2)
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$504
|
|
$1,408
|
|
$1,162
|
|
$2,610
|
|
Energy
Services
|
1
|
|
64
|
|
18
|
|
171
|
|
Segment
subtotal
|
505
|
|
1,472
|
|
1,180
|
|
2,781
|
|
Retail
and Other
|
13
|
|
71
|
|
19
|
|
126
|
|
Total
|
$518
|
|
$1,543
|
|
$1,199
|
|
$2,907
|
|
Interest
Expense, net
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$4,204
|
|
$5,376
|
|
$10,664
|
|
$11,495
|
|
Energy
Services
|
(124
|
)
|
887
|
|
(148
|
)
|
1,764
|
|
Segment
subtotal
|
4,080
|
|
6,263
|
|
10,516
|
|
13,259
|
|
Retail
and Other
|
139
|
|
429
|
|
250
|
|
1,243
|
|
Total
|
$4,219
|
|
$6,692
|
|
$10,766
|
|
$14,502
|
|
Income
Tax Provision (Benefit)
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$24,767
|
|
$21,115
|
|
$38,103
|
|
$31,160
|
|
Energy
Services
|
(813
|
)
|
(20,221
|
)
|
(4,540
|
)
|
(11,555
|
)
|
Segment
subtotal
|
23,954
|
|
894
|
|
33,563
|
|
19,605
|
|
Retail
and Other
|
(4,057
|
)
|
2,500
|
|
(8,421
|
)
|
2,283
|
|
Total
|
$19,897
|
|
$3,394
|
|
$25,142
|
|
$21,888
|
|
Net
Financial Earnings
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$41,588
|
|
$34,170
|
|
$ 64,662
|
|
$ 50,840
|
|
Energy
Services
|
31,078
|
|
43,517
|
|
40,461
|
|
62,609
|
|
Segment
subtotal
|
72,666
|
|
77,687
|
|
105,123
|
|
113,449
|
|
Retail
and Other
|
(238
|
)
|
311
|
|
(217
|
)
|
856
|
|
Total
|
$72,428
|
|
$77,998
|
|
$104,906
|
|
$114,305
|
|
(1)
|
Consists
of transactions between subsidiaries that are eliminated and reclassified
in consolidation
|
(2) Included
in Other income in the Unaudited Condensed Consolidated Statement of
Income
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
The chief
operating decision maker of the Company is the Chief Executive Officer (CEO).
The CEO uses net financial earnings as a measure of profit or loss in measuring
the results of the Company’s segments and operations. A reconciliation of
consolidated net financial earnings to consolidated net income, for the three
and six months ended March 31, 2009 and 2008, respectively, is as
follows:
|
Three
Months Ended
|
Six Months Ended
|
|
March
31,
|
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Consolidated
Net Financial Earnings
|
$72,428
|
|
$77,998
|
|
$104,906
|
|
$114,305
|
|
Less:
|
|
|
|
|
|
|
|
|
Unrealized
loss from derivative instruments, net of taxes
|
22,952
|
|
69,012
|
|
27,074
|
|
73,802
|
|
Realized
loss from derivative instruments related to natural gas inventory, net of
taxes
|
13,959
|
|
(3,549
|
)
|
30,539
|
|
(2,217
|
)
|
Consolidated
Net Income
|
$35,517
|
|
$12,535
|
|
$
47,293
|
|
$
42,720
|
|
The
Company’s assets for the various business segments and business operations are
detailed below:
|
March
31,
|
September 30,
|
(Thousands)
|
2009
|
2008
|
Assets
at end of period:
|
|
|
|
|
Natural
Gas Distribution
|
$1,743,326
|
|
$1,761,964
|
|
Energy
Services
|
415,503
|
|
689,992
|
|
Segment
Subtotal
|
2,158,829
|
|
2,451,956
|
|
Retail
and Other
|
275,847
|
|
231,551
|
|
Intercompany
Assets (1)
|
(18,085
|
)
|
(58,115
|
)
|
Total
|
$2,416,591
|
|
$2,625,392
|
|
(1)
Consists of transactions between subsidiaries that are eliminated and
reclassified in
consolidation
|
NJRES’
assets decreased 40 percent from September 30, 2008 to March 31, 2009 due
primarily to lower inventory values as resulting from a decline in commodity
prices. Retail and Other’s assets increased 19 percent during the current
fiscal period largely as a result of higher cash balances at NJR as well as an
increase in NJR’s investment in Steckman Ridge.
For the
six months ended March 31, 2009, NJRES had one customer who represented more
than 10 percent of its total revenue. Management believes that the loss of this
customer would not have a material effect on its financial position, results of
operations or cash flows as an adequate number of alternative counterparties
exist.
At March
31, 2009, there were 42,313,293 shares of common stock outstanding and the book
value per share was $17.90.
New
Jersey Resources Corporation
Part
I
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 Company (NJNG) and NJR Energy
Services Company (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, an
investor in energy-related ventures, most significantly through NJNR Pipeline
Company, which holds the Company’s 5.53 percent interest in Iroquois Gas and
Transmission System, LP (Iroquois), a 412-mile natural gas pipeline from the New
York-Canadian border to Long Island, New York, and NJR Steckman Ridge Storage
Company, which has a 50 percent equity ownership interest in Steckman Ridge GP,
LLC and Steckman Ridge, LP (collectively, Steckman Ridge), a 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
Pennsylvania; NJR Investment Company, which makes energy-related equity
investments; NJR Home Services Company (NJRHS), which provides service, sales
and installation of appliances; Commercial Realty and Resources Corporation
(CR&R), which holds and develops commercial real estate; and NJR Service
Corporation (NJR Service), which provides support services to the various NJR
businesses.
Net
income by business segment and business operations for the three and six months
ended March 31, 2009 and 2008, respectively, are as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$41,588
|
|
117
|
%
|
$34,170
|
|
273
|
%
|
$64,662
|
|
137
|
%
|
$50,840
|
|
119
|
%
|
Energy
Services
|
(1,011
|
)
|
(3
|
)
|
(25,947
|
)
|
(207
|
)
|
(6,625
|
)
|
(14
|
)
|
(12,797
|
)
|
(30
|
)
|
Retail
and Other
|
(5,060
|
)
|
(14
|
)
|
4,312
|
|
34
|
|
(10,744
|
)
|
(23
|
)
|
4,677
|
|
11
|
|
Total
|
$35,517
|
|
100
|
%
|
$12,535
|
|
100
|
%
|
$47,293
|
|
100
|
%
|
$42,720
|
|
100
|
%
|
Assets by
business segment and business operations are as follows:
(Thousands)
|
March
31,
2009
|
September
30,
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Natural
Gas Distribution
|
$1,743,326
|
|
72
|
%
|
$1,761,964
|
|
67
|
%
|
|
Energy
Services
|
415,503
|
|
17
|
|
689,992
|
|
26
|
|
|
Retail
and Other
|
275,847
|
|
12
|
|
231,551
|
|
9
|
|
|
Intercompany
Assets (1)
|
(18,085
|
)
|
(1
|
)
|
(58,115
|
)
|
(2
|
)
|
|
Total
|
$2,416,591
|
|
100
|
%
|
$2,625,392
|
|
100
|
%
|
|
(1)
Consists of transactions between subsidiaries that are eliminated and
reclassified in
consolidation
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
NJRES and
NJR Energy account for certain of their derivative instruments used to
economically hedge the forecasted purchase, sale and transportation of natural
gas at fair value, as required under Statement of Financial Accounting Standards
No. 133, Accounting for
Derivative Instruments and Hedging Activities (as amended and
interpreted, SFAS 133). Effective October 1, 2007, the Company changed the
treatment of its physical commodity contracts at NJRES, such that the changes in
fair value of new contracts are included in earnings, and are not accounted for
using the “normal purchase normal sales” (normal) scope exception of SFAS 133.
In addition, effective October 1, 2008, due to changes in the Company’s ability
to assert physical delivery, the Company is no longer treating physical
commodity contracts executed prior to October 1, 2007 as normal. Therefore, all
NJRES physical commodity contracts are accounted for at fair value on the
Unaudited Condensed Consolidated Balance Sheets, with changes in fair value
included as a component of operating revenue and gas purchases, as appropriate,
on the Unaudited Condensed Consolidated Statements of Income. All physical
commodity contracts at NJNG and NJR Energy continue to be designated as normal
and accounted for under accrual accounting.
The
change in fair value of these derivative instruments at NJRES and NJR Energy
over periods of time, referred to as unrealized gains or losses, can result in
substantial volatility in reported net income under generally accepted
accounting principles of the United States of America (GAAP). When a financial
instrument settles the result is the realization of these gains or losses. NJRES
utilizes certain financial instruments to economically hedge natural gas
inventory placed into storage that will be sold at a later date, all of which
were contemplated as part of an entire forecasted transaction. GAAP requires
that when a financial instrument that is economically hedging natural gas that
has been placed into inventory, but not yet sold, has been settled, the realized
gain or loss associated with that settlement must be reflected currently in the
income statement. While NJRES will recognize the same economic impact from the
entire planned transaction, this also leads to additional volatility in NJRES’
reported earnings.
Unrealized
losses and gains at NJRES and NJR Energy are the result of changes in the fair
value of derivative instruments, used to economically hedge future natural gas
purchases, sales and transportation. Realized gains and losses at NJRES include
the settlement of natural gas futures instruments used to economically hedge
natural gas purchases in inventory that have not been sold.
Included
in Net income in the table on the previous page for the six-month period ended
March 31, 2009 and 2008 are unrealized (losses) in the Energy Services
segment of $(16.6) million and $(77.6) million, after taxes, respectively and
realized (losses)/gains of $(30.5) and $2.2 million, after taxes, respectively,
which are related to derivative instruments that have settled and are designed
to economically hedge natural gas that is in storage inventory.
Also,
included in Net income above are unrealized (losses)/gains in the Retail and
Other segment of $(10.5) million and $3.8 million, after taxes, for the
six-month period ended March 31, 2009 and 2008, respectively.
Natural
Gas Distribution Segment
Natural
Gas Distribution operations have been managed with the goal of growing
profitably through several key initiatives including:
Ÿ
|
Earning
a reasonable rate of return on the investments in its natural gas
distribution system, as well as recovery of all prudently incurred costs
in order to provide safe and reliable service throughout NJNG’s service
territory.
|
Ÿ
|
Working
with the BPU and the Department of the Public Advocate, Division of Rate
Counsel (Rate Counsel), on the implementation and continuing review of the
Conservation Incentive Program (CIP). The CIP allows NJNG to promote
conservation programs to its customers while maintaining protection of its
utility gross margin associated with reduced customer usage. CIP usage
differences are calculated annually and are recovered one year following
the end of the CIP usage year;
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Ÿ
|
Managing
the new customer growth rate, which is expected to be approximately 1.3
percent over the next two years. In fiscal 2009 and 2010, NJNG currently
expects to add, in total, approximately 12,000 to 14,000 new customers.
The Company believes that this growth would increase utility gross margin
under its base rates as provided by approximately $3.6 million annually,
as calculated under NJNG’s CIP tariff;
|
|
|
Ÿ
|
Generating
earnings from various BPU-authorized gross margin-sharing incentive
programs; and
|
|
|
Ÿ
|
Managing
the volatility of wholesale natural gas prices through a hedging program
designed to keep customers’ Basic Gas Supply Service (BGSS) rates as
stable as possible.
|
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 filing was consistent with NJNG’s
objectives of providing safe and reliable service to its customers and earning a
market-based return.
On
October 3, 2008, the BPU unanimously approved and made effective the settlement
of NJNG’s base rate case. As a result, NJNG received a revenue increase in its
base rates of $32.5 million, which is inclusive of an approximate $13 million
impact of a change to the CIP baseline usage rate, received an allowed return on
equity component of 10.3 percent, reduced its depreciation expense component
from 3.0 percent to 2.34 percent and reduced its annual depreciation expense of
$1.6 million as a result of the amortization of previously recovered asset
retirement obligations.
The CIP
allows NJNG to recover utility gross margin variations related to both weather
and customer usage. Recovery of such margin variations is subject to additional
conditions including an earnings test, which includes a return on equity
component of 10.3 percent, and an evaluation of Basic Gas Supply Service
(BGSS)-related savings achieved. An annual review of the CIP must be filed in
June of each year, coincident with NJNG’s annual BGSS filing. In October
2007, the BPU provisionally approved NJNG’s initial CIP recovery rates, which
are designed to recover approximately $15.6 million of accrued margin. In
October 2008, the BPU provisionally approved recovery of an additional $6.8
million of accrued margin for the CIP. The total recovery requested of $22.4
million includes amounts accrued and estimated through September 30, 2008. As of
March 31, 2009, NJNG has $7.6 million accrued in Regulatory Assets in the
Unaudited Condensed Consolidated Balance Sheets. On April 1, 2009, NJNG filed a
letter with the BPU requesting a 1-year extension to its CIP through
October 1, 2010.
In
conjunction with the CIP, NJNG is required to administer programs that promote
customer conservation efforts. As of March 31, 2009 and September 30, 2008,
the obligation to fund these conservation programs was reflected at its present
value of $305,000 and $864,000, respectively in the Unaudited Condensed
Consolidated Balance Sheets.
In
conducting NJNG’s business, management focuses on factors it believes may have
significant influence on its future financial results. NJNG’s policy is to work
with all stakeholders, including customers, regulators and policymakers, to
achieve favorable results. These factors include the rate of NJNG’s customer
growth in its service territory, which can be influenced by general economic
conditions as well as political and regulatory policies that may impact the new
housing market. A portion of NJNG’s customer growth comes from the conversion
market, which is influenced by the delivered cost of natural gas compared with
competing fuels, interest rates and other economic conditions.
As a
regulated company, NJNG is required to recognize the impact of regulatory
decisions on its financial statements. As a result, significant costs are
deferred and treated as regulatory assets, pending BPU decisions regarding their
ultimate recovery from customers. The most significant costs incurred that are
subject to this accounting treatment include manufactured gas plant (MGP)
remediation costs and wholesale natural gas costs. Actual remediation costs may
vary from management’s estimates due to the developing nature of remediation
requirements, regulatory decisions by the New Jersey Department of Environmental
Protection (NJDEP) and related litigation. If there are changes in the
regulatory position on the recovery of these costs, such costs would be charged
to income in the period of such determination.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
On April
16, 2009, the BPU approved NJNG’s AIP Program allowing NJNG to commence
construction on its 14 infrastructure projects. NJNG will make a filing for the
recovery of infrastructure program investment costs in June 2010 to be effective
October 1, 2010. The filing will allow the recovery of costs of the AIP
construction activities for the period ending August 31, 2010, including the
recovery of NJNG’s overall weighted cost of capital.
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 and
Canada.
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 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 gross margin; and
|
|
|
Ÿ
|
Managing
economic hedging programs that are designed to mitigate adverse market
price fluctuations in natural gas transportation and storage
commitments.
|
NJRES
views “financial margin” as a financial measurement metric. NJRES’ financial
margin, which is a non-GAAP financial measure, represents revenues earned from
the sale of natural gas less costs of natural gas sold, transportation and
storage, and excludes any accounting impact from the change in fair value of
derivative instruments designed to hedge the economic impact of its transactions
that have not been settled, which represent unrealized gains and losses, and
realized gains and losses associated with financial instruments economically
hedging natural gas in storage and not yet sold as part of a planned
transaction. NJRES uses financial margin to gauge operating results against
established benchmarks and earnings targets as it eliminates the impact of
volatility in GAAP earnings that can occur prior to settlement of the physical
commodity portion of the transactions and therefore is more representative of
the overall expected economic result.
NJRES has
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 of the United States and eastern Canada.
These assets become more valuable when prices change between these areas and
across time periods. NJRES seeks to optimize this process on a daily basis as
market conditions change by evaluating all the natural gas supplies,
transportation and opportunities to which it has access, to find the most
profitable alternative to serve its various commitments. This enables NJRES to
capture geographic pricing differences across these various regions as delivered
natural gas prices change 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
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.
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 gas at a later date for return back 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 trading limits, approval processes, segregation
of duties, and formal contract and credit review and approval procedures. NJRES
continuously monitors and seeks to reduce the risk associated with various
counterparties credit exposure. The Risk Management Committee (RMC) of NJR
oversees compliance with these established guidelines.
Retail
and Other Operations
As part
of the Retail and Other operations NJR utilizes a subsidiary, NJR Energy
Holdings, to develop its investments in natural gas “mid-stream” assets.
Mid-stream assets are natural gas transportation and storage facilities. NJR
believes that acquiring, owning and developing these mid-stream assets, which
operate under a tariff structure that has either a regulated or market-based
rate, can provide a significant growth opportunity for the Company. To that end,
NJR has ownership interests in Iroquois (regulated rate) and Steckman Ridge
(market-based rate), and is actively pursuing other potential opportunities that
meet its investment and development criteria. Other businesses included as part
of Retail and Other include NJRHS, which provides service, sales and
installation of appliances to over 145,000 customers and is focused on growing
its installation business and expanding its service contract customer base, and
CR&R, which seeks additional opportunities to enhance the value of its
undeveloped land.
The
financial results of Retail and Other consist primarily of the operating results
of NJRHS and equity in earnings attributable to the Company’s equity investment
in Iroquois, as well as to investments made by NJR Energy, an investor in other
energy-related ventures through its operating subsidiaries. Also included within
Retail and Other operations is interest income and organizational expenses
recorded at NJR.
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have begun to
inject natural gas inventory in preparation for the initial withdrawal season.
Construction will continue through the summer of 2009 as more facilities are
made ready to support the initial winter season. As of March 31,
2009, NJR has invested $107 million in Steckman Ridge, excluding capitalized
interest and other
direct costs. Total project costs related to the development of the storage
facility are currently estimated at approximately $265 million, of which NJR is
obligated to fund 50 percent or approximately $132.5 million. NJR anticipates
that Steckman Ridge will seek non-recourse financing upon full completion
of the construction and development of its facilities, thereby potentially
reducing the final expected recourse obligation of NJR. There can be no
assurances that such non-recourse project financing will be secured or available
for Steckman Ridge.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Critical
Accounting Policies
A summary
of NJR’s critical accounting policies is included in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of its Annual
Report on Form 10-K for the period ended September 30, 2008. NJR’s critical
accounting policies have not changed materially from those reported in the 2008
Annual Report on Form 10-K with the exception of the following:
Derivative
Instruments
Derivative
activities are recorded in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted, (SFAS
133) under which NJR records the fair value of derivatives held as assets and
liabilities. In addition, NJRES also treats contracts for the purchase or sale
of natural gas as derivatives and, therefore, records them at fair value in the
Unaudited Condensed Consolidated Balance Sheet, with changes in fair value being
recorded as a component of Gas purchases in the Unaudited Condensed Consolidated
Statements of Income.
NJRES
previously applied the “normal purchase normal sale” (normal) scope exception
for certain physical commodity contracts that were executed prior to October 1,
2007 which otherwise qualified as derivatives. Based on current conditions in
the credit markets and developments within the natural gas industry, NJRES has
determined that the probability of physical delivery with these counterparties
could potentially diminish and, therefore, these contracts meet
the requirements, outlined in SFAS 133, to continue applying the normal
scope exception. As a result, effective October 1, 2008, NJRES will treat these
contracts as derivatives and record them at fair value in the Unaudited
Condensed Consolidated Balance Sheet, with changes in fair value being recorded
as a component of Operating revenues and Gas purchases, as appropriate, in the
Unaudited Condensed Consolidated Statements of Income.
Effective
October 1, 2008, NJR began applying the provisions of SFAS 157 Fair Value Measurement (see
Note 5, Fair Value
Measurements). As a result of the adoption of SFAS 157, NJR implemented
procedures to evaluate its own credit profile to determine an appropriate
valuation adjustment to the recorded amount of its derivative liabilities. NJR
uses historical default probabilities corresponding to Standard and Poor’s
issuer ratings and considers conditions in the credit markets to further adjust
the valuation, when deemed appropriate, based on the change in a market index
that tracks the credit default swaps of investment grade companies.
Capitalized
Financing Costs
NJNG
capitalizes an allowance for funds used during construction (AFUDC) as a
component of Utility plant in the Unaudited Condensed Consolidated Balance
Sheets. Under regulatory rate practices and in accordance with SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation, NJNG fully recovers AFUDC through base
rates. As a result of the BPU’s Base Rate Order issued in October 2008, NJNG
implemented certain rate design changes, including a change to its AFUDC
calculation. Effective October 3, 2008, NJNG is allowed to recover an
incremental cost of equity component during periods when its short-term debt
balances are lower than its construction work in progress balance. This results
in a non-cash income statement recognition that will also be capitalized as a
component of Utility plant.
Guarantees
In fiscal
2009, the Company entered into agreements to lease vehicles over a five-year
term, which qualify as operating leases. These agreements contain provisions
that could require the Company to make additional cash payments at the end of
the term for a portion of the residual value of the vehicles. As a result, the
Company has recognized a liability of $275,000 based on the present value of the
potential obligation associated with the guarantees. In the event performance
under the guarantee is required, the Company’s maximum future payment would be
$475,000.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Foreign
Currency Transactions
NJRES’
market area includes Canadian delivery points and as a result it incurs certain
natural gas commodity costs and demand fees that are denominated in Canadian
dollars. Gains or losses that occur as a result of these foreign currency
transactions are reported as a component of Gas purchases in the Consolidated
Statements of Income and were not material during the three and six months ended
March 31, 2009 and March 31, 2008, respectively.
Recently
Issued Accounting Standards
Refer to
Note 1. General, for
discussion of recently issued accounting standards.
Results
of Operations
Consolidated
Net
income for the three-month period ended March 31, 2009 increased by 183 percent
to $35.5 million, compared with $12.5 million for the same period last fiscal
year. Basic EPS increased 180 percent to $0.84 compared with $0.30 for the same
period last fiscal year, and diluted EPS increased 177 percent to $0.83 compared
with $0.30 for the same period last fiscal year.
Net
income for the six-month period ended March 31, 2009, increased 10.7 percent to
$47.3 million, compared with $42.7 million for the same period last fiscal year.
Basic EPS increased 9.8 percent to $1.12, compared with $1.02 for the same
period last fiscal year, and diluted EPS increased 8.8 percent to $1.11,
compared with $1.02 for the same period last fiscal year.
The
increase in net income for both the three and six months periods ended March 31,
2009, as compared with the same periods in the prior fiscal year was due
primarily to a continuing decline in natural gas commodity prices at NJRES,
during the current fiscal periods, which resulted in lower unrealized and
realized losses on derivatives compared with the same periods during the prior
fiscal year. This was partially offset by lower storage spreads and lower
margins at NJRES due primarily to the expiration of a transportation contract
resulting in reduced asset optimization opportunities compared with the prior
fiscal periods. Also contributing to the increase in net income for the three
and six months ended March 31, 2009 were improved margins at NJNG as a result of
the changes to its base rates that took effect on October 3, 2008, higher gross
margin from incentive programs and an overall reduction in interest expense
driven by lower average debt balances and short-term borrowing
rates.
The
Company’s Operating revenues and Gas purchases are as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
% Change
|
2009
|
2008
|
% Change
|
Operating
revenues
|
$937,516
|
|
$1,177,545
|
|
(20.4
|
)%
|
$1,738,820
|
|
$1,988,683
|
|
(12.6
|
)%
|
Gas
purchases
|
$782,130
|
|
$1,065,925
|
|
(26.6
|
)%
|
$1,480,275
|
|
$1,750,619
|
|
(15.4
|
)%
|
Operating
revenues decreased $240.0 million and Gas purchases decreased $283.8 million in
the three months ended March 31, 2009, compared with the same period of the
prior fiscal year due primarily to:
Ÿ
|
a
decrease in Operating revenues of $215.1 million and Gas purchases of
$257.7 million at NJRES due primarily to lower average natural gas prices
and lower sales volumes;
|
|
|
Ÿ
|
a
decrease in Operating revenues of $15.2 million at Retail and
Other due to a decrease of $15.0 million in unrealized losses at
NJR Energy, which were the result of declining natural gas market prices
within a portfolio of net long financial derivative positions;
and
|
|
|
Ÿ
|
a
decrease in Operating revenues of $7.6 million at NJNG due primarily
to the temporary rate credit given on customers’ bills from January
through March of 2009, partially offset by the base rate increase; Gas
purchases were also impacted by the temporary rate credit, which
contributed to a $23.9 million
decrease.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
For the
six months ended March 31, 2009, Operating revenues decreased $249.9 million and
Gas purchases decreased $270.3 compared with the same period of the prior fiscal
year due primarily to:
Ÿ
|
a
decrease in Operating revenues of $272.3 million and Gas purchases of
$284.6 million at NJRES and a decrease in Operating revenues of $24.5
million at Retail and Other due to $24.4 million of unrealized losses
at NJR Energy due primarily to the same factors noted
above; partially offset by
|
|
|
Ÿ
|
an increase
in Operating revenues of $49.0 million and Gas purchases of $16.4
million at NJNG due primarily to an increase in firm sales as a result of
colder weather during the current fiscal period, partially offset by
higher credits extended to customers during fiscal 2009 in comparison to
the BGSS refunds given to customers during fiscal 2008. In addition,
operating revenues were favorably impacted by the base rate increase,
while improved incentive program margins contributed to the decrease in
Gas purchases .
|
Natural
Gas Distribution Operations
NJNG is a
local natural gas distribution company that provides regulated retail energy
services to approximately 487,000 residential and commercial customers in
central and northern New Jersey and participates in the off-system sales and
capacity release markets.
NJNG’s
business is seasonal by nature, as weather conditions directly influence the
volume of natural gas delivered. Specifically, customer demand substantially
increases during the winter months when natural gas is used for heating
purposes. As a result, NJNG receives most of its gas distribution revenues
during the first and second fiscal quarters and is subject to variations in
earnings and working capital during the year.
The
Electric Discount and Energy Competition Act (EDECA) provides the framework for
New Jersey’s energy markets, which are open to competition from other energy
suppliers. Currently, NJNG’s residential markets are open to competition, and
its rates are segregated between BGSS (natural gas commodity) and delivery
(i.e., transportation) components. NJNG earns no utility gross margin on the
commodity portion of its natural gas sales. NJNG earns utility gross margin
through the delivery of natural gas to its customers. Under an existing order
from the BPU, BGSS can be provided by suppliers other than the state’s natural
gas utilities.
NJNG’s
financial results are as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Utility
Gross Margin
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$469,261
|
|
$476,818
|
|
$810,169
|
|
$761,178
|
|
Less:
|
|
|
|
|
|
|
|
|
Gas
purchases
|
314,091
|
|
337,988
|
|
544,543
|
|
528,136
|
|
Energy
and other taxes
|
29,791
|
|
27,744
|
|
51,378
|
|
44,106
|
|
Regulatory
rider expense
|
20,744
|
|
17,788
|
|
34,305
|
|
29,954
|
|
Total
Utility Gross Margin
|
104,635
|
|
93,298
|
|
179,943
|
|
158,982
|
|
Operation
and maintenance expense
|
26,836
|
|
23,901
|
|
51,786
|
|
47,780
|
|
Depreciation
and amortization
|
7,291
|
|
9,332
|
|
14,452
|
|
18,565
|
|
Other
taxes not reflected in utility gross margin
|
977
|
|
854
|
|
1,988
|
|
1,824
|
|
Operating
Income
|
69,531
|
|
59,211
|
|
111,717
|
|
90,813
|
|
Other
income
|
1,028
|
|
1,450
|
|
1,712
|
|
2,682
|
|
Interest
charges, net
|
4,204
|
|
5,376
|
|
10,664
|
|
11,495
|
|
Income
tax provision
|
24,767
|
|
21,115
|
|
38,103
|
|
31,160
|
|
Net
Income
|
$ 41,588
|
|
$ 34,170
|
|
$ 64,662
|
|
$ 50,840
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
The
following table summarizes Utility Gross Margin and throughput in billion cubic
feet (Bcf) of natural gas by type:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
|
2009
|
2008
|
2009
|
2008
|
($
in thousands)
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Margin
|
Bcf
|
Residential
|
$72,060
|
21.4
|
$66,187
|
19.5
|
$121,747
|
34.7
|
$111,587
|
32.2
|
Commercial,
Industrial & Other
|
17,966
|
4.7
|
19,227
|
4.2
|
31,347
|
7.9
|
33,023
|
7.0
|
Transportation
|
10,420
|
3.9
|
5,865
|
3.8
|
18,851
|
6.9
|
10,799
|
6.6
|
Total
Utility Firm Gross Margin
|
100,446
|
30.0
|
91,279
|
27.5
|
171,945
|
49.5
|
155,409
|
45.8
|
Incentive
programs
|
4,119
|
20.1
|
2,191
|
11.5
|
7,843
|
32.3
|
3,611
|
21.2
|
Interruptible
|
70
|
0.7
|
128
|
1.0
|
155
|
1.6
|
262
|
2.6
|
BPU
settlement
|
—
|
—
|
(300)
|
—
|
—
|
—
|
(300)
|
—
|
Total
Utility Gross Margin/throughput
|
$104,635
|
50.8
|
$93,298
|
40.0
|
$179,943
|
83.4
|
$158,982
|
69.6
|
Utility
Gross Margin
NJNG’s
utility gross margin is defined as natural gas revenues less natural gas
purchases, sales tax, a Transitional Energy Facilities Assessment (TEFA) and
regulatory rider expenses, and may not be comparable to the definition of gross
margin used by others in the natural gas distribution business and other
industries. Utility gross margin is comprised of three major categories which
include utility firm gross margin, incentive programs and utility gross margin
from interruptible customers. Management believes that utility gross margin
provides a more meaningful basis than revenue for evaluating utility operations
since natural gas costs, sales tax, TEFA and regulatory rider expenses are
included in operating revenue and passed through to customers and, therefore,
have no effect on utility gross margin.
Natural
gas costs are charged to operating expenses on the basis of therm sales at the
prices in NJNG’s BGSS tariff approved by the BPU. The BGSS tariff rate includes
projected natural gas costs, net of supplier refunds, the impact of hedging
activities and credits from non-firm sales and transportation activities. Any
underrecoveries or overrecoveries from the projected amounts are deferred and
reflected in the BGSS tariff rate in subsequent years.
TEFA,
which is included in Energy and other taxes on the Unaudited Condensed
Consolidated Statements of Income, is calculated on a per-therm basis and
excludes sales to cogeneration facilities, other utilities and off-system sales.
TEFA represents a regulatory allowed assessment imposed on all energy providers
in the state of New Jersey, as TEFA has replaced the previously used utility
gross receipts tax formula.
Regulatory
rider expenses consist of recovery of state-mandated programs and the
remediation adjustment clause costs. These expenses are offset by corresponding
revenues and are calculated on a per-therm basis.
NJNG’s
Operating revenues decreased by $7.6 million, or 1.6 percent, and Gas purchases
decreased by $23.9 million, or 7.1 percent, for the three months ended March 31,
2009, respectively, compared with same period in the prior fiscal year as a
result of:
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to firm sales in
the amount of approximately $47.1 million, net of taxes, and $45.8
million, respectively, associated with the temporary rate credit given on
customers’ bills from January through March of 2009, due to continuing
lower wholesale natural gas costs;
|
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $19.3 million and $20.2 million, respectively, as a
result of 40 percent lower average sale prices from $10.37/dth compared
with $6.22/dth due to the change in the wholesale price of natural gas;
partially offset by
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to firm sales in
the amount of $33.9 million and $23.1 million, respectively, due primarily
to weather being 9.8 percent colder than the same period of the prior
fiscal year, partially offset by a decrease in Operating revenue of $10.6
million, as a result of comparatively lower CIP accruals during the
current fiscal period;
|
|
|
Ÿ
|
an
increase in Operating revenue related to total firm sales in the amount of
$31.2 million, as a result of an increase in BGSS base rates and
rates associated with riders; and
|
|
|
Ÿ
|
an
increase of $5.7 million in fixed revenue as a result of changes approved
by the BPU for restructured
tariffs.
|
NJNG’s
Operating revenues increased by $49.0 million, or 6.4 percent, and Gas purchases
increased by $16.4 million, or 3.1 percent, for the six months ended March 31,
2009, respectively, compared with the same period in the prior fiscal year as a
result of:
Ÿ
|
an
increase in Operating revenue and Gas purchases related to firm sales in
the amount of $56.0 million and $38.3 million, respectively, as a result
of increases in BGSS and base rates, as well as increases in rider
expenses, sales tax and TEFA as described below;
|
|
|
Ÿ
|
an
increase in Operating revenue and Gas purchases related to firm sales in
the amount of $48.5 million and $32.6 million, respectively, due primarily
to weather being 9.9 percent colder than the same period of the prior
fiscal year, partially offset by a decrease in Operating revenue of $15.8
million, as a result of lower accruals relating to the CIP during the
current fiscal period;
|
|
|
Ÿ
|
a
net decrease in Operating revenue and Gas purchases of $15 million related
to fiscal 2009 temporary rate credits of approximately $45 million
extended to customers, compared with a BGSS refund of $30 million given to
customers during fiscal 2008. NJNG extends these credits and refunds to
its customers to manage the recovery of its gas costs during periods when
wholesale natural gas costs are declining in comparison to the established
rate included in NJNG’s BGSS tariff;
|
|
|
Ÿ
|
an
increase in Operating revenue in the amount of $10.5 million related to
fixed revenue as a result of changes approved by the BPU for restructured
tariffs; partially offset by
|
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to off-system
sales in the amount of $32.1 million and $32.8 million, respectively, as a
result of a 25.4 percent lower average sales prices from $9.15/dth to
$6.83/dth due to the change in the wholesale price of natural
gas;
|
|
|
Ÿ
|
a
decrease in Operating revenue and Gas purchases related to interruptible
sales in the amount of $2.7 million and $2.3 million, respectively, due to
a decrease in sales to electric co-generation customers;
and
|
|
|
Ÿ
|
a
decrease of $2.1 million in Gas purchases related to increased amounts
earned through the financial risk management (FRM) and capacity release
incentive programs of $2.6 million in fiscal 2009 as compared with
$459,000 in fiscal 2008 due primarily to lower NYMEX market prices in
comparison to published benchmark prices, resulting in additional
opportunities to purchase call options that were below the established
quarterly FRM benchmark pricing levels; and
|
|
|
Ÿ
|
a
decrease of $1.4 million in Gas purchases related to increased amounts
received through the storage incentive program due primarily to the timing
of the incentive margins during the program's April 2008 through October
2008 injection period as compared with the same period in the prior fiscal
year.
|
Sales tax
and TEFA, which are presented as both components of Revenues and Operating
Expenses in the Unaudited Condensed Consolidated Statements of Income, totaled
$29.8 million and $27.7 million for the three months ended March 31, 2009 and
2008, respectively. For the six months ended March 31, 2009 and 2008, Sales tax
and TEFA totaled $51.4 million and $44.1 million, respectively. The increase for
both periods was due primarily to an increase of operating revenue from firm
sales of $24.1 million and $101.0 million for the three and six months ended
March 31, 2009, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Regulatory
rider expenses are calculated on a per-therm basis and totaled $20.7 million and
$17.8 million for the three month periods ended March 31, 2009 and 2008,
respectively, and $34.3 million and $30.0 million for the six month periods
ended March 31, 2009 and 2008, respectively. The increase was due primarily to
an increase in firm throughput of 2.5 Bcf for the three months and 3.7 Bcf for
the six months ended March 31, 2009 as compared with the three and six months
ended March 31, 2008, respectively, as a result of the previously mentioned
colder weather coupled with an increase in the SBC rate.
Utility
gross margin is comprised of three major categories:
Ÿ
|
Utility
firm gross margin, which is derived from residential and commercial
customers who receive natural gas service from NJNG through either sales
or transportation tariffs;
|
|
|
Ÿ
|
Incentive
programs, where margins generated or savings achieved from BPU-approved
off-system sales, capacity release, Financial Risk Management (defined in
Incentive Programs, below) or storage incentive programs are shared
between customers and NJNG; and
|
|
|
Ÿ
|
Utility
gross margin from interruptible customers who have the ability to switch
to alternative fuels.
|
Utility
Firm Gross Margin
Utility
firm gross margin is earned from residential and commercial customers who
receive natural gas service from NJNG through either sales or transportation
tariffs.
As a
result of NJNG’s implementation of the CIP, utility gross margin is no longer
linked to customer usage. The CIP eliminates the disincentive to promote
conservation and energy efficiency and facilitate normalizing NJNG’s utility
gross margin recoveries for variances not only in weather but also in other
factors affecting usage, including customer conservation. Recovery of utility
gross margin for the non-weather variance through the CIP is limited to the
amount of certain gas supply cost savings achieved and is subject to an earnings
test, which contains a return on equity component of 10.3 percent.
NJNG’s
total utility gross margin is not negatively affected by customers who use its
transportation service and purchase natural gas from another supplier because
its tariff is designed so that no profit is earned on the commodity portion of
sales to firm customers. All customers who purchase natural gas from another
supplier continue to use NJNG for transportation service.
Total
utility firm gross margin increased $9.2 million, or 10.0 percent, for the three
months and $16.5 million, or 10.6 percent, for the six months ended March 31,
2009, as compared with the same periods in the prior fiscal year, due primarily
to an increase in residential and commercial transport customer margin as a
result of an increase in base rates effective October 3, 2008 partially offset
by a decrease in the amounts accrued through the CIP program. Firm margin was
also favorably impacted by the increase in firm and transport customers of 2,400
and 2,600, respectively, over the same periods in the prior fiscal
year.
Utility
firm gross margin from residential service sales increased to $72.1 million for
the three months and $121.7 million for the six months ended March 31, 2009, as
compared with $66.2 million for the three months and $111.6 million for the six
months ended March 31, 2008. NJNG delivered 21.4 Bcf, to its firm
residential customers, compared with 19.5 Bcf in the three months ended
March 31, 2009 and 2008, respectively, due primarily to weather being 9.8
percent colder. In the six months ended March 31, 2009 NJNG delivered 34.7 Bcf
compared with 32.2 Bcf during the same period in fiscal 2008 due primarily
to weather being 9.9 percent colder.
Utility
firm gross margin from transportation service increased to $10.4 million for the
three months and $18.9 million for the six months ended March 31, 2009, as
compared with $5.9 million for the three months and $10.8 million for the six
months ended March 31, 2008. NJNG delivered 3.9 Bcf, to its customers
that utilize its transportation service, in the three months and 6.9 Bcf in the
six months ended March 31, 2009, compared with 3.8 Bcf and 6.6 Bcf,
respectively, for the same periods ended March 31, 2008. The increase for both
periods was due primarily to the change in base rates, effective in October
2008.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
The
weather for the three months ended March 31, 2009 was 4.2 percent colder than
normal, based on a 20-year average, which resulted in a negative adjustment of
utility gross margin under the weather component of the CIP of $(1.8) million,
compared with 6.8 percent warmer-than-normal weather for the same period last
fiscal year, which resulted in an accrual of utility gross margin of $4.6
million last year. The weather for the six months ended March 31, 2009 was 3.2
percent colder than normal, which resulted in a negative adjustment of $(2.0)
million, compared with 7.3 percent warmer-than-normal weather for the same
period last fiscal year, which resulted in an accrual of utility gross margin of
$7.4 million. Under the provisions of the CIP, accruals related to the weather
portion are dependent on the occurrence of degree days and the magnitude of the
variance in relation to the normal number of degree days. Customer usage was
lower than the established benchmark during the three and six months ended March
31 2009, which resulted in an accrual of utility gross margin under the CIP of
$1.4 million and $2.4 million, respectively, compared with $5.6 million and
$8.8 million, respectively, during the three and six months ended March 31,
2008. The change in the weather and non-weather components of the CIP include
the effect of adjustments, normal degree days, consumption factors and
benchmarks related to the baseline use per customer, which was amended with
NJNG’s new base rates approved by the BPU effective October 3,
2008.
NJNG had
12,461 and 10,181 residential customers and 5,420 and 5,112 commercial customers
using its transportation service at March 31, 2009 and 2008, respectively. The
increase in transportation customers for the period ended March 31, 2009 was due
primarily to an increase in marketing activity by third party natural gas
service providers in NJNG’s service territory.
NJNG
added 3,147 and 3,125 new customers during the six months ended March 31, 2009
and 2008, respectively. In addition, NJNG converted 366 and 374 existing
customers to natural gas heat and other services during the same periods for
fiscal 2009 and 2008, respectively. This customer growth represents an estimated
annual increase of approximately 0.65 Bcf in sales to firm customers, assuming
normal weather and usage which would contribute approximately
$1.9 million to utility gross margin.
Incentive
Programs
To reduce
the overall cost of its natural gas supply commitments, NJNG has entered into
contracts to sell natural gas to wholesale customers outside its franchise
territory when the natural gas is not needed for system requirements. These
off-system sales enable NJNG to reduce its overall costs applicable to BGSS
customers. NJNG also participates in the capacity release market on the
interstate pipeline network when the capacity is not needed for its firm system
requirements. NJNG retains 15 percent of the utility gross margin from these
sales, with 85 percent credited to firm customers through the BGSS.
The
Financial Risk Management (FRM) program is designed to provide price stability
to NJNG’s natural gas supply portfolio. The FRM program includes an incentive
mechanism designed to encourage the use of financial instruments to economically
hedge NJNG’s natural gas costs. Gross margin is generated by entering into
financial option positions that have a strike price below a published quarterly
benchmark, minus premiums and associated fees. NJNG retains 15 percent of the
utility gross margin, with 85 percent credited to firm customers through the
BGSS.
The
storage incentive program shares gains and losses on an 80 percent and 20
percent basis between customers and NJNG, respectively. This program measures
the difference between the actual cost of natural gas injected into storage and
a benchmark established with the purchase of a portfolio of futures contracts
applicable to the April-through-October natural gas injection
season.
On
October 3, 2008, the BPU 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.
Sales
under NJNG’s incentive programs totaled 20.1 Bcf and generated $4.1 million of
utility gross margin for the three months ended March 31, 2009, compared with
11.5 Bcf and $2.2 million of utility gross margin during the same period last
fiscal year. Sales under the incentive programs totaled 32.3 Bcf and generated
$7.8 million of utility gross margin for the six months ended March 31,
2009, compared with 21.2 Bcf and $3.6 million of utility gross margin during the
same period last fiscal year. Utility gross margin from incentive programs
comprised 3.9 percent and 4.4 percent of total utility gross margin for the
three and six months ended March 31, 2009, respectively, and 2.3 percent of
total utility gross margin for both the three and six months ended March 31,
2008. The increase in utility gross margin was due primarily to increased
amounts earned through the FRM program of $343,000 and $1.5 million for the
three and six months ended March 31, 2009, respectively, and $301,000 and $1.4
million in the same periods, respectively, from increased amounts received
through the storage incentive program as discussed above.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Interruptible
Revenues
As of
March 31, 2009, NJNG serves 62 customers through interruptible transportation
and sales services. Interruptible customers are those customers whose service
can be temporarily halted as they have the ability to utilize an alternate fuel
source. Although therms transported and sold to interruptible customers
represented 0.7 Bcf, or 1.4 percent, and 1.6 Bcf, or 1.9 percent, of total
throughput for the three and six months ended March 31, 2009, respectively, and
1.0 Bcf, or 2.5 percent, and 2.6 Bcf, or 3.7 percent, of the total throughput
during the same period in the prior fiscal year, respectively, they accounted
for less than 1 percent of the total utility gross margin in each
year.
Operation
and Maintenance Expense
Operation
and maintenance expense increased $2.9 million, or 12.3 percent, during the
three months ended March 31, 2009, as compared with the same period in the last
fiscal year, due primarily to:
Ÿ
|
an
increase in bad debt expense of $883,000 due primarily to additional
write-off’s as a result of the economic recession;
|
|
|
Ÿ
|
increased
postemployment benefit costs in the amount of $486,000 primarily as a
result of the decline in equity markets and the related impact on plan
asset values;
|
|
|
Ÿ
|
increased
labor costs of $404,000 due primarily to annual wage increases, partially
offset by lower overtime;
|
|
|
Ÿ
|
an
increase of $317,000 in contractors expenses due to third party damage
repair and increased maintenance; and
|
|
|
Ÿ
|
increased
legal fees of $262,000.
|
Operation
and maintenance expense increased $4.0 million, or 8.4 percent, during the six
months ended March 31, 2009, as compared with the same period in the last fiscal
year, due primarily to:
Ÿ
|
an
increase in the bad debt expense of $1.2 million associated with higher
operating revenues and write-off activity;
|
|
|
Ÿ
|
increased
benefit costs of $893,000 including higher costs associated with
postemployment benefits as described above;
|
|
|
Ÿ
|
increased
legal fees of $341,000;
|
|
|
Ÿ
|
an
increase of $309,000 in contractors expenses due primarily to the same
factors noted above;
|
|
|
Ÿ
|
increased
labor costs of $169,000 due to the same factors as above;
and
|
|
|
Ÿ
|
higher
pipeline integrity costs of
$243,000.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Operating
Income
Operating
income increased $10.3 million, or 17.4 percent, for the three months ended
March 31, 2009 as compared with the same period in the last fiscal year, due
primarily to:
Ÿ
|
an
increase in total Utility gross margin of $11.3 million, as discussed
above;
|
|
|
Ÿ
|
a
decrease in depreciation expense of $2.0 million, due to a rate reduction
from 3 percent to 2.34 percent and amortization of previously recovered
asset retirement obligations, both of which were part of the settlement of
the base rate case; partially offset by
|
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $2.9
million, as discussed above.
|
Operating
income increased $20.9 million, or 23.0 percent, for the six months ended March
31, 2009 as compared with the same period in the last fiscal year, due primarily
to:
Ÿ
|
an
increase in total Utility gross margin of $21.0 million, as discussed
above;
|
|
|
Ÿ
|
a
decrease in depreciation expense of $4.1 million, due to a rate reduction
from 3 percent to 2.34 percent and amortization of previously recovered
asset retirement obligations, both of which were part of the settlement of
the base rate case; partially offset by
|
|
|
Ÿ
|
an
increase in Operations and maintenance expense in the amount of $4.0
million, as discussed above.
|
Interest
Expense
Interest
expense decreased $1.2 million and $830,000 for the three and six months ended
March 31, 2009, respectively compared with the same periods in the last fiscal
year, due primarily to:
Ÿ
|
lower
average interest rates and balances related to NJNG’s commercial paper
program, as well as lower rates associated with its variable rate EDA
bonds; partially offset by
|
|
|
Ÿ
|
the
issuance of long-term fixed rate debt of $125 million in May 2008,
partially offset by the redemption of a $30 million bond on November 1,
2008.
|
Net
Income
Net
income increased $7.4 million, or 21.7 percent, to $41.6 million in the three
months ended March 31, 2009. Net income increased $13.8 million, or 27.2
percent, to $64.7 million in the six months ended March 31, 2009. Net income in
both periods increased due primarily to an increase in Operating income of
approximately $10.3 million and $20.9 million and lower Interest expense of $1.2
million and $830,000 for the three and six months ended March 31, 2009,
respectively, as discussed above, partially offset by higher income tax expense
of $3.7 million and $6.9 million for the three and six months ended March 31,
2009, respectively, as a result of the higher pre-tax income.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Energy
Services Operations
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 eastern Canada or directly to customers in various market areas
including the Northeastern region of the United States and eastern
Canada.
When
NJRES enters into contracts for the future delivery and sales of physical
natural gas, it simultaneously enters into financial derivative contracts at
market prices to establish an initial financial margin for each of its
forecasted physical commodity transactions. The financial derivative
contracts also serve to protect the cash flows of the transaction from
volatility in commodity prices as NJRES locks in pricing and can include
futures, options, and swap contracts, which are all predominantly actively
quoted on the NYMEX.
Through
the use of its contracts for natural gas storage and pipeline capacity, NJRES is
able to take advantage of pricing differences between geographic locations,
commonly referred to as “locational spreads,” as well as over different time
periods, for the delivery of natural gas to its customers, thereby improving the
initially established financial margin result. NJRES utilizes financial futures,
forwards and swap contracts to establish economic hedges that fix and protect
the cash flows surrounding these transactions.
Accordingly,
NJRES utilizes these contractual assets to optimize its opportunities to
increase its financial margin by capitalizing on changes or events in the
marketplace that impact natural gas demand levels. NJRES generates financial
margin through three primary channels:
Ÿ
|
Storage: NJRES
attempts to take advantage of differences in market prices occurring over
different time periods (time spreads) as follows:
|
|
|
|
*
|
NJRES
can purchase gas to inject into storage and concurrently lock in gross
margin with a contract to sell the natural gas at a higher price at a
future date; and
|
|
|
|
*
|
NJRES
can purchase a future contract with an early delivery date at a lower
price and simultaneously sell another future contract with a later
delivery date having a higher price.
|
|
|
Ÿ
|
Transportation
(Basis): Similarly, NJRES benefits from pricing differences
between various receipt and delivery points along a natural gas pipeline
as follows:
|
|
|
|
*
|
NJRES
can utilize its pipeline capacity by purchasing natural gas at a lower
price location and transporting to a higher value location. NJRES can
enter into a basis swap contract, a financial commodity
derivative based on the price of natural gas at two different
locations, when it will lead to positive cash flows and financial margin
for NJRES.
|
|
|
Ÿ
|
Daily Sales
Optimization
(Cash):
Consists of buying and selling flowing gas on a daily basis while
optimizing existing transport positions during short-term market price
movements to benefit from locational spreads:
|
|
|
|
|
*
|
Involves
increasing the financial margin on established transportation hedges by
capitalizing on price movements between specific
locations.
|
Typically,
periods of greater price volatility provide NJRES with additional opportunities
to generate financial margin by optimizing its storage and transport capacity
assets, and capturing their respective time or locational spreads. The
combination of strategically positioned natural gas storage and transportation
capacities provides NJRES with a significant amount of arbitrage opportunities
that are typically more prevalent during periods of high price
volatility.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Predominantly
all of NJRES’ purchases and sales of natural gas result in the physical delivery
of natural gas. NJRES has elected not to use the normal purchase normal sale
scope exception of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, under which
related liabilities incurred and assets acquired under these contracts are
recorded when title to the underlying commodity passes. Therefore, all NJRES
physical commodity contracts are recorded at fair value on the Unaudited
Condensed Consolidated Balance Sheets with any changes in fair value related to
its forward physical sale and purchase contracts recognized as a component of
Operating revenues and Gas purchases, respectively, in the Unaudited Condensed
Consolidated Statements of Income.
The
changes in fair value of NJRES’ financial derivative instruments, which are
financial futures, swaps and option contracts, are also recognized in the
Unaudited Condensed Consolidated Statements of Income, as a component of Gas
purchases.
NJRES’
financial and physical contracts will result, over time, in earning a gross
margin on the entire transaction. For financial reporting purposes under GAAP,
the change in fair value associated with derivative instruments used to
economically hedge these transactions are recorded as a component of Operating
revenue and Gas purchases, as appropriate, in the Unaudited Condensed
Consolidated Statements of Income during the duration of the financial
instrument or commodity contract. These changes in fair value are referred to as
unrealized gains and losses. In other instances, certain financial contracts
designed to economically fix or hedge the price of natural gas that is purchased
and placed into storage, to be sold at a later date, settle and result in
realized gains, which are also recorded at the time of settlement as a component
of Gas purchases in the Unaudited Condensed Consolidated Statements of
Income.
These
unrealized gains or losses from the change in fair value of unsettled financial
instruments and physical commodity contracts, or realized gains or losses
related to financial instruments that economically hedge natural gas inventory
that has not been sold as part of a planned transaction, cause large variations
in the reported gross margin and earnings of NJRES. NJRES will continue to earn
the gross margin established at inception of the transaction over the duration
of the forecasted transaction and may be able to capitalize on events in the
marketplace that enable it to increase the initial margin; however, gross margin
or earnings during periods prior to the delivery of the natural gas will not
reflect the underlying economic result.
NJRES
expenses its demand charges, which represent the right to use natural gas
pipeline and storage capacity assets of a third-party, over the term of the
related natural gas pipeline or storage contract. The term of these contracts
vary from less than one year to five years.
Operating
Results
NJRES’
financial results are summarized as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Operating
revenues
|
$472,763
|
|
$687,912
|
|
$935,857
|
|
$1,208,123
|
|
Gas
purchases
|
470,201
|
|
727,937
|
|
937,933
|
|
1,222,483
|
|
Gross
Margin (Loss)
|
2,562
|
|
(40,025
|
)
|
(2,076
|
)
|
(14,360
|
)
|
Operation
and maintenance expense
|
3,868
|
|
5,026
|
|
8,228
|
|
7,866
|
|
Depreciation
and amortization
|
51
|
|
53
|
|
102
|
|
106
|
|
Other
taxes
|
596
|
|
199
|
|
925
|
|
408
|
|
Operating
(Loss)
|
(1,953
|
)
|
(45,303
|
)
|
(11,331
|
)
|
(22,740)
|
|
Other
income
|
5
|
|
22
|
|
18
|
|
152
|
|
Interest
income (expense), net
|
124
|
|
(887
|
)
|
148
|
|
(1,764
|
)
|
Income
tax benefit
|
813
|
|
20,221
|
|
4,540
|
|
11,555
|
|
Net
(Loss)
|
$ (1,011
|
)
|
$ (25,947
|
)
|
$ (6,625
|
)
|
$ (12,797
|
)
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Gross
Margin
Gross
margin for the three months ended March 31, 2009 increased by $42.6 million, as
compared with the same period in the last fiscal year, due primarily to lower
unrealized losses during the current fiscal period partially offset by an
increase in certain realized losses as described below. The
combination of these changes in values generated a net favorable variance of
$60.7 million in overall values on its financial and physical commodity
contracts compared to the same period during fiscal 2008.
NJRES’
results during the quarter ended March 31, 2009 were impacted by the continuing
decline in the price of natural gas resulting in realized losses of $(22.9)
million compared to gains of $5.9 million during the same fiscal period in the
prior year. The realized gains/(losses) pertain to the settlement of
certain purchased futures and fixed swap contracts which economically hedge
planned natural gas purchases. The losses incurred during the current fiscal
period resulted from a lower settlement price as compared to the original hedge
price (or trade price). Conversely, the fiscal 2008 period was a period of
rising commodity prices, therefore NJRES recorded realized gains as a result of
settlement prices that were generally higher in comparison to initial trade
prices.
As these
financial contracts settle, the physical gas is purchased and injected into
storage. These physical gas injections and the associated financial hedges are
part of the NJRES’ business strategy to subsequently sell the natural gas from
storage in the future. The realized amounts are a component of the
anticipated financial margin associated with the overall strategy, and as a
result of certain accounting requirements, are recognized in current earnings
and result in a timing difference. When the purchased gas is eventually sold,
NJRES will realize the entire margin on the transaction.
In
addition, NJRES had unrealized losses of $(29.7) million and $(119.2) million
during the three months ended March 31, 2009 and 2008, respectively. The
unrealized losses relate to certain derivative contracts that have not yet
settled. The unrealized amounts represent the change in price of natural
gas from the original hedge price as compared to the market price of natural gas
at each reporting date, respectively. These unrealized amounts relate to
physical and financial contracts that lock in a sale price on the physical gas
that will be sold. When NJRES sells the purchased gas, the associated financial
hedges will be settled and any previously recognized unrealized amounts related
to these transactions will be realized.
Offsetting
the improved margin resulting from the lower net losses discussed above, was a
decrease in storage spreads during the current fiscal period, as further
discussed in the Financial margin sections below.
Gross
margin for the six months ended March 31, 2009 increased by $12.3 million, as
compared with the same period in the last fiscal year, due primarily to an
increase of $46.2 million in overall values on its financial and physical
commodity contracts, offset by lower margin of $33.9 million primarily related
to a decrease in storage spreads and the expiration of a favorable
transportation contract as described further in the Financial Margin section
below.
The
decline in commodity prices discussed above also impacted NJRES’ realized and
unrealized gains/(losses) during the fiscal 2009 and 2008 six month
periods. As a result,
included in NJRES’ gross margin for the current six month period ended March 31,
2009, were realized losses of $(50.1) million compared to gains of $3.6 million
during the same period in fiscal 2008. In addition,
NJRES recognized net unrealized losses of $(27.1) million and $(127.0) million
during the six months ended March 31, 2009 and 2008, respectively, due primarily
to the change in values related to its short financial derivative
contracts.
Non-GAAP
measures
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.”
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
The
following table is a computation of financial margin of NJRES:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Operating
revenues
|
$472,763
|
|
$687,912
|
|
$935,857
|
|
$1,208,123
|
|
Less:
Gas purchases
|
470,201
|
|
727,937
|
|
937,933
|
|
1,222,483
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments
|
29,738
|
|
119,218
|
|
27,141
|
|
127,043
|
|
Realized
loss (gain) from derivative instruments related to natural gas
inventory
|
22,894
|
|
(5,889
|
)
|
50,088
|
|
(3,629
|
)
|
Financial
Margin
|
$55,194
|
|
$ 73,304
|
|
$75,153
|
|
$ 109,054
|
|
A
reconciliation of Operating loss, the closest GAAP financial
measurement, to the Financial margin of NJRES is as
follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Operating
(Loss)
|
$ (1,953
|
)
|
$(45,303
|
)
|
$(11,331
|
)
|
$ (22,740
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Operation
and maintenance expense
|
3,868
|
|
5,026
|
|
8,228
|
|
7,866
|
|
Depreciation
and amortization
|
51
|
|
53
|
|
102
|
|
106
|
|
Other
taxes
|
596
|
|
199
|
|
925
|
|
408
|
|
Subtotal
– Gross Margin (Loss)
|
2,562
|
|
(40,025
|
)
|
(2,076
|
)
|
(14,360
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments
|
29,738
|
|
119,218
|
|
27,141
|
|
127,043
|
|
Realized
(gain) loss from derivative instruments related to natural gas
inventory
|
22,894
|
|
(5,889
|
)
|
50,088
|
|
(3,629
|
)
|
Financial
Margin
|
$55,194
|
|
$
73,304
|
|
$75,153
|
|
$109,054
|
|
A
reconciliation of Net loss to Net financial earnings is as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Net
(Loss)
|
$
(1,011
|
)
|
$(25,947
|
)
|
$
(6,625
|
)
|
$(12,797
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative instruments, net of taxes
|
18,130
|
|
73,013
|
|
16,547
|
|
77,623
|
|
Realized
loss (gain) from derivative instruments related to natural gas
inventory, net of taxes
|
13,959
|
|
(3,549
|
)
|
30,539
|
|
(2,217
|
)
|
Net
Financial Earnings
|
$31,078
|
|
$
43,517
|
|
$40,461
|
|
$
62,609
|
|
Financial
margin for the three months ended March 31, 2009 and 2008 was $55.2 million and
$73.3 million, respectively. The decrease
of $18.1 million is due primarily to fewer storage arbitrage opportunities,
which resulted in lower average price spreads (difference between market sales
price and cost) on storage positions for the three-month period ended March 31,
2009, as compared with the same period in the prior fiscal year.
Financial
margin for the six months ended March 31, 2009 and 2008 was $75.2 million and
$109.1 million, respectively. The decrease
of $33.9 million is due primarily to the expiration of a highly favorable
physical transport capacity contract servicing the Northeast market region that
was no longer available for asset optimization in the current fiscal period,
along with the transportation portfolio experiencing lower hedged values coupled
with higher capacity fees. NJRES’ total firm
transportation capacity decreased by 170,400 dth/day, from 837,400 dth/day at
March 31, 2008 to 667,000 dth/day at March 31, 2009. Transport
capacity contracts normally have greater market value during the winter season,
when demand levels are usually higher. As a result,
the combined operating results of the basis and cash portfolios in the quarter
ended March 31, 2009, decreased by $17.8 million, as compared with the same
period last fiscal year. The Gross
margin from the storage portfolio also decreased by $16.1 million compared with
the prior fiscal period, due primarily to lower average spreads on storage
positions in the current fiscal period, and less storage capacity, which
decreased from 26.9 Bcf in the prior fiscal period to 25.5 Bcf in the current
fiscal period.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Operation
and Maintenance Expense (O&M)
Operation
and maintenance expense decreased $1.2 million, or 23.0 percent, during the
three months ended March 31, 2009, as compared with the same period in the last
fiscal year, due primarily to a decrease of $1.4 million in incentive-based
compensation expense during the three months ended March 31, 2009, partially
offset by increased shared corporate service costs.
O&M
expense increased $362,000, or 4.6 percent, during the six months ended March
31, 2009, as compared with the same period in the last fiscal year, due
primarily to an increase of $180,000 in shared corporate service costs and
$179,000 for increased audit fees. NJRES’ decrease of $1.4 million related to
its incentive compensation during the current fiscal period as noted above was
offset by a $1.2 million decrease to incentive compensation during
the first quarter of fiscal 2008 as compared to the same
period in fiscal 2009.
Future
results are subject to NJRES’ ability to maintain and expand its wholesale
marketing activities and are contingent upon many other factors, including an
adequate number of appropriate counterparties, volatility in the natural gas
market, availability of storage arbitrage opportunities, sufficient liquidity in
the energy trading market and continued access to the capital
markets.
Retail
and Other Operations
The
consolidated financial results of Retail and Other are summarized as
follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Operating
(Losses) Revenues
|
$(2,350
|
)
|
$12,859
|
|
$ (5,004
|
)
|
$19,490
|
|
Operation
and maintenance expense
|
$
6,712
|
|
$ 5,678
|
|
$ 13,862
|
|
$11,138
|
|
Equity
in earnings, net of tax
|
$ 787
|
|
$ 746
|
|
$ 1,301
|
|
$ 1,170
|
|
Net
(Loss) Income
|
$(5,060
|
)
|
$ 4,312
|
|
$(10,744
|
)
|
$ 4,677
|
|
Operating
revenue decreased $15.2 million, or 118.3 percent, and $24.5 million, or 125.7
percent, respectively for the three months and six months ended March 31,
2009, to $(2.4) million and $(5.0) million, respectively as compared with $12.9
million and $19.5 for the three months and six months ended March 31, 2008,
respectively, due primarily to greater unrealized losses at NJR Energy, which
were the result of declining market prices within a portfolio of net long
financial derivative positions along with a decrease in installation revenue at
NJRHS.
Operation
and maintenance expenses for the three months and the six months ended March 31,
2009, increased $1.0 million and $2.7 million, respectively as compared to last
fiscal year due primarily to higher labor cost, increased building and utilities
expenses and higher health care costs at NJRHS.
Taxes
netted in Equity in earnings from Iroquois are $518,000 and $481,000 for the
three months ended March 31, 2009 and 2008, respectively. For the six months
ended March 2009 and 2008, taxes netted in Equity in earnings from Iroquois are
$857,000 and $763,000. These amounts are included in the Unaudited Condensed
Consolidated Statements of Income. 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
Net
income for the three months and six months ended March 31, 2009, decreased $9.4
million and $15.4 million, respectively compared with same period in the
prior fiscal year, due primarily to the decreased operating revenue at NJR
Energy and NJRHS and the increased O&M expenses, partially offset by lower
income tax expense as a result of the lower Operating income
NJR
Energy has economically hedged a long-term fixed-price contract to sell gas
to a counterparty. Unrealized losses or gains at NJR Energy are the result of
the change in value associated with financial derivative instruments designed to
economically hedge the long-term fixed-price contracts.
The
Income statement includes unrealized losses (gains) associated with these
derivative instruments of $8.2 million and $(6.8) million for the three months
and $17.9 million and $(6.5) million six months ended March 31, 2009 and 2008,
respectively, which are recorded, pre-tax, as a component of Operating
revenues.
Additionally,
management of the Company uses the non-GAAP measure “net financial earnings”,
when viewing the results of NJR Energy to monitor the operational results
without the impact of unsettled derivative instruments.
A
reconciliation of Net (loss) income to Net financial earnings, a non-GAAP
measure, is as follows:
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
(Thousands)
|
2009
|
2008
|
2009
|
2008
|
Net
(loss) income
|
$(5,060
|
)
|
$4,312
|
|
$(10,744
|
)
|
$4,677
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized
loss (gain) on derivative instruments, net of taxes
|
4,822
|
|
(4,001
|
)
|
10,527
|
|
(3,821
|
)
|
Net
financial earnings
|
$ (238
|
)
|
$ 311
|
|
$ (217
|
)
|
$ 856
|
|
Net
financial earnings for the three months and six months ended March 31,
2009, decreased $549,000 and $1.1 million, respectively compared with
the same period in the prior fiscal year, due primarily to increased Operation
and maintenance expense, partially offset by a decrease in installation revenue
at NJRHS.
Liquidity
and Capital Resources
NJR’s
objective is to maintain a consolidated capital structure that reflects the
different characteristics of each business segment and provides adequate
financial flexibility for accessing capital markets as required.
NJR’s
consolidated capital structure was as follows:
|
March
31,
|
September
30,
|
|
2009
|
2008
|
Common
stock equity
|
62
|
%
|
51
|
%
|
Long-term
debt
|
37
|
|
32
|
|
Short-term
debt
|
1
|
|
17
|
|
Total
|
100
|
%
|
100
|
%
|
Common
stock equity
NJR
satisfies its external common equity requirements, if any, through issuances of
its common stock, including the proceeds from stock issuances under its
Automatic Dividend Reinvestment Plan (DRP) and proceeds from the exercise of
options 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
The
Company has a share repurchase program that provides for the repurchase of up to
6.8 million shares. As of March 31, 2009, the Company repurchased approximately
5.5 million of those shares and has the ability to repurchase approximately 1.3
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
March 31, 2009, NJR, NJRES and NJNG had committed credit facilities of $605
million with approximately $589 million available under these facilities (see
Note 7. Debt).
NJR
believes that as of March 31, 2009, NJR, NJNG and NJRES were, and currently are,
in compliance with all debt covenants.
NJR
believes that existing borrowing availability, its current cash balances and its
cash flow from operations will be sufficient to satisfy it and its subsidiaries’
working capital, capital expenditure and dividend requirements for the
foreseeable future. NJR, NJNG and NJRES currently anticipate that its financing
requirements for the next twelve months will be met through the issuance of
short-term debt, meter sale lease-backs and proceeds from the Company’s
DRP.
NJR
On March
15, 2009, NJR repaid its $25 million, 3.75 percent, Unsecured
Senior notes at maturity.
On
December 13, 2007, NJR entered into a $325 million, five-year, revolving,
unsecured credit facility, which permits the borrowing of revolving loans and
swing loans, as well as the issuance of letters of credit. Swing loans are loans
made available on a same-day basis for an aggregate principal amount of up to
$50 million and repayable in full within a maximum of seven days of borrowing.
It also permits an increase to the facility, from time to time, with the
existing or new lenders, in a minimum of $5 million increments up to a maximum
$100 million at the lending banks discretion. Borrowings under the new facility
are conditional upon compliance with a maximum leverage ratio, as defined in the
new credit facility, of not more than 0.65 to 1.00 at any time. NJR used the
initial borrowings under the new credit facility to refinance its prior credit
facility. In addition, certain of NJR’s non-regulated subsidiaries have
guaranteed to the lenders all of NJR’s obligations under the new credit
facility. Depending on borrowing levels and credit ratings, NJR’s interest rate
can either be, at its discretion, the London inter-bank offered rate (“LIBOR”)
or the Federal Funds Open Rate plus an applicable spread and facility
fee.
As of
March 31, 2009, NJR has a $5 million letter of credit outstanding on behalf
of NJRES, which is used for margin requirements for natural gas transactions and
will expire on June 30, 2009.
NJR also
has a $675,000 letter of credit outstanding on behalf of CR&R,
which will expire on December 3, 2009. The letter of credit is in place to
support development activities.
NJR uses
its short term borrowings primarily to finance its share repurchases, to satisfy
NJRES’ short term liquidity needs and to finance, on an initial basis,
unregulated investments. NJRES’ use of high-injection, high-withdrawal storage
facilities and anticipated pipeline park-and-loan arrangements, combined with
related economic hedging activities in the volatile wholesale natural gas
market, create significant short-term cash requirements.
NJNG
NJNG
satisfies its debt needs by issuing short- and long-term debt based upon its own
financial profile. The seasonal nature of NJNG’s operations creates large
short-term cash requirements, primarily to finance natural gas purchases and
customer accounts receivable. NJNG obtains working capital for these
requirements, and for the temporary financing of construction and MGP
remediation expenditures and energy tax payments, through the issuance of
commercial paper and short-term bank loans.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS (Continued)
|
On
November 1, 2008, upon maturity, NJNG redeemed its $30 million, 6.27 percent,
Series X First Mortgage bonds.
In
October 2007, NJNG entered into an agreement for standby letters of credit that
may be drawn upon through December 15, 2009 for up to $50 million. As of March
31, 2009, no letters of credit have been issued under this agreement. These
letters of credit would not reduce the amount available to be borrowed under
NJNG’s credit facility.
To
support the issuance of commercial paper, NJNG has a $250 million committed
credit facility with several banks, with a 5-year term, expiring in December
2009. NJNG currently plans to renew or replace this
facility
prior to or upon its expiration. NJNG had $10 million of commercial paper
borrowings supported by the credit facility as of March 31, 2009. In addition,
borrowings under NJNG’s credit facility are conditioned upon compliance with a
maximum leverage ratio, as defined in the credit facility, of not more than 0.65
to 1.00 at any time and a minimum interest coverage ratio, as defined in the
credit facility, of less than 2.50 to 1.00.
NJNG is
obligated with respect to loan agreements securing six series of variable rate
bonds totaling approximately $97.0 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. On
those dates, an auction is held for the purposes of determining the interest
rate of the securities. The interest rate associated with the NJNG variable-rate
debt is based on the rates on the EDA ARS. For the six months ended March 31,
2009, all of the auctions surrounding the EDA ARS have failed, resulting in
those bonds bearing interest at their maximum rates, defined as the lesser of
(i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per annum, as
applicable to such series of ARS. As of March 31, 2009, the 30-day LIBOR rate
was 0.5 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 0.9 percent as of March 31, 2009, compared with a weighted average
interest rate of 4.6 percent as of September 30, 2008. There can be no assurance
that the EDA ARS will have enough market liquidity to avoid failed auctions in
the future.
Neither
NJNG nor its assets are obligated or pledged to support the NJR or NJRES
facilities.
NJRES
NJRES has
a 3-year, $30 million committed credit facility with a multinational financial
institution. Borrowings under this facility are guaranteed by NJR. There were no
borrowings under this facility as of March 31, 2009.
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 March 31,
2009.
(Thousands)
|
Total
|
Up
to
1 Year
|
2-3
Years
|
4-5
Years
|
After
5 Years
|
Long-term
debt (1)
|
$
535,416
|
$
17,475
|
$
52,887
|
$
32,200
|
$432,854
|
Capital
lease obligations (1)
|
88,322
|
9,748
|
22,687
|
16,038
|
39,849
|
Operating
leases (1)
|
13,731
|
3,590
|
5,278
|
3,291
|
1,572
|
Short-term
debt
|
10,000
|
10,000
|
—
|
—
|
—
|
New
Jersey Clean Energy Program (1)
|
41,651
|
10,589
|
22,516
|
8,546
|
—
|
Construction
obligations
|
2,730
|
2,730
|
—
|
—
|
—
|
Remediation
expenditures (2)
|
120,230
|
13,360
|
41,070
|
22,200
|
43,600
|
Natural
gas supply purchase obligations–NJNG
|
117,561
|
106,211
|
11,350
|
—
|
—
|
Demand
fee commitments–NJNG
|
723,001
|
89,888
|
185,584
|
162,403
|
285,126
|
Natural
gas supply purchase obligations–NJRES
|
757,222
|
443,198
|
244,053
|
69,971
|
—
|
Demand
fee commitments–NJRES
|
183,707
|
85,432
|
72,406
|
19,837
|
6,032
|
Total
contractual cash obligations
|
$2,593,571
|
$792,221
|
$657,831
|
$334,486
|
$809,033
|
(1)
|
These
obligations include an interest component, as defined under the related
governing agreements or in accordance with the applicable tax
statute.
|
(2)
|
Expenditures
are
estimated
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS
(Continued)
|
For
fiscal 2009, the Company has no minimum pension funding requirements, however,
funding requirements are uncertain and can depend significantly on changes in
actuarial assumptions, returns on plan assets and changes in demographic
factors. It is anticipated that the annual funding level to the OPEB plans will
range from $1.2 million to $1.4 million over the next five years. Additional
contributions may be made based on market conditions and various
assumptions.
As of
March 31, 2009, there were NJR guarantees covering approximately $394 million of
natural gas purchases and demand fee commitments of NJRES and NJNG, included in
natural gas supply purchase obligations above, not yet reflected in Accounts
payable on the Unaudited Condensed Consolidated Balance Sheet.
The
Company is obligated to fund up to $132.5 million associated with the
construction and development of Steckman Ridge. Currently, NJR anticipates that
Steckman Ridge will seek non-recourse project financing for a portion of the
facility once construction activities are completed, therefore potentially
reducing the aggregate recourse amount funded by NJR. There can be no assurances
that Steckman Ridge will eventually secure such non-recourse project
financing.
Total
capital expenditures for fiscal 2009 are estimated at $87.4 million, including
an estimate of $6 million related to the AIP construction costs.
Off-Balance-Sheet
Arrangements
The
Company does not have any off-balance-sheet financing arrangements.
Cash
Flow
Operating
Activities
As
presented in the Unaudited Condensed Consolidated Statements of Cash Flows, cash
flow from operating activities totaled $345.9 million for the six months ended
March 31, 2009, compared with cash flow from operations of $167.7 million for
the same period in fiscal 2008. NJR employs the indirect method when preparing
its Unaudited Condensed Consolidated Statement of Cash Flows. Net income is
adjusted for any non-cash items, such as accruals and certain amortization
amounts that impact earnings during the period. In addition, operating cash
flows are primarily affected by variations in working capital and the related
changes in the beginning and period end balances, which can be impacted by the
following:
Ÿ
|
seasonality
of NJR’s business;
|
|
|
Ÿ
|
fluctuations
in wholesale natural gas prices;
|
|
|
Ÿ
|
timing
of storage injections and withdrawals;
|
|
|
Ÿ
|
management
of the deferral and recovery of gas costs,
|
|
|
Ÿ
|
changes
in contractual assets utilized to optimize margins related to natural gas
transactions; and
|
|
|
Ÿ
|
timing
of the collections of receivables and payments of current
liabilities.
|
A summary
of the primary factors that contributed to the increase in operating cash flows
during the six months ended March 31, 2009 as compared with the prior fiscal
period is as follows:
Ÿ
|
a
larger decrease in storage volumes and the average cost of gas at NJRES
resulting in a reduction in the value of its inventory
balances;
|
|
Ÿ
|
a
reduction in receivable balances at NJRES stemming from a 6 percent
decrease in sales volumes and 42 percent decrease in average sales price
compared with an increase in receivable balances during the six months
ended March 31, 2008, as a result of a 28 percent increase in volumes
coupled with a 63 percent increase in average sales
prices;
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS
(Continued)
|
Ÿ
|
an
increase in NJNG’s gas costs recovered during fiscal 2009 as a result of
gas costs falling below the commodity component of NJNG’s BGSS rate billed
to its customers compared with the six months ended March 31, 2008. The
amount of gas costs overrecovered was moderated by a BGSS refund of $30
million issued to NJNG’s customers during fiscal 2008 and temporary rate
credits of $45 million during fiscal
2009;
|
These
increases in operating cash flows were offset by:
Ÿ
|
lower
NYMEX prices which prompted an increase in broker margin deposits for
NJNG’s financial derivatives during the six months ended March 31, 2009;
and
|
|
|
Ÿ
|
lower
NJRES payable balances primarily related to a 55 percent decrease in the
cost of purchases during the current fiscal period compared to a 39
percent decrease in the cost of purchases as well as a 32 percent increase
in volumes purchased during fiscal
2008.
|
NJNG’s
MGP expenditures are currently expected to total $13.3 million in fiscal 2009
(see Note 13. Commitments and
Contingent Liabilities).
Investing
Activities
Cash flow
used in investing activities totaled $66 million for the six months ended March
31, 2009, compared with $38.9 million in the same period in fiscal 2008. The
increase in cash used was due primarily to an increase in the cash invested in
Steckman Ridge and higher NJNG utility plant expenditures offset by the drawdown
from the restricted cash construction fund.
On June
5, 2008, the Federal Energy Regulatory Commission (FERC) issued Steckman Ridge a
certificate of public convenience and necessity authorizing the ownership,
construction and operation of its natural gas storage facility and associated
facilities. On April 1, 2009, Steckman Ridge received authorization to place
certain injection related facilities into commercial operation. Customers have begun to
inject natural gas inventory in preparation for the initial withdrawal season.
Construction will continue through the summer of 2009 as more facilities are
made ready to support the initial winter season. As of March 31,
2009, NJR has invested $107 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 full completion of the construction and development of its
facilities, thereby potentially reducing the final expected recourse obligation
of NJR. There can be no assurances that such non-recourse project financing will
be secured or available for Steckman Ridge.
Retail
and Other capital expenditures each year have been made primarily in connection
with investments made to preserve the value of real estate holdings. At December
31, 2008, CR&R owned 83 acres of undeveloped land and a 56,400-square-foot
building on 5 acres of land.
NJRES
does not currently anticipate any significant capital expenditures in fiscal
2009.
Financing
Activities
Cash flow
used in financing activities totaled $239.2 million for the six months ended
March 31, 2009, compared with $124.7 million for the same period in the prior
fiscal. During the current fiscal period, NJNG repaid its $30 million, 6.27
percent, Series X Mortgage bonds and NJR repaid its $25 million, 3.75 percent,
unsecured senior notes. In addition, the Company was able to reduce its
short-term borrowings as a result of its improved cash from
operations.
NJNG
provides funding for certain of its infrastructure projects through tax exempt,
variable-rate debt, which has been issued to back six series of auction rate
securities (ARS) through the Economic Development Authority of New Jersey (EDA),
and are based on the borrowing costs of the ARS. During periods of reduced
liquidity for ARS, NJNG’s rate on its variable rate debt could default to a
maximum rate of the lesser of (i) 175 percent of the 30-day LIBOR or (ii) 10 to
12 percent, as applicable to a particular series of ARS. Although its average
weighted interest rate has decreased to a rate of 0.9 percent as of March 31,
2009, NJNG continues to review alternatives that would eliminate or mitigate the
inherent interest rate risk associated with its variable rate debt.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTSOF OPERATIONS
(Continued)
|
NJNG
received $6.3 million and $7.5 million in December 2008 and 2007, respectively,
in connection with the sale-leaseback of its natural gas meters. This
sale-leaseback program is expected to be continued on an annual
basis.
Credit
Ratings
The table
below summarizes NJNG’s current credit ratings issued by two rating entities,
Standard and Poor’s (S&P) and Moody’s Investors Service, Inc.
(Moody’s):
|
Standard
and Poor’s
|
Moody’s
|
Corporate Rating
|
A
|
N/A
|
Commercial
Paper
|
A-1
|
P-1
|
Senior
Secured
|
A+
|
Aa3
|
Ratings
Outlook
|
Stable
|
Negative
|
NJNG’s
S&P and Moody’s ratings are investment-grade ratings. S&P and Moody’s
give NJNG’s commercial paper the highest rating within the Commercial Paper
investment-grade category. NJR is not a rated entity. On April 30, 2009, S&P
affirmed its ratings and changed its outlook from negative to
stable.
NJNG is
not party to any lending agreements that would accelerate the maturity date of
any obligation caused by a failure to maintain any specific credit rating. If
such ratings are downgraded below investment grade, borrowing costs could
increase, as will the costs of maintaining certain contractual relationships and
for future financing. Even if ratings are downgraded without falling below
investment grade, NJR and NJNG may still face increased borrowing costs under
their respective credit facilities. A rating set forth above is not a
recommendation to buy, sell or hold the Company’s or NJNG’s securities and may
be subject to revision or withdrawal at any time. Each rating set forth above
should be evaluated independently of any other rating.
The
timing and mix of any external financings will target a common equity ratio that
is consistent with maintaining the Company’s current short- and long-term credit
ratings.
Financial
Risk Management
Commodity
Market Risks
Natural
gas is a nationally traded commodity, and its prices are determined effectively
by the New York Mercantile Exchange (NYMEX) and over-the-counter markets.
The prices on the NYMEX and over-the-counter markets generally reflect the
notional balance of natural gas supply and demand, but are also influenced
significantly from time to time by other events.
The
regulated and unregulated natural gas businesses of the Company and its
subsidiaries are subject to market risk due to fluctuations, in the price of
natural gas. To economically hedge against such fluctuations, the Company and
its subsidiaries have entered into futures contracts, options agreements and
swap agreements. To manage these derivative instruments, the Company has
well-defined risk management policies and procedures that include daily
monitoring of volumetric limits and monetary 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 3.8 Bcf of
natural gas (Gas Sales Contract) to an energy marketing
company.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The
following table reflects the changes in the fair market value of financial
derivatives related to natural gas purchases and sales from September 30, 2008
to March 31, 2009:
(Thousands)
|
Balance
September
30,
2008
|
Increase
(Decrease)
in
Fair
Market Value
|
Less
Amounts
Settled
|
Balance
March
31,
2009
|
NJNG
|
$(49,610
|
)
|
$(70,373
|
)
|
$ (20,928
|
)
|
$(99,055
|
)
|
NJRES
|
89,571
|
|
98,493
|
|
133,297
|
|
54,767
|
|
NJR
Energy
|
20,190
|
|
(20,366
|
)
|
(2,499
|
)
|
2,323
|
|
Total
|
$
60,151
|
|
$ 7,754
|
|
$109,870
|
|
$(41,965
|
)
|
There
were no changes in methods of valuations during the quarter ended March 31,
2009.
The
following is a summary of fair market value of financial derivatives related to
natural gas purchases and sales at March 31, 2009, by method of valuation and by
maturity for each fiscal year period:
(Thousands)
|
2009
|
2010
|
2011-2013
|
After
2013
|
Total
Fair Value
|
Price
based on NYMEX
|
$(61,928
|
)
|
$ 9,368
|
|
$(2,945
|
)
|
—
|
|
$ (55,505
|
)
|
Price
based on other external data
|
9,081
|
|
4,423
|
|
36
|
|
—
|
|
13,540
|
|
Total
|
$(52,847
|
)
|
$13,791
|
|
$(2,909
|
)
|
—
|
|
$(41,965
|
)
|
The
following is a summary of financial derivatives by type as of March 31,
2009:
|
|
Volume
(Bcf)
|
Price
per
Mmbtu
|
Amounts
included in
Derivatives
(Thousands)
|
NJNG
|
Futures
|
16.8
|
|
$3.73
- $9.19
|
$(91,546
|
)
|
|
Swaps
|
(0.3
|
)
|
$3.71
- $4.62
|
(7,771
|
)
|
|
Options
|
10.4
|
|
$4.00
- $9.51
|
262
|
|
NJRES
|
Futures
|
(6.7
|
)
|
$3.65
- $10.98
|
24,876
|
|
|
Swaps
|
(39.5
|
)
|
$3.63
- $12.46
|
29,820
|
|
|
Options
|
3.6
|
|
$3.50
- $3.80
|
71
|
|
NJR
Energy
|
Swaps
|
3.8
|
|
$3.41
- $ 4.44
|
2,323
|
|
Total
|
|
|
|
|
$(41,965
|
)
|
The
following table reflects the changes in the fair market value of physical
commodity contracts from September 30, 2008 to March 31, 2009:
(Thousands)
|
Balance
September
30,
2008
|
Increase
(Decrease)
in Fair
Market Value
|
Less
Amounts
Settled
|
Balance
March
31,
2009
|
NJRES
|
$1,714
|
|
$7,480
|
|
$(183
|
)
|
$9,377
|
|
The
Company uses a value-at-risk (VaR) model to assess the market risk of its net
futures, options and swap positions. VaR represents the potential loss in value
of NJRES’ trading portfolio due to adverse market movements over a defined time
horizon (NJRES utilizes holding periods of 1 day and 10 days) with a specified
confidence level (NJRES utilizes either a 95 percent or 99 percent confidence
level). As an example, utilizing a 1 day holding period with a 95 percent
confidence level would indicate that there is a 5 percent chance that the
liquidation value of the NJRES portfolio would fall below the expected trading
value by an amount at least as large as the calculated VaR.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
The VaR
at March 31, 2009, using the variance-covariance method with a 95 percent
confidence level and a 1-day holding period, was $1.3 million. The VaR with a 99
percent confidence level and a 10-day holding period was $6.0 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 March 31, 2009. Gross credit
exposure is defined as the unrealized fair value of physical and financial
derivative commodity contracts plus any outstanding receivable for the value of
natural gas delivered for which payment has not yet been received. Net credit
exposure is defined as gross credit exposure reduced by collateral received from
counterparties and/or payables, where netting agreements exist. The amounts
presented below exclude accounts receivable for retail natural gas sales and
services.
Unregulated
counterparty credit exposure as of March 31, 2009 is as follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$134,722
|
|
|
$81,673
|
|
Noninvestment
grade
|
13,793
|
|
|
6,258
|
|
Internally
rated investment grade
|
15,779
|
|
|
5,852
|
|
Internally
rated noninvestment grade
|
1,472
|
|
|
8
|
|
Total
|
$165,766
|
|
|
$93,791
|
|
NJNG’s
counterparty credit exposure as of March 31, 2009 is as follows:
(Thousands)
|
Gross Credit
Exposure
|
|
Net Credit
Exposure
|
Investment
grade
|
$28,942
|
|
|
$26,851
|
|
Noninvestment
grade
|
1,167
|
|
|
22
|
|
Internally
rated investment grade
|
1,235
|
|
|
552
|
|
Internally
rated noninvestment grade
|
425
|
|
|
67
|
|
Total
|
$31,769
|
|
|
$27,492
|
|
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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
Interest
Rate Risk–Long-Term Debt
As of
March 31, 2009, the Company (excluding NJNG) had no variable-rate long-term
debt.
As of
March 31, 2009, 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 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 March 31, 2009, all of the auctions surrounding the EDA ARS have failed,
resulting in the securities bearing interest at their maximum rates, as defined
as the lesser of (i) 175 percent of 30-day LIBOR or (ii) 10 to 12 percent per
annum, as applicable to such series of ARS. While the failure of the ARS
auctions has no default impact on NJNG’s variable-rate debt, it does impact its
borrowing costs of the variable-rate debt. As such, NJNG currently has a
weighted average interest rate of 0.9 percent as of March 31, 2009. There can be
no assurance that the ARS securities of the EDA will have enough market
liquidity to avoid failed auctions in the future.
Effects
of Inflation
Although
inflation rates have been relatively low to moderate in recent years, any change
in price levels has an effect on operating results due to the capital-intensive
and regulated nature of the Company’s utility subsidiary. The Company attempts
to minimize the effects of inflation through cost control, productivity
improvements and regulatory actions where appropriate.
Disclosure
Controls and Procedures
As discussed in
"Part II. Item 9A. Controls and Procedures" in our Form 10-K for
the fiscal year ended September 30, 2008, in connection with the
Company’s preparation of its consolidated financial statements for the fiscal
year ended September 30, 2008, the Company identified an immaterial error in the
recording of certain physical natural gas transactions, which were not recorded
at the appropriate fair value during the interim quarters ended March 31, 2008
and June 30, 2008, as they were valued at an incorrect price. Controls were
not designed properly or operating effectively to prevent or detect these
pricing errors. Natural gas prices are volatile and it is reasonably possible
that the volume of these transactions could have been larger during any interim
period or for the fiscal year ended September 30, 2008. The Company concluded
that it was reasonably possible that this control weakness could have resulted
in a material error in its Consolidated Financial Statements had the volume of
these transactions been larger.
As of
March 31, 2009, under the supervision and with the participation of the
Company’s management, including the principal executive officer and principal
financial officer, the Company conducted an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, as of the end of the
period covered by this report. Based on this evaluation, since the material
weakness discussed above is not completely remediated, the Company’s principal
executive officer and principal financial officer concluded that, as of end of
the period covered by this report, the Company’s disclosure controls and
procedures were not effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As a
result of this conclusion, the financial statements for the period covered by
this report were prepared with particular attention to the material weakness.
Accordingly, management believes that the condensed consolidated financial
statements included in this Quarterly Report fairly present, in all material
respects, our financial condition, results of operations and cash flows as of
and for the periods presented.
ITEM
4. CONTROLS AND PROCEDURES (Continued)
|
The
Company continually reviews its disclosure controls and procedures and makes
changes, as necessary, to ensure the quality of its financial reporting. As
detailed below, the Company has implemented certain additional controls that it
believes will significantly reduce the potential for similar issues to arise in
the future.
Changes
in Internal Control over Financial Reporting
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:
Ÿ
|
expand
training, education and accounting reviews for all relevant personnel
involved in the accounting treatment and disclosures for the Company’s
commodity transacting;
|
|
|
Ÿ
|
invest
in additional resources with appropriate accounting technical expertise,
including the hiring of a Controller-Unregulated Operations in April
2009;
|
|
|
Ÿ
|
expand
the review of the design of the internal control over financial reporting
related to the accounting of commodity transacting, which will incorporate
an analysis of the current staffing levels, job assignments and the design
of all internal control processes for the accounting for commodity
transacting and implement new and improved processes and controls, if
warranted; and
|
|
|
Ÿ
|
increase
the level of review and discussion of significant accounting matters and
supporting documentation with senior finance
management.
|
As part
of the Company’s fiscal 2009 assessment of internal control over financial
reporting, management will conduct sufficient testing and evaluation of the
controls to be implemented as part of this remediation plan to ascertain that
they are designed and are operating effectively. The effectiveness of
remediation efforts will not be known until the Company can test those controls
in connection with the management tests of internal control over financial
reporting that the Company will perform during fiscal 2009. Management believes,
however, these measures will remediate the above identified material weakness in
internal control over financial reporting.
These
were the only changes in the Company’s internal control over financial reporting
(as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during
the quarter ended March 31, 2009, that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
New
Jersey Resources Corporation
Part
II
ITEM
1. LEGAL PROCEEDINGS
|
Information
regarding reportable legal proceedings is contained in Part I, "Item 3. Legal
Proceedings" in NJR’s Annual Report on Form 10-K for the year ended September
30, 2008, and is set forth in Part I, Item 1, Note
12, Commitment and
Contingent Liabilities—Legal Proceedings in the Unaudited Condensed
Consolidated Financial Statements. No legal proceedings became reportable during
the quarter March 31, 2009, and there have been no material developments during
such quarter regarding any previously reported legal proceedings, which have not
been previously disclosed.
While NJR
attempts to identify, manage and mitigate risks and uncertainties associated
with its business to the extent practical, under the circumstances, some level
of risk and uncertainty will always be present. Part I, Item 1A, "Risk Factors,"
of NJR’s 2008 Annual Report on Form 10-K includes a detailed discussion of NJR’s
risk factors. These risks and uncertainties have the potential to materially
affect NJR’s financial condition and results of operations. There have not been
any material changes from the risk factors as previously disclosed by NJR in the
2008 Annual Report on Form 10-K.
ITEM
2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In 1996,
the NJR Board of Directors (“Board”) authorized the Company to implement a share
repurchase program, which has been expanded several times since the inception of
the program. On November 14, 2007, the Board authorized an increase to the plan
to permit the repurchase, in the open market or in privately negotiated
transactions, of 1.5 million shares, bringing the total permitted repurchases to
6.8 million shares as of that date. As of March 31, 2009, the Company has 1.3
million shares of its common stock still available for repurchase.
The
following table sets forth NJR’s repurchase activity for the quarter ended March
31, 2009:
Period
|
|
Total
Number of Shares
(or
Units) Purchased
|
|
Average
Price
Paid
per Share
(or
Unit)
|
|
Total
Number of Shares
(or
Units) Purchased as
Part
of Publicly
Announced
Plans or Programs
|
|
Maximum
Number
(or
Approximate Dollar Value)
of
Shares (or Units) That
May Yet be Purchased Under
the Plans or Programs
|
01/01/09
– 01/31/09
|
|
—
|
|
—
|
|
—
|
|
1,369,171
|
02/01/09
– 02/28/09
|
|
—
|
|
—
|
|
—
|
|
1,369,171
|
03/01/09
– 03/31/09
|
|
66,200
|
|
$32.71
|
|
66,200
|
|
1,302,971
|
Total
|
|
66,200
|
|
$32.71
|
|
66,200
|
|
1,302,971
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
(a) An
annual meeting of shareholders was held on January 21, 2009 and information
regarding such meeting was included in the Company’s Quarterly Report on Form
10-Q for the period ended December 31, 2008, which is incorporated herein by
reference.
*This
certificate accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by NJR for purposes of
Section 18 or any other provision of the Securities Exchange Act of 1934, as
amended.
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:
May 8, 2009
|
|
|
By:/s/ Glenn C. Lockwood
|
|
Glenn
C. Lockwood
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|